Expected manner of recovery or settlement

Learning objectives

• Determine the rate and tax base consistent with the expected manner of recovery (use, sale or a combination).L2, L3
• Calculate the deferred tax on revalued land and on an investment property measured at fair value under the presumption of sale.L3
• Assess whether the presumption of recovery through sale is rebutted.L3, L4

Normative references

• IAS 12 §51The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
• IAS 12 §51AIn some jurisdictions, the manner in which an entity recovers an asset (through use or sale) or settles a liability determines the tax consequences and may affect the applicable tax rate, the tax base, or both; deferred tax is measured using the tax rate and tax base that are consistent with the expected manner of recovery or settlement.
• IAS 12 §51BWhen a non-depreciable asset measured using the revaluation model in IAS 16 gives rise to a deferred tax liability or asset, the deferred tax reflects the tax consequences of recovering its carrying amount through sale, as no part of that amount is recovered through use (incorporating the consensus of former SIC-21).
• IAS 12 §51CFor an investment property measured using the fair value model in IAS 40, there is a rebuttable presumption that its carrying amount will be recovered through sale; unless the presumption is rebutted, deferred tax reflects the tax consequences of recovering the whole carrying amount through sale. The presumption is rebutted if the property is depreciable and held within a business model whose objective is to consume substantially all of its economic benefits over time rather than through sale; when it is rebutted, paras. 51 and 51A apply.
• IAS 12 §51DThe rebuttable presumption in para. 51C also applies when a deferred tax liability or asset arises from measuring investment property in a business combination, if the entity will subsequently measure that property using the fair value model.
• IAS 12 §51EParas. 51B to 51D do not change the requirement to apply the principles in paras. 24 to 33 (deductible temporary differences) and 34 to 36 (unused tax losses and unused tax credits) when recognising and measuring deferred tax assets.

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

19 questions

• The measurement of deferred tax assets and liabilities reflects the tax consequences of the manner in which the entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.L2
• For an investment property measured using the fair value model, the presumption that its carrying amount will be recovered through sale is irrebuttable.L2
• In Arvelune's jurisdiction, the disposal of an asset is taxed at a rate and on a base that differ from those that apply to its use. How does Arvelune measure the deferred tax on this asset?L2
• Borlance measures land (a non-depreciable asset) using the IAS 16 revaluation model. Which tax consequences does its deferred tax reflect?L2
• When is the presumption that an investment property measured at fair value will be recovered through sale rebutted?L2
• Under the legislation in the case, Cassiver would be taxed differently depending on whether it uses or disposes of a warehouse. Which deferred tax parameters may depend on the expected manner of recovery?L2
• Dumovelle holds a press with a carrying amount of {carrying_amount}. Under the legislation in the case, if it is used, its tax base is {tax_base_use} and the income is taxed at {rate_use}%; if it is sold, the tax base (indexed cost) is {tax_base_sale} and the gain is taxed at {rate_sale}%. At the reporting date, Dumovelle expects to use the press until the end of its useful life. Compute the deferred tax liability to be recognised, then the one that would have resulted from an expected sale.L3
• Estrabel revalues the land of its head office to {revalued_amount} under the IAS 16 revaluation model; its tax base, equal to its cost, is {tax_base}. Under the legislation in the case, operating profits are taxed at {income_rate}% and gains on disposal of real estate at {sale_rate}%. Estrabel has no intention of selling. Compute the deferred tax liability.L3
• Fennoric operates a vineyard whose bare land, which is not depreciable, is measured under the IAS 16 revaluation model at {revalued_amount}; the tax base recognised on disposal is {tax_base}. Under the legislation in the case, tax is {income_rate}% on operating income and {sale_rate}% on gains on land. Compute the deferred tax liability relating to the land.L3
• Gorsalis measures an office building let to third parties under the IAS 40 fair value model: {fair_value} at the reporting date. Under the legislation in the case, rents are taxed at {rent_rate}% and a disposal is taxed at {sale_rate}% on the difference between the price and a tax base of {tax_base_sale}. Nothing allows the sale presumption to be rebutted. Compute the deferred tax liability.L3
• Heliodane holds a logistics warehouse classified as investment property and measured at fair value ({fair_value} at the reporting date). Management says it wants to 'keep it for a long time' and mainly expects a capital gain from it; no business model of consuming substantially all of its benefits over time is documented (case data). On disposal, the tax base would be {tax_base_sale} and the rate {sale_rate}%. Compute the deferred tax liability.L3
• Ivranne revalued land under IAS 16, giving rise to a taxable difference of 400,000. Under the legislation in the case, operating income is taxed at 28% and gains on land at 15%. The accountant recognised a deferred tax liability of 112,000, on the ground that the land is used in operations. What is the error?L3
• Jasmolde holds bare land let as a car park, classified as investment property and measured at fair value. It measured deferred tax under the rules for taxing rents, rebutting the sale presumption on the ground that it has 'no intention of disposing of the land'. What is the error?L3
• Korvelin holds a data centre as investment property measured at fair value; the building is depreciated for tax purposes and has a useful life of twenty years (case data). Its business model, documented by the board, is to let the building under successive leases until the end of its useful life and then demolish it; no sale is contemplated. How does Korvelin measure the deferred tax on the building?L3
• Until now, Lormeval measured the deferred tax on a production line under the rules for its use. In December 20X5, the board approves its sale to a competitor, signed in February 20X6; at the reporting date of 31 December 20X5, sale is the expected manner of recovery. Under the legislation in the case, a disposal is taxed at a different rate and on a different base from use. What does Lormeval do at 31 December 20X5?L3
• The property company Mirvolle measures three investment properties at fair value: (1) bare land let as a car park; (2) a recent office building that management 'intends to keep' with no documented plan; (3) a warehouse depreciated for tax purposes, let under successive leases until its planned demolition, under a plan approved by the board. Write the memo justifying, property by property, whether the sale presumption is maintained or rebutted, and the supporting evidence to keep.L4
• Nivalde uses an industrial building that, under a plan approved at the reporting date, it expects to operate for four more years and then sell. Under the legislation in the case, the tax depreciation claimed during use reduces the tax base and the gain on disposal is taxed at a reduced rate. Write the memo justifying the method for measuring the deferred tax on the building and listing the data needed.L4
• 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
• The Ostrevane group holds land revalued under IAS 16 and an investment property measured at fair value under IAS 40; the legislation in the case taxes use and disposal differently. Which statements on the measurement of deferred tax are correct?L3