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$: IAS16 Notes and class examples - clickUP\Share\Rek\FRK 300\2017\KB LEITH\IAS16\IAS16 Notes and class examples.docx 1 FINANCIAL ACCOUNTING 300 IAS 16: PROPERTY, PLANT AND EQUIPMENT$
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FINANCIAL ACCOUNTING 300

IAS 16: PROPERTY, PLANT AND EQUIPMENT

NOTES AND CLASS EXAMPLES

K B Leith

DEPARTMENT OF

ACCOUNTING

UP

Material already covered in FRK201

A significant part of IAS 16 has already been addressed in FRK201. Therefore, it is assumed that you already know, understand and can apply all of the content of IAS 16, other than that related to the alternative method of accounting for a revaluation in terms of IAS 16.35(a) and the income tax implications of revaluations. These latter issues will be addressed in the material contained in this handout.

Further, IAS 16 should be read, inter alia, in the context of its objective and the Conceptual Framework for Financial Reporting. The inter-relationship between IAS 16 and the Conceptual Framework for Financial Reporting has also been addressed in FRK201. Therefore, it is assumed that you already know, understand and can apply all of the content of this Framework to IAS 16.

None of the FRK201 content will be addressed again in FRK300 lectures, other than a brief revision of matters related to revaluations. However, all of this content may be tested at any time in any FRK300 tests. Some of the homework questions provided in a separate handout, Questions and suggested solutions, do address some of the issues already covered in FRK201. You should also refer to the material provided to you in FRK201 where necessary.

What line items of an entity’s financial statements are affected by IAS 16?

Note: The impact on the line items of the statement of cash flows will be addressed in the lecture material of IAS 7, Statement of Cash Flows, later in the year.

Example Limited Statement of financial position as at ………..

R

Assets Non-current assets Property, plant and equipment Investment property Goodwill Other intangible assets Financial assets Deferred tax (if debit balance) Current assets Inventories (in a manufacturing environment) Trade receivables Other current assets Cash and cash equivalents Current tax prepaid (if current tax owing by SARS)

Total assets


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Equity and liabilities R Total equity Share capital Retained earnings/Accumulated loss Other components of equity (if revaluation surpluses exist for revalued assets)

Non-current liabilities Long-term borrowings Deferred tax (if credit balance) Long-term provisions Current liabilities Trade and other payables Short-term borrowings Short-term portion of long-term borrowings Current tax payable (if current tax owing to SARS) Short-term provisions Bank overdraft

Total equity and liabilities

Example Limited Statement of profit or loss and other comprehensive income for the year ended on ………..

R

Revenue Cost of sales (if assets used in manufacturing operation) Gross profit Other income (if gains on disposal of assets) Distribution costs (if assets used in distribution activities) Administrative expenses (if assets used in administrative activities) Other expenses (if assets used in activities not covered by above) Net finance costs Finance costs Finance income

Profit before tax Income tax expense (including current and deferred tax) Profit for the year Other comprehensive income Items that will not be reclassified to profit or loss: Revaluations of property, plant and equipment Revaluation surplus/(deficit) on plant Income tax expense Mark-to-market reserve on equity instruments Re-measurement gains/losses on defined benefit plan Cash flow hedge reserve Items that will be reclassified to profit or loss: Foreign currency translation reserve Mark-to-market reserve on debt instruments Cash flow hedge reserve

Total comprehensive income for the year will be presented with their tax effect (FRK300 will address these only in the IAS16 and IAS38 study material). The tax implications on the other items here are not addressed in FRK300.


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Example Limited Statement of changes in equity for the year ended on ……….. Share

capital R

Revaluation surplus

R

Retained earnings

R Balance at beginning of the year

Total comprehensive income for the year

Profit for the year Other comprehensive income for the year

Will be net of tax

effect

Transfer to retained earnings

Will be net of tax effect

Balance at end of the year

Revaluation model of IAS 16 (IAS 16.31 - .42)

What are the rules that apply to the revaluation model?

The following questions are based on your FRK201 knowledge. Can this model be applied on the initial recognition of property, plant and

equipment? (IAS 16.31) Is the application of the revaluation model an accounting policy choice for

measurement after recognition? (IAS 16.29) Can the revaluation model be applied to all property, plant and equipment?

(IAS 16.31) How often should revaluations be performed? (IAS 16.31 and .34) How is the elimination method of accounting for a revaluation applied?

(IAS 16.35(b)) Should all of the property, plant and equipment be revalued if an entity adopts the

revaluation model? (IAS 16.36) What characteristics does a class of assets have? (IAS 16.37)


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If there is more than one asset in a class of assets, should they all be revalued at

the same time? (IAS 16.38) If a revaluation surplus arises on the revaluation of an asset, how should it be

recognised? (IAS 16.39) If a revaluation deficit arises on the revaluation of an asset, how should it be

recognised? (IAS 16.40) How should the revaluation surplus that is recognised in equity be realised?

(IAS 16.41) If the asset that was revalued is depreciable, how is the realisation of the

revaluation surplus calculated? (IAS 16.41) When an asset has been revalued, what other issues should be considered?

(IAS 16.51 and .61) How should these issues be accounted for? (IAS 16.51 and .61) If an entity previously accounted for a class of property, plant and equipment on

the cost model and changed this to the revaluation model, is this a change in accounting policy? (IAS 8.17)

If this is a change in accounting policy, how should it be accounted for? (IAS 8.17) If items are stated at revalued amounts, what information must be specifically

disclosed in addition to that information that must be disclosed for all assets whether on the cost or revaluation model? (IAS 16.77)

Accounting for the revaluation of property, plant and equipment using the elimination method [IAS 16.35(b)]

In FRK201, only the accounting method of IAS 16.35(b) was addressed. Further, all revaluations were done at the beginning of the year and the net replacement cost at the beginning of the year was provided for this purpose. The net replacement cost is the approximate value of an asset that is similar to the asset being revalued and that is of the same age and condition as the asset being revalued. No income tax implications were considered in FRK201. Class Examples 1 to 3 (inclusive) are based on FRK201 knowledge and will not necessarily be dealt with in the FRK300 lectures. You are nonetheless strongly advised to work through them and make sure that your FRK201 knowledge is sound.


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Class Example 1 – Revision of FRK201 knowledge (revaluation surplus) On 1 January 20X4, SATURN LIMITED purchased equipment for R100 000 that was available for use as intended by management immediately. Depreciation is written off on a basis over 10 years with no residual value. No changes to the depreciation method, useful life and residual value of this equipment were made from 1 January 20X4 to 31 December 20X6. On 1 January 20X7, the company decided to revalue the equipment every year at the beginning of the year. The net replacement cost of similar equipment on 1 January 20X7 was estimated by an independent professional valuator to be R150 000. On this date, the depreciation method, remaining useful life and residual value of the equipment remained unchanged. Saturn Limited’s accounting policy related to revalued assets is as follows: - accumulated depreciation is eliminated against the gross carrying amount of the

asset on revaluation; - depreciation is calculated annually on the latest revalued amount on the method;

and - revaluation surpluses arising on the revaluation of depreciable assets realise with

use of the asset. Revaluation surpluses arising on non-depreciable assets realise on the sale of the asset.

Disclosable income and expenses are presented in a “Profit before tax” note by Saturn Limited. Ignore all income tax implications. Required: a) Prepare the general journal entries of Saturn Limited for the year ended

31 December 20X7 from the above information in accordance with International Financial Reporting Standards (IFRS). Closing journal entries are not required.

b) Present the above information in an extract from the statement of profit or loss

and other comprehensive income and an extract from the statement of changes in equity of Saturn Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required. Assume for this purpose that the profit for the year ended 31 December 20X7 is R500 000 before any amounts related to the information provided has been taken into account. The balance on retained earnings on 1 January 20X7 is R300 000.

c) Disclose the above information in the notes to the financial statements of Saturn

Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.


