Reference is made to para no. 10 of IAS-12, Income Taxes which is reproduced hereunder:
10 Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based: that an entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.
Furthermore, the reference is also being made to sub-section (8) and (13) (d) of Section 22 of the Income Tax Ordinance, 2001 dealing with the matter of disposal of depreciable assets which are reproduced hereunder:
(8) Where, in any tax year, a person disposes a depreciable asset, no depreciation deduction shall be allowed under this section for that year and-
(a) if the consideration received exceeds the written down value of the asset at the time of disposal, the excess shall be chargeable to tax in that year under the head “Income from Business” or
(b) if the consideration received is less than the written down value of the asset at the time of disposal, the difference shall be allowed as a deduction in computing the person’s income chargeable under the head “Income from Business” for that year.
(13)(d) Where the consideration received on the disposal of immoveable property exceeds the cost of the property, the consideration received shall be treated as the cost of the property.
The cumulative effect of above provisions of the Income Tax Ordinance, 2001 is such that if there is a situation where cost of the building is Rs.100,000 and the WDV for tax purposes is Rs.80,000 and the building is sold out at Rs.150,000, the gain or loss on disposal will be calculated as follows:
Thereby what has been claimed as depreciation and initial allowance now been recouped on disposal
Keeping in view the above illustration, if there is revaluation of the building, we understand that, for the purpose, the revaluation surplus on disposal of the building will be accounted for as excess of the consideration received over the cost which will not provide any tax consequence in the future keeping in view the above provisions of the Income Tax Ordinance, 2001.
Thus, we understand that the revaluation surplus in relation to the building is not subject to calculation of any temporary difference and therefore the deferred tax is not required to be calculated therefore.
You confirmation to the above treatment will be highly appreciated.
The Committee would like to draw your attention to the following paragraphs of IAS 12 ‘Income Taxes’:
15 A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
20 IFRSs permit or require certain assets to be carried at fair value or to be revalued (see, for example, IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets, IFRS 9 Financial Instruments and IAS 40 Investment Property). In some jurisdictions, the revaluation or other restatement of an asset to fair value affects taxable profit (tax loss) for the current period. As a result, the tax base of the asset is adjusted and no temporary difference arises. In other jurisdictions, the revaluation or restatement of an asset does not affect taxable profit in the period of the revaluation or restatement and, consequently, the tax base of the asset is not adjusted. Nevertheless, the future recovery of the carrying amount will result in a taxable flow of economic benefits to the entity and the amount that will be deductible for tax purposes will differ from the amount of those economic benefits. The difference between the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.
This is true even if:
(a) the entity does not intend to dispose of the asset. In such cases, the revalued carrying amount of the asset will be recovered through use and this will generate taxable income which exceeds the depreciation that will be allowable for tax purposes in future periods; or
(b) tax on capital gains is deferred if the proceeds of the disposal of the asset are invested in similar assets. In such cases, the tax will ultimately become payable on sale or use of the similar assets.
In view of the above, the Committee is of the opinion that the deferred tax should be recognized.
(April 15, 2011)