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ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes

Tau Co revalues land from a carrying amount of $800,000 (original cost $800,000, tax base $800,000) to $1,100,000. If the land is sold, a tax rate of 25% applies to the gain. Where should the deferred tax on the revaluation be recognised?

The deferred tax liability of $75,000 is recognised in other comprehensive income. The revaluation creates a $300,000 taxable temporary difference taxed at 25%. IAS 12 requires deferred tax to follow the item it arises from, so tax on a gain taken to OCI is also taken to OCI.

  1. AIn profit or loss, as a deferred tax expense
  2. BIn other comprehensive income, as a deferred tax liability of $75,000Correct
  3. CNot recognised, because land is not depreciated
  4. DIn equity directly, as an adjustment to retained earnings only on sale

Explanation

The revaluation creates a taxable temporary difference of 300,000. Deferred tax liability = 300,000 x 25% = 75,000. Because the revaluation gain is recognised in OCI, the related deferred tax is also recognised in OCI. Non-depreciation of land is irrelevant, as IAS 12 measures deferred tax based on recovery of carrying amount.

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