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Suggested solution: Calculations: 1. Carrying amount 1/1/20X7 R Cost (given) 100 000 Accumulated depreciation (R100 000/10 years x 3 years) (30 000) Thus carrying amount 1/1/20X7 (R100 000/10 years x 7 years) 70 000 2. Revaluation surplus 1/1/20X7 R Net replacement cost 1/1/20X7 (given) 150 000 Carrying amount 1/1/20X7 (calc 1) 70 000 Thus revaluation surplus 1/1/20X7 80 000

3. Carrying amount 31/12/20X7 (on revalued basis) R Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Revaluation surplus 1/1/20X7 (per calc 2) 80 000 Net replacement cost (revalued amount) 1/1/20X7 (given) 150 000 Depreciation 1/1/20X7 – 31/12/20X7 (R150 000/7 years) (21 429) Carrying amount 31/12/20X7 (R150 000/7yrs x 6 years) 128 571 4. Carrying amount 31/12/20X7 (on cost model) R Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Depreciation 1/1/20X7 – 31/12/20X7 (R100 000/10 years) (10 000) Carrying amount 31/12/20X7 (R100 000/10 years x 6 years) 60 000 5. Realisation of revaluation surplus 31/12/20X7 (IAS 16.41) R Depreciation on revalued amount (calc 3) 21 429 Depreciation on historical cost basis (calc 4) 10 000 Thus realisation of revaluation surplus 31/12/20X7 11 429

Part a – General journal entries for the year ended 31 December 20X7

Dr R

Cr R

1 January 20X7

1. Accumulated depreciation - equipment (SFP) 30 000 Equipment (SFP) 30 000 (Refer calc 1) Elimination of accumulated depreciation against

gross carrying amount of asset on date of revaluation


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Dr

R Cr R

2. Equipment (SFP) 80 000 Revaluation surplus (OCI) 80 000 (Refer calc 2) Recognition of revaluation surplus Alternatively, Jnl 1 and Jnl 2 can be done as follows: Equipment (at revalued amount) (SFP) 150 000 Accumulated depreciation - equipment (SFP) 30 000 Equipment (at cost) (SFP) 100 000 Revaluation surplus (OCI) 80 000 (Refer calc 1 – 2) Elimination of accumulated depreciation against

gross carrying amount of asset on date of revaluation and recognition of revaluation surplus

31 December 20X7 3. Depreciation (P/L) 21 429 Accumulated depreciation - equipment (SFP) 21 429 (Refer calc 3) Depreciation for year 4. Revaluation surplus (equity) 11 429 Retained earnings (equity) 11 429 (Refer calc 5) Realisation of revaluation surplus

Part b – presentation for the year ended 31 December 20X7 Saturn Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X7 R Profit for the year (R500 000 – R21 429 depreciation (calc 3)) 478 571 Other comprehensive income: Items that will not be reclassified to profit or loss Gain on revaluation of equipment (calc 2) 80 000 Total comprehensive income for the year 558 571


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Saturn Limited Extract from the statement of changes in equity for the year ended 31 December 20X7 Revaluation

surplus Retained earnings

R R Balance beginning of the year (given) - 300 000 Total comprehensive income for the year (above) 80 000 478 571 Profit for the year - 478 571 Other comprehensive income for the year 80 000 - Transfer to retained earnings (calc 5) (11 429) 11 429 Balance end of the year 68 571 790 000

Part c – disclosure in notes for the year ended 31 December 20X7 Saturn Limited

Notes for the year ended 31 December 20X7

1. Accounting policy

1.1 Property, plant and equipment

Equipment is stated at revalued amount, being net replacement cost less accumulated depreciation and accumulated impairment losses. On revaluation, the accumulated depreciation is eliminated against the gross carrying amount of the asset. The revaluation surplus realises with use of the asset.

Depreciation on equipment is written-off on the straight-line basis over the estimated useful life of the asset. The useful life is estimated at 10 years with no significant residual value.

2. Property, plant and equipment Equipment

20X7 R

Carrying amount at beginning of year (calc 1) 70 000 Gross carrying amount 100 000 Accumulated depreciation (30 000)

Movements during the year: 58 571 Revaluation surplus (calc 2) 80 000 Depreciation (calc 3) (21 429)

Carrying amount at end of year 128 571 Gross carrying amount (given) 150 000 Accumulated depreciation (above) (21 429)

The equipment was revalued by an independent professional valuator on 1 January 20X7.

If the equipment was accounted for on the cost model, the carrying amount would have been R60 000 (calc 5).


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Comments: The gross carrying amount at the end of the year = net replacement cost at

the beginning of the year. The accumulated depreciation at the end of the year = depreciation for the

current year only. This will only be true for the year in which the revaluation is first recognised. In the following years, it will be the cumulative amount of depreciation recognised since the last revaluation.

3. Profit before tax

R Profit before tax is stated after the following items have been taken into account:

Expenses Depreciation (calc 3) 21 429

Class Example 2 – Revision of FRK201 knowledge (revaluation deficit) On 1 January 20X4, SATURN LIMITED purchased equipment for R100 000 that was available for use as intended by management immediately. Depreciation is written off on a straight-line basis over 10 years with no residual value. No changes to the depreciation method, useful life and residual value of this equipment were made from 1 January 20X4 to 31 December 20X6. On 1 January 20X7, the company decided to revalue the equipment every year at the beginning of the year. The net replacement cost of similar equipment on 1 January 20X7 was estimated by an independent professional valuator to be R50 000. On this date, the depreciation method, remaining useful life and residual value of the equipment remained unchanged. Saturn Limited’s accounting policy related to revalued assets is as follows: - accumulated depreciation is eliminated against the gross carrying amount of the

asset on revaluation; - depreciation is calculated annually on the latest revalued amount on the straight-

line method; and - revaluation surpluses arising on the revaluation of depreciable assets realise with


Disclosable income and expenses are presented in a “Profit before tax” note by Saturn Limited.

Ignore all income tax implications.


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Required: a) Prepare the general journal entries for the year ended 31 December 20X7 of

Saturn Limited from the above information in accordance with International Financial Reporting Standards (IFRS). Closing journal entries are not required.





Suggested solution:

Calculations:

1. Carrying amount 1/1/20X7 R

Cost (given) 100 000 Accumulated depreciation (R100 000/10 years x 3 years) (30 000) Thus carrying amount 1/1/20X7 (R100 000/10 years x 7 years) 70 000

2. Revaluation surplus 1/1/20X7 R Net replacement cost 1/1/20X7 (given) 50 000 Carrying amount 1/1/20X7 (calc 1) 70 000 Thus revaluation deficit 1/1/20X7 (20 000)

3. Carrying amount 31/12/20X7 (on revalued basis) R

Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Revaluation deficit 1/1/20X7 (per calc 2) (20 000) Net replacement cost (revalued amount) 1/1/20X7 (given) 50 000 Depreciation 1/1/20X7 – 31/12/20X7 (R50 000/7 years) (7 143) Carrying amount 31/12/20X7 (R50 000/7yrs x 6 years) 42 857

4. Carrying amount 31/12/20X7 (on cost model) R

Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Depreciation 1/1/20X7 – 31/12/20X7 (R100 000/10 years) (10 000) Carrying amount 31/12/20X7 (R100 000/10 years x 6 years) 60 000


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R 5. Realisation of revaluation surplus 31/12/20X7 (IAS 16.41) There can be no realisation since no surplus exists.

Part a – General journal entries for the year ended 31 December 20X7 Dr

R Cr R

1 January 20X7 1. Accumulated depreciation - equipment (SFP) 30 000 Equipment (SFP) 30 000 (Refer calc 1) Elimination of accumulated depreciation against


2. Revaluation deficit (P/L) 20 000 Equipment (SFP) 20 000 (Refer calc 2) Recognition of revaluation surplus Alternatively, Jnl 1 and Jnl 2 can be done as follows: Equipment (at revalued amount) (SFP) 50 000 Accumulated depreciation - equipment (SFP) 30 000 Equipment (at cost) (SFP) 100 000 Revaluation deficit (P/L) 20 000 (Refer calc 1 – 2) Elimination of accumulated depreciation against

gross carrying amount of asset on date of revaluation and recognition of revaluation deficit

31 December 20X7 3. Depreciation (P/L) 7 143 Accumulated depreciation - equipment (SFP) 7143 (Refer calc 3) Depreciation for year


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Part b – presentation for the year ended 31 December 20X7 Saturn Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X7 R Profit for the year (R500 000 – R7 143 depreciation (calc 3) - R20 000 revaluation deficit (calc 2))

472 857

Other comprehensive income: - Total comprehensive income for the year 472 857

Saturn Limited Extract from the statement of changes in equity for the year ended 31 December 20X7 Retained

earnings R Balance beginning of the year 300 000 Total comprehensive income for the year (above) 472 857 Profit for the year 472 857 Other comprehensive income for the year - Balance end of the year 772 857

Part c – disclosure in notes for the year ended 31 December 20X7 Saturn Limited Notes for the year ended 31 December 20X7 1. Accounting policy 1.2 Property, plant and equipment

Equipment is stated at revalued amount, being net replacement cost less accumulated depreciation and accumulated impairment losses. On revaluation, the accumulated depreciation is eliminated against the gross carrying amount of the asset. The revaluation surplus realises with use of the asset. Depreciation on equipment is provided on the straight-line basis over the estimated useful life of the asset. The useful life is estimated at 10 years with no significant residual value.


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20X7 R


Movements during the year: (27 143) Revaluation deficit (calc 2) (20 000) Depreciation (calc 3) (7 143)

Carrying amount at end of year 42 857 Gross carrying amount (given) 50 000 Accumulated depreciation (above) (7 143)



Comments:

The gross carrying amount at the end of the year = net replacement cost at the beginning of the year.

