Deferred tax on a revalued factory, which rate for the manner of recovery?

3 answers

• Hi all, your instinct is spot on here. The £1m temporary difference arises because the carrying amount is £2m and the tax base stays at £1m (capital allowances are on original cost). That difference will reverse as the factory is used, through higher depreciation charges in the accounts that aren't deductible for tax, so the recovery is through trading profits and the 25% rate applies to the whole amount. The revaluation surplus doesn't automatically mean they'll sell it, so the 20% gains rate is only relevant if there's a clear plan to dispose of it soon rather than just keep using it. Under IAS 12 it's the expected manner of recovery that drives the rate, and here it's use, so 25% across the £1m. Cheers

  Priya K. · 2mo ago

  0 votes

• Good catch on the rate, but just to add the bit everyone forgets on the double entry, because the factory is revalued under IAS 16, that revaluation surplus sits in OCI, so the deferred tax on it also hits OCI, not P&L. It’s a classic FR slip up. The temporary difference is still £1m and the manner of recovery is use so the 25% rate is right, giving a £250k deferred tax liability, but you Dr Revaluation Surplus (OCI) and Cr Deferred Tax Liability, not a P&L tax charge. IAS 12.61A makes it clear the tax follows the accounting treatment, and the examiner loves testing whether you remember that the deferred tax on a revaluation goes to OCI, then you unwind it through the equity reserve as the asset depreciates (the ‘excess’ depreciation transfer from the revaluation surplus to retained earnings is net of the related deferred tax). Cheers

  Aisha M. · 2mo ago

  0 votes

• tbf the one that caught me out on my FR resit was the non-depreciable asset rule in IAS 12.51B, that’s where you presume recovery through sale unless there’s evidence otherwise. but that only applies to stuff like land that isn’t depreciated, your factory is depreciable so that presumption doesn’t kick in, you just follow the general expected manner of recovery. so if they’re keeping it in use, 25% on the whole £1m diff, exactly like the others said. i proper messed this up in a mock, panicked and split the rate, examiner’s report roasted everyone for it aswell. just one less thing to brick over in the exam.

  Tom H. · 2mo ago

  0 votes