Income Taxes - Recovery of Revalued Non-Depreciable Assets
Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.
Reference: FRS 12, Income Taxes
ISSUE
Under FRS 12.49, the measurement of deferred tax liabilities and assets should reflect the tax consequences that would follow from the manner in which the enterprise expects, at the balance sheet date, to recover or settle the carrying amount of those assets and liabilities that give rise to temporary differences.
FRS 12.19 notes that the revaluation of an asset does not always affect taxable profit (tax loss) in the period of the revaluation and that the tax base of the asset may not be adjusted as a result of the revaluation. If the future recovery of the carrying amount will be taxable, any difference between the carrying amount of the revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.
The issue is how to interpret the term "recovery"
in relation to an asset that is not depreciated (non-depreciable
asset) and is revalued under paragraph 29 of FRS 16.
This Interpretation also applies to investment properties which are carried at revalued amounts under FRS 25.23(b) but would be considered nondepreciable if FRS 16 were to be applied.
CONSENSUS
5.
The deferred tax liability or asset that arises from the revaluation of a nondepreciable asset under FRS 16.29 should be measured based on the tax consequences that would follow from recovery of the carrying amount of that asset through sale, regardless of the basis of measuring the carrying amount of that asset. Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a nondepreciable asset.
BASIS FOR CONCLUSIONS
6.
The FRS Framework indicates that an enterprise recognises an asset if it is probable that the future economic benefits associated with the asset will flow to the enterprise. Generally, those future economic benefits will be derived (and therefore the carrying amount of an asset will be recovered) through sale, through use, or through use and subsequent sale. Recognition of depreciation implies that the carrying amount of a depreciable asset is expected to be recovered through use to the extent of its depreciable amount, and through sale at its residual value. Consistent with this, the carrying amount of a nondepreciable asset, such as land having an unlimited life, will be recovered only through sale. That is, because the asset is not depreciated, no part of its carrying amount is expected to be recovered (that is, consumed) through use. Deferred taxes associated with the non-depreciable asset reflect the tax consequences of selling the asset.
7.
The expected manner of recovery is not predicated on the basis of measuring the carrying amount of the asset. For example, if the carrying amount of a non-depreciable asset is measured at its value in use, the basis of measurement does not imply that the carrying amount of the asset is expected to be recovered through use, but through its residual value upon ultimate disposal.
Effective Date: INT FRS 21 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.