The accumulated depreciation at the end of the year = depreciation for the current year only. This will only be true for the year in which the revaluation is first recognised. In the following years, it will be the cumulative amount of depreciation recognised since the last revaluation.

4. Profit before tax R

Profit before tax is stated after the following items have been taken into account:


Revaluation deficit on equipment (assume material) (calc 2) 20 000

Class Example 3 – Revision of FRK201 knowledge (revaluation deficit with existing revaluation surplus)

On 1 January 20X4, SATURN LIMITED purchased equipment for R100 000 that was available for use as intended by management immediately. Depreciation is written off on a straight-line basis over 10 years with no residual value. No changes to the depreciation method, useful life and residual value of this equipment were made from 1 January 20X4 to 31 December 20X5. On 1 January 20X6, the company decided to revalue the equipment every year at the beginning of the year. The net replacement cost of similar equipment on 1 January 20X6 was estimated by an independent professional valuator to be


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R150 000 whilst on 1 January 20X7 it was R65 000. On both of these dates, the depreciation method, remaining useful life and residual value of the equipment remained unchanged. Saturn Limited’s accounting policy related to revalued assets is as follows: - accumulated depreciation is eliminated against the gross carrying amount of the

asset on revaluation; - depreciation is calculated annually on the latest revalued amount on the straight-

line method; and - revaluation surpluses arising on the revaluation of depreciable assets realise with


Disclosable income and expenses are presented in a “Profit before tax” note by Saturn Limited. Ignore all income tax implications. Required: a) Prepare the general journal entries for the year ended 31 December 20X7 of


b) Present the above information in an extract from the statement of profit or loss and other comprehensive income and an extract from the statement of changes in equity of Saturn Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required. Assume for this purpose that the profit for the year ended 31 December 20X7 is R500 000 before any amounts related to the information provided has been taken into account. The balance on retained earnings on 1 January 20X7 is R300 000.

c) Disclose the above information in the notes to the financial statements of Saturn Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

Suggested solution:

Calculations:


Cost (given) 100 000 Accumulated depreciation (R100 000/10 years x 2 years) (20 000) Thus carrying amount 1/1/20X6 (R100 000/10 years x 8 years) 80 000 2. Revaluation surplus 1/1/20X6 R Net replacement cost 1/1/20X6 (given) 150 000 Carrying amount 1/1/20X6 (calc 1) 80 000 Thus revaluation surplus 1/1/20X6 70 000


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Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X6 (per calc 1) (20 000) Carrying amount 1/1/20X6 80 000 Revaluation surplus 1/1/20X6 (per calc 2) 70 000 Net replacement cost (revalued amount) 1/1/20X6 (given) 150 000 Depreciation 1/1/20X7 – 31/12/20X6 (R150 000/8 years) (18 750) Carrying amount 31/12/20X6 (R150 000/8yrs x 7 years) 131 250

4. Realisation of revaluation surplus 31/12/20X6 (IAS 16.41) R

Depreciation on revalued amount (calc 3) 18 750 Depreciation on historical cost basis (R100 000/10 years) 10 000 Thus realisation of revaluation surplus 31/12/20X6 8 750

5. Balance on revaluation surplus 31/12/20X6 R

Arising on revaluation 1/1/20X6 (calc 2) 70 000 Realised on 31/12/20X6 (calc 4) (8 750) Thus balance on revaluation surplus on 31/12/20X6 61 250

6. Revaluation deficit 1/1/20X7 R

Net replacement cost 1/1/20X7 (given) 65 000 Carrying amount 1/1/20X7 (calc 3) 131 250 Thus revaluation deficit 1/1/20X7 (66 250) Recognised in revaluation surplus (OCI) (calc 5) (61 250) Recognised in profit or loss (5 000)


Carrying amount 31/12/20X6 (calc 3) 131 250 Revaluation deficit 1/1/20X7 (per calc 6) (66 250) Net replacement cost (revalued amount) 1/1/20X7 (given) 65 000 Depreciation 1/1/20X7 – 31/12/20X7 (R65 000/7 years) (9 286) Carrying amount 31/12/20X7 (R65 000/7yrs x 6 years) 55 714

8. Realisation of revaluation surplus 31/12/20X7 (IAS 16.41)

No realisation based on usage since whole revaluation surplus utilised for revaluation deficit on 1/1/20X7 (refer calc 6)


Balance on revaluation surplus on 31/12/20X6 (calc 5) 61 250 Recognition of revaluation deficit 1/1/20X7 (calc 6) (61 250) -

10. Carrying amount 31/12/20X7 (on cost model) R

Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (30 000) Carrying amount 1/1/20X7 70 000 Depreciation 1/1/20X7 – 31/12/20X7 (R100 000/10 years) (10 000) Carrying amount 31/12/20X7 (R100 000/10 years x 6 years) 60 000


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Dr R

Cr R

1 January 20X7

1. Accumulated depreciation - equipment (SFP) 18 750 Equipment (SFP) 18 750 (Refer calc 3) Elimination of accumulated depreciation against


2. Revaluation deficit (P/L) 5 000 Revaluation surplus (OCI) 61 250 Equipment (SFP) 66 250 (Refer calc 6) Recognition of revaluation surplus

Alternatively, Jnl 1 and Jnl 2 can be done as follows:

1. Equipment (at revalued amount) (SFP) 65 000 Accumulated depreciation - equipment (SFP) 18 750 Equipment (at revalued amount) (SFP) 150 000 Revaluation surplus (OCI) 61 250 Revaluation deficit (P/L) 5 000 (Refer calc 3 and 6) Elimination of accumulated depreciation against

gross carrying amount of asset on date of revaluation and recognition of revaluation deficit

31 December 20X7

3. Depreciation (P/L) 9 286 Accumulated depreciation - equipment (SFP) 9 286 (Refer calc 7) Depreciation for year

Part b – presentation for the year ended 31 December 20X7 Saturn Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X7 R Profit for the year (R500 000 – R5 000 revaluation deficit (calc 6) – R9 286 depreciation (calc 7))

485 714

Other comprehensive income: Items that will not be reclassified to profit or loss Deficit on revaluation of equipment (calc 6) (61 250)

Total comprehensive income for the year 424 464


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Saturn Limited Extract from the statement of changes in equity for the year ended 31 December 20X7

Revaluation surplus

Retained earnings

R R Balance beginning of the year ( calc 5) (given) 61 250 300 000 Total comprehensive income for the year (above) (61 250) 485 714 Profit for the year - 485 714 Other comprehensive income for the year (61 250) - Balance end of the year - 785 714

Part c – disclosure in notes for the year ended 31 December 20X7

Saturn Limited





Depreciation on equipment is written off on the straight-line basis over the estimated useful life of the asset. The useful life is estimated at 10 years with no significant residual value.


20X7 R


Movements during the year: (75 536) Revaluation deficit (calc 6) (66 250) Depreciation (calc 7) (9 286)

Carrying amount at end of year 55 714 Gross carrying amount 65 000 Accumulated depreciation (9 286)




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Comments:

The gross carrying amount at the end of the year = net replacement cost at the beginning of the year.

The accumulated depreciation at the end of the year = depreciation for the

current year only. This will only be true for the year in which the revaluation is first recognised. In the following years, it will be the cumulative amount of depreciation recognised since the last revaluation.




Revaluation deficit – equipment (assume material) (calc 6) 5 000

Accounting for the revaluation of property, plant and equipment where the gross carrying amount is adjusted [IAS 16.35(a)]

This method requires that when an asset is revalued, the gross carrying amount of the asset is adjusted, in a manner that is consistent with the revaluation of the carrying amount of the asset. The gross carrying amount of an asset is the carrying amount before any depreciation or impairment losses have been taken into account. IAS16.35(a) gives examples of how the gross carrying amount can be adjusted, these being: the gross carrying amount may be restated with reference to observable market

data; or the gross carrying amount may be restated proportionately to the change in the

carrying amount of the asset. The accumulated depreciation on the date of revaluation is adjusted to equal the difference between the gross carrying amount (as adjusted) and the carrying amount of the asset following revaluation (i.e. the net replacement cost) having taken any accumulated impairment losses into account. The balance on the accumulated depreciation and impairment losses account immediately following revaluation will thus be the balancing amount. In accordance with this method, both the gross carrying amount and the accumulated depreciation amount (including any accumulated impairment losses) of the asset on the date of revaluation must be adjusted, so that the carrying amount of the asset immediately after revaluation comprises the following:


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R Gross carrying amount (= gross replacement cost) xxx xxx Accumulated depreciation and impairment losses (= balancing amount)

(xxx xxx)

