Tax recognised in OCI or equity

Learning objectives

• Determine whether the current or deferred tax on an item is recognised in profit or loss, in OCI or directly in equity.L2
• Recognise the deferred tax on a revaluation in OCI and that on an equity component in equity.L2, L3
• Analyse the allocation of a change in tax rate on differences that arose partly in OCI (tracing back to the original allocation).L3, L4
• Explain the transfer of the revaluation surplus net of tax and the treatment of a revaluation for tax purposes.L3

Normative references

• IAS 12 §20When assets are carried at fair value or revalued with no equivalent tax adjustment, the difference between the carrying amount of the revalued asset and its tax base is a temporary difference that gives rise to a deferred tax liability or asset, even if the entity does not intend to dispose of the asset.
• IAS 12 §23Compound financial instrument: in some jurisdictions, the tax base of the liability component on initial recognition is equal to the initial carrying amount of the sum of the liability and equity components; the taxable temporary difference that arises from the separate recognition of the equity component is not covered by the initial recognition exception; the resulting deferred tax liability is charged directly to the carrying amount of the equity component, and subsequent changes in it are recognised in profit or loss.
• IAS 12 §57The current and deferred tax effects of a transaction or other event are accounted for consistently with the accounting for the transaction or event itself; paras. 58 to 68C implement this principle.
• IAS 12 §60The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences, in particular as a result of: (a) a change in tax rates or tax laws; (b) a reassessment of the recoverability of deferred tax assets; (c) a change in the expected manner of recovery of an asset. The resulting deferred tax is recognised in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss.
• IAS 12 §61ACurrent and deferred tax are recognised outside profit or loss if they relate to items recognised, in the same or a different period, outside profit or loss: in other comprehensive income for items recognised in other comprehensive income, and directly in equity for items recognised directly in equity.
• IAS 12 §62The standard gives examples of items that other standards require or permit to be recognised in other comprehensive income, including a change in carrying amount arising from the revaluation of property, plant and equipment under IAS 16.
• IAS 12 §62AExamples of items recognised directly in equity: (a) an adjustment to the opening balance of retained earnings resulting from a change in accounting policy applied retrospectively or from the correction of an error; (b) amounts arising on initial recognition of the equity component of a compound financial instrument.
• IAS 12 §63In exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates to items recognised outside profit or loss, for example when there are graduated rates of income tax or when a change in the tax rate or other tax rules affects a deferred tax asset or liability relating (in whole or in part) to an item previously recognised outside profit or loss. The tax relating to such items is then determined on the basis of a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned, or another method that achieves a more appropriate allocation in the circumstances.
• IAS 12 §64IAS 16 does not specify whether an entity should transfer each period from revaluation surplus to retained earnings an amount equal to the difference between the depreciation of the revalued asset and the depreciation based on its cost; when the entity makes such a transfer, the amount transferred is net of any related deferred tax. Similar considerations apply to transfers made on disposal of an item of property, plant and equipment.
• IAS 12When the tax base of a revalued asset is changed by a revaluation for tax purposes, the related tax effect is recognised in other comprehensive income only to the extent that a related accounting revaluation was, or is expected to be, recognised there.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

