IAS 12 Past exam question (Dec 2017)
Case Study (Dec 2017)
•You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with IFRS. You have recently prepared the financial statements for the year ended 30 September 2017 and these are due to be published shortly. The managing director has reviewed these financial statements and has prepared a list of queries arising out of the review.
•I noticed that OCI includes a gain of $64 million relating to the revaluation of our portfolio of properties. I looked in the notes to check that a corresponding amount of $64 million had been added to property, plant and equipment. However, the note explaining movements in property, plant and equipment showed a revaluation increase of $80 million. There was a reference to tax in one of the notes I looked at but I don’t see why this is relevant.
•I know our rate of tax is 20% and this would explain the difference but we won’t pay any tax on this gain unless we sell the properties. We have no intention of selling any of them in the foreseeable future, so what relevance does tax have?
•Please explain the difference between the $64 million gain in OCI and the $80 million gain added to property, plant and equipment. (6 marks)
Carrying amount of the asset increased by $ 80000 . Hence gain will be recongnised through Other comprehensive income (OCI). however their is no change in the tax base of the asset since there is no future deduction available due to the revaluation surplus . accordingly , the revaluation gain results into deferred tax liability @20 % as applicable on the revaluation gain of $ 80000 .
This does not change even if the management does not intend to sell the asset in the foreseeable future. accordingly , deferred tax liability shall be recognized in the financial statements .
taxable temporary difference =Increase in the carrying amount -increase in the tax base
$ 80000 - 0
increase in the deferred tax liability = $80000 x 20 % = $ 16000
Net gain to be recognised through the OCI = $ 80000 -$16000 =$64000