Revalued amount (= net replacement cost) xxx xxx Gross replacement cost is the approximate value of a new and unused asset that is similar to the asset being revalued. Note: In accordance with the elimination method, the carrying amount of the asset immediately after revaluation comprises the following: R Gross carrying amount (= net replacement cost) xxx xxx Accumulated depreciation and impairment losses - Revalued amount (= net replacement cost) xxx xxx

It should be noted that the method used to adjust the gross carrying amount of the asset on the date of revaluation in accordance with IAS 16.35(a) (i.e.: observable market data or proportionate restatement), is not part of the accounting policy. The accounting policy would be that when assets are revalued, the gross carrying amount of the asset is adjusted [IAS 16.35(a)] or the elimination method is applied ([IAS 16 35(b)]. Further, the basis used in accordance with IAS 16.35(a) to adjust the gross carrying amount of the asset (i.e.: observable market data or proportionate restatement) does not need to be the same for all classes of an entity’s assets that are revalued nor does it have to be the same for all assets within a specific class of assets. In other words, the gross carrying amount for machines could be restated with reference to observable market data whilst the gross carrying amount of buildings could be restated proportionately to the change in the carrying amount of the asset. Further, two machines (i.e. same class of asset) can be revalued by adjusting the gross carrying amount of the machines where one machine’s gross carrying amount is restated by reference to observable market data whilst the other machine’s gross carrying amount can be restated proportionately to the change in the carrying amount of the asset. The application of IAS 16.35(a) is explained in the examples provided below.

Application of IAS 16.35(a) where the gross carrying amount is adjusted with reference to observable market data

In such cases, both the gross carrying amount and the net replacement cost on the date of revaluation would need to be given since neither of these amounts can be calculated using a proportionate restatement method. The gross replacement cost of the asset will be the adjusted gross carrying amount of the asset whilst the net replacement cost would be the revalued carrying amount of the asset. The difference between these two amounts (balancing amount) would then be the restated accumulated depreciation on the date of revaluation. To account for the revaluation of the asset, a journal entry will be necessary to record the differences between these new amounts (restated amounts) and the amounts


20

already in the general ledger with the resultant recognition of a revaluation surplus or revaluation deficit. It should be noted that the gross replacement cost would approximate the value of a similar new asset, whilst the net replacement cost would approximate the value of a similar asset of the same age and condition as the asset being revalued.

Class Example 4 – Gross carrying amount is adjusted with reference to observable market data

Scenario 1 – revaluation surplus

Plant with an original cost of R500 000 has a carrying amount of R460 000 on 31 December 20X9, which is the entity’s reporting date. Since the date of acquisition until 31 December 20X9, there have been no changes in the depreciation method, useful life or the residual value of the asset. The residual value was estimated to be Rnil. On 1 January 20X10, the plant was revalued for the first time. The entity’s accounting policy related to revaluations is to adjust the gross carrying amount of the asset on revaluation. On 1 January 20X10, the gross carrying amount was adjusted with reference to observable market data and the following data was obtained: Gross replacement cost on 1 January 20X10 is R620 000; and Net replacement cost on 1 January 20X10 is R560 000. The restated accumulated depreciation and resultant revaluation surplus can be calculated as follows: Carrying

amount 1/1/20X10

R

Revalued amount

1/1/20X10 R

Difference to be accounted for

1/1/20X10 R

Gross carrying amount 500 000 (a) 620 000 120 000 Dr Accumulated depreciation (40 000) (c) (60 000) (20 000) Cr Carrying amount Net replacement cost

460 000

(b) 560 000

Revaluation surplus (d) (100 000) Cr a) Given as the gross replacement cost b) Given as the net replacement cost c) R620 000 – R560 000 = R60 000 (balancing amount) d) R560 000 – R460 000 = R100 000 The revaluation would be accounted for as follows:


21

Dr R

Cr R

1 January 20X10 Plant (SFP) 120 000 Accumulated depreciation - plant (SFP) 20 000 Revaluation surplus (OCI) 100 000 Recognition of revaluation of plant where the gross carrying amount is adjusted

NB: BOTH the asset account (Plant) and the accumulated depreciation for plant general ledger accounts are adjusted when the revaluation is accounted for. The journal entry is thus NOT the same as the journal that would have been processed if the elimination method had been used.

Scenario 2 – revaluation deficit Plant with an original cost of R500 000 has a carrying amount of R460 000 on 31 December 20X9, which is the entity’s reporting date. Since the date of acquisition until 31 December 20X9, there have been no changes in the depreciation method, useful life or the residual value of the asset that was estimated to be Rnil. On 1 January 20X10, the plant was revalued for the first time. The entity’s accounting policy related to revaluations is to adjust the gross carrying amount of the asset. On 1 January 20X10, the gross carrying amount was adjusted with reference to observable market data and the following data was obtained: Gross replacement cost on 1 January 20X10 is R620 000; and Net replacement cost on 1 January 20X10 is R440 000. The restated accumulated depreciation and resultant revaluation deficit can be calculated as follows: Carrying

amount 1/1/20X10

R

Revalued amount

1/1/20X10 R


1/1/20X10 R

Gross carrying amount 500 000 (a) 620 000 120 000 Dr Accumulated depreciation (40 000) (c) (180 000) (140 000) Cr Carrying amount Net replacement cost

460 000

(b) 440 000

Revaluation deficit (see above) (d) 20 000 Dr a) Given as the gross replacement cost b) Given as the net replacement cost c) R620 000 – R440 000 = R180 000 (balancing amount) d) R460 000 – R440 000 = R20 000


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The revaluation would be accounted for as follows: Dr

R Cr R

1 January 20X10

Plant (SFP) 120 000 Accumulated depreciation - plant (SFP) 140 000 Revaluation deficit (P/L) 20 000 Recognition of revaluation of plant where the gross carrying amount is adjusted

NB: BOTH the asset account (Plant) and the accumulated depreciation for plant general ledger accounts are adjusted when the revaluation is accounted for. The journal entry is thus NOT the same as the journal that would have been processed if the elimination method had been used.

Application of IAS 16.35(a) where the gross carrying amount is adjusted by restating it proportionately to the change in the carrying amount of the asset

In such cases, only the net replacement cost on the date of revaluation would be given, since the adjusted gross carrying amount can be calculated by way of proportionate restatement. When the asset is revalued, the gross carrying amount is restated proportionately to the change in the (revalued) carrying amount of the asset. The gross carrying amount that has been calculated based on the proportionate restatement, would in this case, be the gross replacement cost. The difference between the restated gross carrying amount (i.e.: the gross replacement cost) and the revalued carrying amount (net replacement cost) will be the restated accumulated depreciation on the date of revaluation. To account for the revaluation of the asset, a journal entry will be necessary to record the differences between these new amounts (restated amounts) and the amounts already in the general ledger with the resultant recognition of a revaluation surplus or revaluation deficit. Note that the gross replacement cost amount (as calculated) would approximate the value of a similar new asset whilst the net replacement cost would approximate the value of a similar asset of the same age and condition as the asset being revalued.

Class Example 5 – Gross carrying amount is adjusted by restating it proportionately to the change in the carrying amount of the asset

Scenario 1 – revaluation surplus

On 1 January 20X7, a machine that had been purchased for R600 000 has a carrying amount of R480 000 after it had been depreciated over its estimated useful life of 10 years on the straight-line basis with no residual value. Since the date of acquisition


23

until 31 December 20X6, there have been no changes in the depreciation method, useful life or the residual value of the asset. On 1 January 20X7, the machine was revalued for the first time to a net replacement cost of R560 000. The depreciation method, total useful life and residual value of the machine remained unchanged on this date. The entity’s accounting policy related to revaluations is to adjust the gross carrying amount of the machine. On 1 January 20X7, the entity adjusted the gross carrying amount of the machine by restating it proportionately to the change in the carrying amount. The restated gross carrying amount (i.e.: the gross replacement cost), accumulated depreciation and resultant revaluation surplus can be calculated as follows: Carrying

amount 1/1/20X7

R

Revalued amount 1/1/20X7

R


1/1/20X7 R

Gross carrying amount 600 000 (b) 700 000 100 000 Dr Accumulated depreciation (120 000) (c) (140 000) (20 000) Cr Carrying amount Net replacement cost

480 000

(a) 560 000

Revaluation surplus (d) (80 000) Cr a) Given as the net replacement cost b) [R560 000/R480 000] x R600 000 = R700 000 (i.e. the gross replacement cost) c) R700 000 – R560 000 = R140 000 (balancing amount) d) R480 000 – R560 000 = - R80 000 The revaluation would be accounted for as follows: Dr

R Cr R

1 January 20X7

Machine (SFP) 100 000 Accumulated depreciation - machine (SFP) 20 000 Revaluation surplus (OCI) 80 000 Recognition of revaluation of plant where the gross carrying amount is adjusted

NB: BOTH the asset account (Machine) and the accumulated depreciation for machine general ledger accounts are adjusted when the revaluation is accounted for. The journal entry is thus NOT the same as the journal that would have been processed if the elimination method had been used.