32 questions

• Current or deferred tax relating to an item recognised in other comprehensive income is also recognised in other comprehensive income, whether the item was recognised in the same period or in a different period.L2
• When a change in accounting policy applied retrospectively adjusts the opening balance of retained earnings, the related deferred tax is recognised in profit or loss of the period of the change.L2
• The current and deferred tax effects of a transaction are accounted for consistently with the accounting for the transaction itself.L2
• When it is exceptionally difficult to determine the share of tax that relates to items recognised outside profit or loss, the entity determines it by a reasonable pro rata allocation of its tax in the jurisdiction concerned, or by another method that achieves a more appropriate allocation in the circumstances.L2
• Tarvalis revalues an owner-occupied building under IAS 16; the increase is recognised in other comprehensive income, with no adjustment to the tax base. Where does it recognise the resulting deferred tax liability?L2
• Ulvaride issues a convertible loan; under the legislation in the case, the tax base of the liability component equals the total of the liability and equity components, giving rise to a taxable difference. How is the related deferred tax liability recognised?L2
• Valmorce corrects a prior period error by restating the opening balance of its retained earnings. Where does it recognise the tax effect of this correction?L2
• The deferred tax liability relating to the equity component of Wendrolle's convertible loan decreases as the liability component unwinds. Where is this decrease recognised?L2
• Yslande's only deferred tax liability arose from a land revaluation recognised in other comprehensive income three years ago. A lower rate is enacted this year. Where is the decrease in the liability recognised?L2
• For which of the following items of Zarvenne is deferred tax recognised outside profit or loss?L2
• In Alvrenne's jurisdiction, the law allows a tax revaluation that increases the tax base of certain assets. Which statements about the tax effect of this tax revaluation are correct?L3
• Brevonne revalues a building under IAS 16; the increase of {revaluation_increase} is recognised in other comprehensive income, with no effect on the tax base. The expected rate is {rate}%. Compute the deferred tax recognised in OCI and the revaluation surplus net of tax.L2
• Corvianne applies the revaluation model to its port facilities. At the reporting date, their revalued amount exceeds the previous carrying amount by {revaluation_increase}; the increase is recognised in OCI and the tax base is unchanged. With a rate of {rate}%, compute the deferred tax recognised in OCI and the net revaluation surplus.L2
• Dravelin has taxable differences identified by origin: {pl_differences} arising from accelerated tax depreciation (profit or loss) and {oci_differences} arising from a revaluation recognised in OCI. The rate falls from {old_rate}% to {new_rate}%; the differences are unchanged. Compute the decrease in the liability recognised in profit or loss and the decrease recognised in OCI.L3
• A rate cut reduces Esquerlle's net deferred tax liability by {rate_effect}. The differences, arising partly from revaluations recognised in OCI and partly from items in profit or loss, can no longer be tracked individually. After a documented analysis, management judges that {oci_share}% of the net liability relates to the revaluations and uses this pro rata key. Compute the effects in OCI and in profit or loss.L4
• Fauvrenne issues a convertible loan for {proceeds}; the liability component is measured at {liability_component}, the balance being the equity component. Under the legislation in the case, the tax base of the liability component equals the total issue proceeds. At a rate of {rate}%, compute the deferred tax liability and the equity component net of tax.L3
• Gaudrisse discovers that a restoration provision of {understated_expense} should have been recognised in a prior period; it corrects the error by restating the opening balance of retained earnings. Under the legislation in the case, the expense will be deductible when the restoration is carried out, and the related deferred tax asset is recoverable at a rate of {rate}%. Compute the tax effect and the net adjustment to the opening balance.L3
• Harlouve recognised in other comprehensive income an IAS 16 revaluation of {revaluation_increase} on a warehouse, with no adjustment to the tax base. The rate is {rate}%. Record the deferred tax entry.L2
• Ismarelle, which measures its hotels under the revaluation model, records an increase of {revaluation_increase} recognised in OCI; the tax base is unchanged. The expected rate is {rate}%. Record the deferred tax entry.L2
• Jaunelle issues convertible bonds; the equity component amounts to {equity_component}. Under the legislation in the case, the tax base of the liability component equals the total proceeds, giving a taxable difference equal to the equity component. The rate is {rate}%. Record the deferred tax entry at issue.L3
• Kelvanis has taxable differences of {pl_differences} arising from accelerated tax depreciation and of {oci_differences} arising from a revaluation recognised in OCI. The rate falls from {old_rate}% to {new_rate}%; the differences are unchanged. Record the entry.L3
• Lindarne retrospectively applies a new accounting policy that reduces the opening carrying amount of assets by {opening_decrease}, with no effect on their tax base; the opening balance of retained earnings is adjusted. A deductible difference results; the deferred tax asset is recoverable at a rate of {rate}%. Record the deferred tax entry for the opening adjustment.L2
• Morlance recognised an IAS 16 revaluation of 300,000 in OCI and, for deferred tax (rate 25%): deferred tax expense in profit or loss 75,000 / deferred tax liability 75,000. Where is the error?L3
• Nastrelle's deferred tax liability includes 90,000 relating to revaluations recognised in OCI and 60,000 relating to accelerated tax depreciation. A rate cut reduces these amounts by 15,000 and 10,000 respectively. The accountant recognised 25,000 as deferred tax income in profit or loss. Where is the error?L3
• Oberlance measures its machines at cost, with no accounting revaluation. It opts for a tax revaluation that increases their tax base and recognised the related deferred tax effect in other comprehensive income. Where is the error?L3
• Pavrelle carries a deferred tax liability of 57,000 on revalued land (revaluation in OCI), measured at the 19% rate for gains on land in line with the consequences of sale. An enacted law lowers that rate to 16%; the 300,000 difference is unchanged. Which treatment applies?L3
• Quelvaine is taxed under a graduated scale; part of its taxable profit comes from gains recognised in OCI, and it is exceptionally difficult to determine the current tax relating to them. How does it determine the share of tax to be recognised in OCI?L3
• Rauvelle holds bonds whose fair value changes are recognised in OCI (accounting treatment given by the case). An unrealised loss of 120,000 is recognised in OCI; for tax purposes, it will only be deductible on disposal. The rate is 25% and the deferred tax asset is recoverable. Which treatment applies?L3
• A rate cut is enacted. The Sevrandal group's net deferred tax liability mixes differences arising in profit or loss (depreciation), in OCI (property revaluations) and in equity (component of a convertible); the information system does not track every difference by origin. Write the memo justifying the allocation of the effect of the rate change.L4
• For the year-end, Tolvarde lists four tax effects: (1) deferred tax on a building revaluation in OCI; (2) deferred tax on the equity component of a convertible loan issued during the year; (3) deferred tax on an error correction adjusting opening retained earnings; (4) the decrease, over the year, in the liability arising from item (2). Write the memo allocating each effect (profit or loss, OCI or equity).L4
• Calvidra recognised a revaluation of land in other comprehensive income; the related deferred tax amounts to 45,000. How is this tax presented?L2
• Dorvenne's 20X5 data: current tax 500,000; deferred tax expense in profit or loss 80,000; deferred tax on a revaluation recognised in other comprehensive income 40,000. What tax expense does Dorvenne present in profit or loss?L2