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Scenario 2 – revaluation deficit On 1 January 20X7, a machine that had been purchased for R600 000 has a carrying amount of R480 000 after it had been depreciated over its estimated useful life of 10 years on the straight-line basis with no residual value. Since the date of acquisition until 31 December 20X6, there have been no changes in the depreciation method, useful life or the residual value of the asset. On 1 January 20X7, the machine was revalued for the first time to a net replacement cost of R350 000. The depreciation method, total useful life and residual value of the machine remained unchanged on this date. The entity’s accounting policy related to revaluations is to adjust the gross carrying amount of the machine. On 1 January 20X7, the entity adjusted the gross carrying amount of the machine by restating it proportionately to the change in the carrying amount. The restated gross carrying amount (i.e: the gross replacement cost), accumulated depreciation and resultant revaluation deficit can be calculated as follows: Carrying

amount 1/1/20X7

R


R


1/1/20X7 R

Gross carrying amount 600 000 (b) 437 500 (162 500) Cr Accumulated depreciation (120 000) (c) (87 500) 32 500 Dr Carrying amount Net replacement cost

480 000

(a) 350 000

Revaluation deficit (see above) (d) 130 000 Dr a) Given as the net replacement cost b) [R350 000/R480 000] x R600 000 = R437 500 (i.e. the gross replacement cost) c) R436 500 – R350 000 = R87 500 (balancing amount) d) R480 000 – R350 000 = R130 000 The revaluation would be accounted for as follows: Dr

R Cr R

1 January 20X7

Accumulated depreciation - machine (SFP) 32 500 Machine (SFP) 162 500 Revaluation deficit (P/L) 130 000 Recognition of revaluation of plant where the gross carrying amount is adjusted

NB: BOTH the asset account (Machine) and the accumulated depreciation for machine general ledger accounts are adjusted when the revaluation is accounted for. The journal entry is thus NOT the same as the journal that would have been processed if the elimination method had been used.


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Class Example 6 – Application of IAS 16.35(a) with journal entries, presentation and disclosure

On 1 January 20X4, SATURN LIMITED purchased equipment for R100 000 that was available for use as intended by management immediately. Depreciation is written off on a straight-line basis over 10 years with no residual value. There have been no changes in the depreciation method, useful life and residual value of the equipment during the period 1 January 20X4 to 31 December 20X6. On 1 January 20X7, the company decided to revalue the equipment every year at the beginning of the year. The net replacement cost of similar equipment on 1 January 20X7 was estimated by an independent professional valuator to be R150 000. On this date, the depreciation method, remaining useful life and residual value of the equipment remained unchanged. Saturn Limited’s accounting policy related to revalued assets is as follows: - on revaluation, the gross carrying amount is adjusted; - depreciation is calculated annually on the latest revalued amount in accordance

with the straight-line method; and - any revaluation surpluses arising on the revaluation of depreciable assets realise

with use of the asset. Any revaluation surpluses arising on non-depreciable assets realise on the sale of the asset.

On 1 January 20X7, Saturn Limited adjusted the gross carrying amount of the equipment by restating it proportionately to the change in the carrying amount of the equipment on the date of the revaluation. Disclosable income and expenses are presented in a “Profit before tax” note by Saturn Limited. Ignore all income tax implications. Required: a) Prepare the general journal entries for the year ended 31 December 20X7 of







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Suggested solution: Calculations: 1. Carrying amount 1/1/20X7 R Cost (given) 100 000 Accumulated depreciation (R100 000/10 years x 3 years) (30 000) Thus carrying amount 1/1/20X7 (R100 000/10 years x 7 years) 70 000

2. Revaluation surplus 1/1/20X7 R Net replacement cost 1/1/20X7 (given) 150 000 Carrying amount 1/1/20X7 (calc 1) 70 000 Thus revaluation surplus 1/1/20X7 80 000 3. Restatement on 1/1/20X7 Carrying

amount 1/1/20X7

R


R

Difference to be

recognised R

Gross carrying amount 100 000 (b) 214 286 114 286 Dr Accumulated depreciation (30 000) (c) (64 286) (34 286) Cr Carrying amount Net replacement cost

70 000 (a) 150 000

Revaluation surplus (calc 2) (d) (80 000) Cr

(a) Given as the net replacement cost (b) R150 000/R70 000 x R100 000 = R214 286 (i.e.: gross replacement cost) (c) R214 286 – R150 000 = R64 286 (balancing amount) (d) R150 000 – R70 000 = R80 000

4. Carrying amount 31/12/20X7 (on revalued basis) R Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Revaluation surplus 1/1/20X7 (per calc 2) 80 000 Net replacement cost (revalued amount) 1/1/20X7 (given) 150 000 Depreciation 1/1/20X7 – 31/12/20X7 (R150 000/7 years) (21 429) Carrying amount 31/12/20X7 (R150 000/7 years x 6 years) 128 571 Represented by: Gross carrying amount – restated 1/1/20X7 (calc 3) 214 286 Accumulated depreciation (85 715) Accumulated depreciation – restated 1/1/20X7 (calc 3) (64 286) Depreciation 1/1/20X7 – 31/12/20X7 (above) (21 429) Carrying amount 31/12/20X7 128 571


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5. Carrying amount 31/12/20X7 (on cost model) R Cost (purchased 1/1/20X4 – given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Depreciation 1/1/20X7 – 31/12/20X7 (R100 000/10 years) (10 000) Carrying amount 31/12/20X7 (R100 000/10 years x 6 years) 60 000 6. Realisation of revaluation surplus 31/12/20X7 (IAS 16.41) R Depreciation on revalued amount (calc 3) 21 429 Depreciation on historical cost basis (calc 4) 10 000 Thus realisation of revaluation surplus 31/12/20X7 11 429


Dr R

Cr R

1 January 20X7

1. Equipment (SFP) 114 286 Accumulated depreciation - equipment (SFP) 34 286 Revaluation surplus (OCI) 80 000 (Refer calc 3) Restatement of gross carrying amount and

accumulated depreciation on date of revaluation and recognition of revaluation surplus

31 December 20X7

2. Depreciation (P/L) 21 429 Accumulated depreciation - equipment (SFP) 21 429 (Refer calc 4) Depreciation for year

3. Revaluation surplus (equity) 11 429 Retained earnings (equity) 11 429 (Refer calc 6) Realisation of revaluation surplus

Part b – presentation for the year ended 31 December 20X7 Saturn Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X7 R Profit for the year (R500 000 – R21 429 depreciation (calc 4)) 478 571

Other comprehensive income: Items that will not be reclassified to profit or loss Gain on revaluation of equipment (calc 2 and 3) 80 000



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Saturn Limited Extract from the statement of changes in equity for the year ended 31 December 20X7

Revaluation surplus

Retained earnings


Part c – disclosure in notes

Saturn Limited




Equipment is stated at revalued amount, being net replacement cost less accumulated depreciation and accumulated impairment losses. On revaluation, the gross carrying amount of equipment is adjusted. The revaluation surplus realises with use of the equipment.

Depreciation on equipment is written off on the straight-line basis over the estimated useful life of the asset. The useful life is estimated at 10 years with no significant residual value.


20X7 R


Movements during the year: 58 571 Revaluation surplus (calc 2 or calc 3) 80 000 Depreciation (calc 4) (21 429)

Carrying amount at end of year 128 571 Gross carrying amount (calc 3) 214 286 Accumulated depreciation (R64 286 (calc 3) + R21 429 (above/calc 4)

(85 715)




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Comments:

The gross carrying amount at the end of the year is the gross replacement cost (approximates the value of a new asset).

The accumulated depreciation at the end of the year = restated accumulated depreciation at the beginning of the year plus the depreciation for the current year.




Accounting for revaluations at the beginning of the year but the net replacement cost is given at the end of the year

In such cases, the net replacement cost that is provided for an asset, would represent the value of a similar asset that is one year older than the asset being revalued.

The calculation of the revaluation surplus / (deficit) amount requires a direct comparison between the carrying amount of the asset and the revalued amount of that asset on the date of revaluation. For this reason, the revalued amount (or the net replacement cost) must be for a similar asset of the same age and condition as the asset being revalued.

Up until now, the class examples have dealt with revaluations being recognised (accounted for) at the beginning of the year where the revalued amount given for this purpose, has been the net replacement cost at the beginning of the year. This revalued amount provided was the approximate value of a similar asset of the same age and condition as the asset being revalued. In order to calculate the revaluation surplus / (deficit), a direct comparison between the carrying amount and the revalued amount (net replacement cost) of the asset at the beginning of the year could be made.

However, circumstances may arise where the entity, whilst accounting for the revaluation of asset at the beginning of the year, is unable to obtain a net replacement cost at the beginning of the year but is able to obtain this value at the end of that year. This means that a direct comparison between the carrying amount at the beginning of the year and the revalued amount (net replacement cost) at the beginning of the year to calculate the revaluation surplus / (deficit) will not be possible. This is so, since the net replacement cost given for this asset is for an asset that is one year older (the value is at the end of that year) than the asset being revalued at the beginning of the year.

This means that the equivalent net replacement cost at the beginning of the year (i.e. the value of an asset of the same age and condition as the asset being revalued) will have to be calculated BEFORE the carrying amount and revalued amount can be compared to calculate the revaluation surplus/(deficit) on the date of revaluation (at the beginning of the year).


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Class Example 7 – Revaluation at beginning of year but net replacement cost at the end of the year provided

On 1 January 20X4, SATURN LIMITED purchased equipment for R100 000 that was available for use as intended by management immediately. Depreciation is written off on a straight-line basis over 10 years with no residual value. There have been no changes in the depreciation method, useful life and residual value from 1 January 20X4 to 31 December 20X6. On 1 January 20X7, the company decided to revalue the equipment every year at the beginning of the year. On this date, the depreciation method, remaining useful life and residual value remained unchanged. Saturn Limited’s accounting policy related to equipment is to adjust the gross carrying amount of the asset on revaluation. On the date of revaluation, the gross carrying amount was restated proportionately to the change in the carrying amount of the equipment. The net replacement cost on 31 December 20X7 was estimated by an independent professional valuator to be R150 000. Calculations required:


Cost (given) 100 000 Accumulated depreciation (R100 000/10 years x 3 years) (30 000) Thus carrying amount 1/1/20X7 (R100 000/10 years x 7 years) 70 000

2. Net replacement cost 1/1/20X7 R

Net replacement cost 31/12/20X7 (given) is for an asset that has a remaining useful life of 6 years/that is one year older than asset being revalued

150 000 Thus, net replacement cost 1/1/20X7 calculated for asset of same age and condition as asset being revalued (i.e. for an asset that has a remaining useful life of 7 years) (R150 000/6 years x 7 years)

175 000 3. Revaluation surplus 1/1/20X7 R

Carrying amount 1/1/20X7 (calc 1) 70 000 Net replacement cost 1/1/20X7 (calc 2) 175 000 Thus revaluation surplus 1/1/20X7 105 000

Note: The information, “On 1 January 20X7, the company decided to revalue the equipment every year at the beginning of the year” could alternatively be given as “On 1 January 20X7, the company decided to revalue the equipment every year. Depreciation is calculated on the last revalued amount. “Either of these ways of providing information related to the revaluation of the asset will indicate that the asset is revalued at the beginning of the year and the revaluation is accounted for at the beginning of the year.


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Comments:

The same calculations would have been necessary if the elimination method was the entity’s accounting policy for revaluations. This is so since the net replacement cost at the beginning of the year would have to be calculated to determine the revaluation surplus / deficit on the date of revaluation, which is at the beginning of the year.

Where the revaluation accounting policy is to adjust the gross carrying amount of the asset, the following is important to understand:

- If you are required to prepare journal entries or the property, plant and

equipment note, you MUST calculate the restated gross carrying amount (gross replacement cost) and accumulated depreciation amount.

- If you are ONLY required to prepare a deferred tax note (and thus by

implication, also a deferred tax calculation), you will NOT need to calculate the restated gross carrying amount (gross replacement cost) and accumulated depreciation amounts since you will only need to calculate the carrying amount (net replacement cost) and the revaluation surplus / deficit amount for this purpose. Remember that the assets and liabilities are included in the deferred tax calculation at their carrying amounts in the statement of financial position at the reporting date.

Income tax implications The income tax implications related to property, plant and equipment accounted for on the cost model have already been addressed in the IAS 12, Income Taxes, study material and lectures. This material will now address the income tax implications related to property, plant and equipment accounted for on the revaluation model.

IAS 16.42 requires that the effects of taxes on income resulting from the revaluation of property, plant and equipment be recognised and disclosed in accordance with IAS 12.

The following paragraphs in IAS 12 need to be borne in mind when considering the income tax implications of revalued property, plant and equipment:

IAS 12.15(b) relates to the exemption from the recognition of a deferred tax liability for all taxable temporary differences that meet specific criteria. Where assets are accounted for using the cost model, this exemption is normally also applicable to temporary differences arising on the subsequent measurement of assets that were exempted from the recognition of deferred tax. This is so since the temporary difference is the same as or is part of the temporary difference that arose on initial recognition).

However, where the amount that was recognised for the asset on initial recognition changes (e.g.: where the carrying amount based on the original cost price of the asset is subsequently changed because of upward revaluations), this exemption will no longer be applicable. When an asset is revalued upwards, no change to the tax base arises and so an additional temporary difference related to the revaluation arises. This temporary difference did not arise on initial recognition (revaluing an asset is a


32

subsequent measurement adjustment) and consequently, the exemption is no longer applicable to this additional temporary difference.

IAS 12.20 deals with assets carried at fair value, which includes assets revalued in terms of IAS 16. In the South African jurisdiction, the revaluation of an asset does not affect the taxable profit in the period of the revaluation which means that the tax base of a revalued asset does not change. However, the future recovery of the carrying amount of the asset will still result in economic benefits flowing to the entity. This future recovery may be through use, sale or a mixture of use and sale. The difference between this revalued carrying amount and the tax base (that does not change on revaluation) will result in a temporary difference, and this may give rise to a deferred tax liability or asset.

IAS 12.51 requires that the measurement of deferred tax liabilities (assets) shall reflect the tax consequences of the manner in which the entity expects, at the reporting date, to recover the carrying amounts of its assets. For FRK300 purposes, this is use other than for those non-depreciable assets covered by IAS 12.51B.

IAS 12.51B relates to the revaluation of non-depreciable assets (e.g.: land). This paragraph requires that the measurement of the deferred tax liability shall reflect the tax consequences of the recovery of the carrying amount of such assets through sale only. This means that if the tax rate applied to the taxable income derived from the use of the asset differs from the tax rate that is applied to the taxable income derived from the sale of the asset, the latter tax rate shall be applied to measure the deferred tax liability. This latter rate would be the Capital Gains Tax rate. For FRK300 purposes, this rate will be assumed to be 0%.

When revaluations are accounted for, revaluation surpluses and deficits arise that are recognised in profit or loss, other comprehensive income or a combination of these. The Objective paragraph of IAS 12 read with IAS 12.58 and IAS 12.61A requires that the tax consequences of transactions and events should be accounted for in the same way that the transaction or event was accounted for (i.e. the tax effect follows the transaction). This means that for those transactions and events recognised in profit or loss, the related tax effects shall also be recognised in profit or loss (e.g.: depreciation and revaluation deficits). Where transactions or events are recognised outside profit or loss in other comprehensive income (e.g.: revaluation surpluses) or equity (e.g.: realisation of revaluation surpluses), the tax effects shall also be recognised in other comprehensive income or equity. IAS 12.58 relates to those transactions or events recognised in profit or loss whilst IAS12.61A relates to those transactions recognised in other comprehensive income or equity.

The implication of these paragraphs is that when revaluations are accounted for, the recognition (accounting) of the revaluation surplus or deficit must be tracked, in order to determine whether the revaluation surplus or deficit was recognised in profit or loss, in other comprehensive income or a combination of these. This is important to establish so that the recognition of the movement on the deferred tax account can be properly recognised in profit or loss, other comprehensive income or a combination of these. This means that the whole movement on the deferred tax account from the opening to the closing balance (arising from changes in the temporary differences at the beginning and at the end of year) will no longer all be necessarily recognised in profit or loss.

When an asset is revalued, the revaluation surplus / deficit would cause a change in the temporary difference of an asset from one year to the next. The change in the


33

temporary difference would result in a change in the balance on the deferred tax account related to that asset from one year to the next. If any part of this revaluation surplus / deficit was recognised in other comprehensive income, the related movement in the deferred tax account balance must also be recognized in other comprehensive income.

IAS 12.64 requires that where a transfer from the revaluation surplus to retained earnings is made, this amount is transferred net of any related deferred tax. If it is a depreciable asset, this amount must be calculated in terms of IAS 16.41. Otherwise, all transfers of the revaluation surplus to retained earnings are made when the asset is derecognised.

The deferred tax implications of revaluations are discussed as follows:

Non-depreciable assets For accounting purposes, land is a non-depreciable asset. In terms of the Income Tax Act, there is no tax deduction for land. If the cost model is used to account for land, this means that land has a tax base of Rnil.

On the initial recognition of land (at cost), no deferred tax is recognised since it is exempted in terms of IAS 12.15(b).

On subsequent measurement, where the revaluation model of IAS 16 is applied, the carrying amount of the land can either increase or decrease. For FRK300 purposes, it is assumed that the tax base of the land (which is Rnil) will not change following the revaluation of the land. As a result of this, the temporary difference in respect of the land will either increase or decrease since the carrying amount has either increased or decreased whilst the tax base has remained unchanged. The temporary difference following revaluation will now comprise a portion that arose on initial recognition and a portion that arose on subsequent measurement.

The portion of the temporary difference that arose on initial recognition will still be exempt from the recognition of a deferred tax liability in terms of IAS 12.15(b). The exemption will however, not be applicable to the portion of temporary difference that arose on revaluation since it did not arise on the initial recognition of the asset.

Since land is a non-depreciable asset, the tax implications of the portion that arose on the revaluation are contained in IAS 12.51B. This paragraph requires that the measurement of the deferred tax liability shall reflect the tax consequences of the recovery of the carrying amount through sale. This means that if the tax rate applied to the taxable income derived from the use of the asset differs from the tax rate that is applied to the taxable income derived from the sale of the asset, the latter tax rate shall be applied to measure the deferred tax liability. This latter rate would be the Capital Gains Tax rate. For FRK300 purposes, this rate will be assumed to be 0%.

IAS 12.58 and IAS 12.61A would not have to considered here since there is no movement on the deferred tax account. Portion of the movement is exempt whilst the other portion is at 0%.

Note: For FRK300 purposes, only situations that result in a revaluation surplus on land will be considered. A revaluation deficit in respect of land will only be addressed in FRK700 because of the Capital Gains Tax implications.


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Class Example 8 – Deferred tax implication of revaluation surplus on land JUPITER LIMITED purchased land for R380 000 on 1 January 20X1 and this land was revalued on 1 January 20X2 for the first time to its fair value of R420 000. The reporting date is 31 December. The deferred tax calculation on 31 December 20X2 would be as follows:

CA

R

TB

R

TD

R

DT (28%)

R (dr)/cr

Movement (P/L)

dr/(cr)

Initial (1/1/20X1) Land 380 000 - 380 000 Exempt

IAS 12.15(b)

Subsequent (31/12/20X1)

Land 380 000 - 380 000 Exempt IAS 12.15(b)

-


Land 420 000 - 420 000 At cost 380 000 - 380 000 Exempt

IAS 12.15(b) -

Revaluation 40 000 - 40 000 Nil * -

* R40 000 x 0% CGT rate = Rnil. No journal entry is required for the recognition of deferred tax since there is no movement on the deferred tax account.

Depreciable assets In terms of the Income Tax Act, a tax deduction is normally granted in respect of depreciable assets and these assets would thus normally have a tax base. (The only exception is related to certain administrative buildings for which tax deductions are not granted – this exception is discussed later in this material). On initial recognition, the asset is measured at cost. Since the carrying amount and the tax base of the asset are the same on initial recognition (refer IAS 12 notes and class examples), no temporary difference arises. The exemption from the recognition of deferred tax per IAS 12.15(b) is thus not applicable. If the cost model of IAS 16 is followed, then after initial recognition, the assets are depreciated from the date that they are available for use as intended by management in terms of IAS 16. As a result of this, the carrying amount would reduce over time because of the recognition of depreciation. The tax base would also reduce over time because of the tax allowances granted. Since the depreciation rates used for accounting purposes and capital allowances used for tax purposes are seldom the same, a temporary


35

difference arises that may be deductible or taxable and a deferred tax asset or liability would be recognised since IAS12.24 or IAS 12.15(b) cannot be applied. On subsequent recognition, when the revaluation model of IAS 16 is applied, the carrying amount of the asset may increase or decrease as a result of revaluations on the date of revaluation. However, on the date of revaluation, no adjustment is made to the tax base for this revaluation since the future tax allowances are only applied to the cost of the asset. This means that on the revaluation date, a temporary difference will arise that may be taxable or deductible and this would require the recognition of a deferred tax liability or asset. Since these assets are depreciable, IAS 12.51A is not applied. Thus, to measure the deferred tax liability or asset arising on the revaluation, IAS 12.51 is applied. The carrying amount of the depreciable assets for FRK300 purposes will be recovered through use and thus the corporate tax rate (of 28%) will be applied to the temporary difference to calculate the increase / decrease in the deferred tax account balance. A revaluation deficit will be recognised in profit or loss (if no existing revaluation surplus exists for this asset). Thus, in terms of IAS 12.58, the movement on the deferred tax account related to the revaluation deficit will also be recognised in profit or loss. A revaluation surplus will be recognised in other comprehensive income (if there was no previous revaluation deficit recognised in profit or loss for the asset). Thus, in terms of IAS 12.61A, the movement on the deferred tax account related to a revaluation surplus will also be recognised in other comprehensive income. If a revaluation surplus / deficit is recognised partly in other comprehensive income and partly in profit or loss, then the movement on the deferred tax account balance attributable to the revaluation of the asset must be recognised partly in other comprehensive income and partly in profit or loss.

Class Example 9 – Deferred tax implication of revaluation deficit on depreciable assets (factory building)

JUPITER LIMITED purchased a factory building for R750 000 on 1 January 20X1 that is depreciated straight-line over a useful life of 15 years with no residual value. This building was revalued on 1 January 20X2 for the first time. There were no changes in the depreciation method, useful life or residual value following the revaluation of the factory building. The reporting date of Jupiter Limited is 31 December. For tax purposes, the cost of the factory building is written off at 10% per annum. Jupiter Limited’s accounting policy related to factory buildings is to adjust the gross carrying amount of the factory buildings on the date of revaluation. On 1 January 20X2, the gross carrying amount was restated proportionately to the change in the carrying amount of the factory building. The net replacement cost on 1 January 20X2 was estimated by an independent professional valuator to be R616 000.


36

The deferred tax calculation on 31 December 20X2 would be as follows:

CA

R

TB

R

TD

R

DT (28%)

R (dr)/cr

Movement P/L R

dr/(cr) Initial (1/1/20X1) Factory building 750 000 750 000 - -


Factory building (#)

700 000 675 000 25 000 7 000 7 000



572 000 600 000 (28 000) (7 840) (14 840)

Assume that the criteria for the recognition of a deferred tax asset have been met.

(#) 20X1: CA: R750 000/15 years x 14 years = R700 000 TB: R750 000/10 years x 9 years = R675 000

20X2: CA: R616 000/14 years x 13 years = R572 000 (see alternative calculation)

TB: R750 000/10 years x 8 years = R600 000 Alternatively, the carrying amount on 31 December 20X2 could be calculated as follows: R Carrying amount 31/12/20X1 (above) 700 000 Revaluation deficit 01/01/20X2 (balancing amount) (84 000) Recognised

in profit or loss

Net replacement cost 01/01/20X2 (given) 616 000 Depreciation 01/01/20X2 – 31/12/20X2 (R616 000/14 years)

(44 000) Recognised in profit or

loss Carrying amount 31/12/20X2 572 000

The change in the deferred tax account balance from 20X1 to 20X2 is attributable to the changes in the temporary differences for this asset from 20X1 to 20X2. These changes in temporary differences have arisen because of the recognition of depreciation (and wear and tear) for the year ended 31 December 20X2 and the recognition of a revaluation deficit on 1 January 20X2. Since both of these items were recognised in profit or loss, the whole movement on the deferred tax account of R14 840 will be recognised in profit or loss in terms of IAS 12.58 in the line item “Income tax expense”. The following journal entry would be necessary to account for the movement on the deferred tax account for the year ended 31 December 20X2:


37

Dr R

Cr R

31 December 20X2

Deferred tax (SFP) 14 840 Income tax expense (P/L) 14 840

Class Example 10 – Deferred tax implication of revaluation surplus on depreciable assets (factory building)

JUPITER LIMITED purchased a factory building for R750 000 on 1 January 20X1 that is depreciated straight-line over a useful life of 15 years with no residual value. This building was revalued on 1 January 20X2 for the first time. There have been no changes in the depreciation method, useful life or the residual value of the factory building. The reporting date of Jupiter Limited is 31 December. For tax purposes, the cost of the factory building is written off at 10% per annum. Jupiter Limited’s accounting policy related to factory buildings is to adjust the gross carrying amount of the factory buildings on the date of revaluation. On 1 January 20X2, the gross carrying amount was restated proportionately to the change in the carrying amount of the factory building. The net replacement cost on 1 January 20X2 was estimated by an independent professional valuator to be R840 000. The revaluation surplus would be calculated as follows on 1 January 20X2:

R Net replacement cost 1/1/20X2 (given) 840 000 Carrying amount 1/1/20X2 (R750 000/15 years x 14 years) 700 000 Thus revaluation surplus on 1/1/20X2 140 000


38

The deferred tax calculation on 31 December 20X2 would be as follows:

CA

R

TB

R

TD

R

DT (28%)

R (dr)/cr

Movement P/L R

dr/(cr) Initial (1/1/20X1) Factory building 750 000 750 000 - -



700 000 675 000 25 000 7 000 7 000



780 000 600 000 180 000 50 400 43 400

(#) 20X1: CA: R750 000/15 years x 14 years = R700 000

TB: R750 000/10 years x 9 years = R675 000

20X2: CA: R840 000/14 years x 13 years = R780 000 (see alternative calculation) TB: R750 000/10 years x 8 years = R600 000

Alternatively, the carrying amount on 31 December 20X2 could be calculated as follows: R Carrying amount 31/12/20X1 (above) 700 000 Revaluation surplus 01/01/20X2 (balancing amount) 140 000 Recognised in

other comprehensive

income Net replacement cost 01/01/20X2 (given) 840 000 Depreciation 01/01/20X2 – 31/12/20X2 (R840 000/14 years)

(60 000) Recognised in profit or loss

Carrying amount 31/12/20X2 780 000 The change in the deferred tax account balance from 20X1 to 20X2 is attributable to the changes in the temporary differences for this asset from 20X1 to 20X2. These changes in temporary differences have arisen because of the recognition of depreciation (and wear and tear) for the year ended 31 December 20X2 and the recognition of a revaluation surplus on 1 January 20X2. Since depreciation is recognised in profit or loss whilst the revaluation surplus is recognised in other comprehensive income, the movement on the deferred tax account of R43 400 will have to be recognised partially in other comprehensive income in terms of IAS 12.61A and partially in profit or loss in terms of IAS 12.58. Thus the total movement of R43 400 must be allocated between the profit or loss and other comprehensive income as follows:


39

Movement on the Deferred tax account 31/12/20X2: R

Balance on Deferred tax account 31/12/20X1 7 000 Cr Balance on Deferred tax account 31/12/20X2 50 400 Cr Thus total movement on Deferred tax account 31/12/20X2 in SFP (R7 000 Cr R50 400 Cr)

43 400 Cr

Movement already recognised in OCI on 1/1/20X2 (revaluation surplus) (R140 000 x 28%)

39 200 Dr

Thus movement recognised in P/L (Income tax expense) 4 200 Dr The movement of R39 200 related to the revaluation surplus would be accounted for on the date of revaluation / 1 January 20X2. The movement of R4 200 would be accounted for on 31 December 20X2. Alternatively, the “Deferred tax” account in the general ledger account can be reconstructed to calculate the movement on the deferred tax account that will be recognised in profit or loss, as follows:

Deferred tax account R R 31/12/20X2 Bal c/f 50 400 31/12/20X1 Bal b/f 7 000 01/01/20X2 Reval surplus

(OCI)

39 200 46 200 31/12/20X2 Tax expense

(P/L) (balancing) 4 200

50 400 50 400 01/01/20X3 Bal b/f 50 400

The following journal entries would be necessary to account for the movement on the deferred tax account for the year ended 31 December 20X2: Dr

R Cr R

1 January 20X2 Revaluation surplus (OCI) 39 200

Deferred tax (SFP) 39 200 31 December 20X2

Income tax expense (P/L) 4 200 Deferred tax (SFP) 4 200

If it is assumed that the revaluation surplus will realise as the asset is used, a transfer from the revaluation surplus to retained earnings will be made calculated in terms of IAS 16.41. Since the revaluation surplus will be after deferred tax following the above journal entry for the movement on 1 January 20X2, this transfer must be after tax as well.


40

Depreciable assets on which no tax allowances are given

In terms of the Income Tax Act, there are no tax allowances on certain administrative buildings and therefore, such administrative buildings will have a tax base of Rnil. On the initial recognition of the administrative building (at cost), no deferred tax will need to be recognised since the exemption of IAS 12.15(b) would be applicable. With subsequent measurement, where the revaluation model is used, the carrying amount of the building can increase or decrease as a result of revaluations. For FRK300 purposes, it is assumed that the tax base of the building (which is Rnil) will not change as a result of revaluation. Accordingly, the temporary difference in respect of the building will also increase or decrease. Following revaluation, the temporary difference will now consist of a portion that arose on initial recognition and a portion that arose on revaluation. The portion of the temporary difference that arose on initial recognition will still be exempt from the recognition of deferred tax in terms of IAS 12.15(b). The exemption will however not be applicable to the portion of the temporary difference that arose on revaluation since it did not arise on the initial recognition of the asset. It is important to note that the portion of the temporary difference that arose on revaluation will not be subject to the requirements of IAS 12.51B since IAS 12.51B is only applicable to non-depreciable assets (such as land). The administrative building is a depreciable asset for accounting purposes. Thus, to measure the deferred tax liability or asset that arises on revaluation, IAS 12.51 will be applied. The carrying amount of a depreciable asset will be recovered through use for the purposes of FRK300 and thus the corporate tax rate, which is currently 28%, will be applied to the temporary difference arising on revaluation. Note: For FRK300 purposes, the revaluation of an administrative building on which no tax allowances are granted, will not be considered in detail. This will be dealt with in FRK700.

Integrated class examples

Class Example 11 [Elimination method; revaluation at beginning of year; net replacement cost at end of year, deferred tax and current tax calculations; journal entries, presentation, notes] On 1 January 20X4, MARS LIMITED purchased equipment for R100 000 that was available for use as intended by management immediately. Depreciation is written off on a straight-line basis over 10 years with no residual value. There have been no changes in the depreciation method, useful life or residual value of the equipment from 1 January 20X4 to 31 December 20X6. During the year ended 31 December 20X6, management decided to change the accounting policy related to equipment from the cost model to the revaluation model, and the first revaluation would be on 1 January 20X7. When equipment is revalued, the accumulated depreciation is eliminated against the gross carrying amount of the


41

asset on revaluation. Depreciation is calculated annually on the latest revalued amount. The revaluation surplus realises with use of the asset. The net replacement cost of similar equipment on 31 December 20X7 was estimated by an independent professional valuator to be R90 000. On this date, the depreciation method, remaining useful life and the residual value remained unchanged.

The tax rate is 28%. Wear and tear is calculated at 12% per year on cost of the asset.

The profit for the year ended 31 December 20X7 is R600 000 before tax and any of the information provided has been taken into account. There are no non-deductible or non-taxable items and there are no temporary differences other than those that arise from the information provided.

The balance on retained earnings on 1 January 20X7 is R100 000. Disclosable income and expenses are presented in a “Profit before tax” note by Mars Limited. Required:

a) Prepare the general journal entries of Mars Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS) using the above information. Closing journal entries are not required.

b) Present the above information in an extract from the statement of profit or loss and other comprehensive income and an extract from the statement of changes in equity of Mars Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

c) Disclose the above information in the notes to the annual financial statements of Mars Limited for the year ended 31 December 20X7 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

d) Assume that the equipment is sold on 1 January 20X8 for R100 000 cash. Prepare the general journal entries of Mars Limited for the year ended 31 December 20X8, in accordance with International Financial Reporting Standards (IFRS). Assume that the profit for the year before tax is R450 000 and that there are no non-deductible or non-taxable items and no other temporary differences.

Suggested solution:

Calculations:


Cost (purchased 1/1/20X4 - given) 100 000 Accumulated depreciation 1/1/20X7 (R100 000/10 years x 3 years expired)

(30 000)

Thus carrying amount 1/1/20X7 (R100 000/10 years x 7 years remaining)

70 000


42

2. Net replacement cost 1/1/20X7 R

Net replacement cost 31/12/20X7 (given) (value of similar asset that is one year older than asset being revalued, i.e. 6 years remaining life)

90 000

Thus net replacement cost 1/1/20X7 (R90 000/6 years x 7 years remaining)

105 000

3. Revaluation surplus 1/1/20X7 R Carrying amount 1/1/20X7 (calc 1) 70 000 Net replacement cost (revalued amount) 1/1/20X7 (calc 2) 105 000 Thus revaluation surplus 1/1/20X7 35 000

4. Carrying amount 31/12/20X7 (on revalued basis) R Cost (purchased 1/1/20X4 - given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Revaluation surplus 1/1/20X7 (per calc 3) 35 000 Net replacement cost (revalued amount) 1/1/20X7 (per calc 2) 105 000 Depreciation 1/1/20X7 – 31/12/20X7 (R105 000/7 years remaining) (15 000) Carrying amount 31/12/20X7 (R105 000/7 years x 6 years remaining) 90 000 5. Carrying amount 31/12/20X7 (on historical cost basis) R Cost (purchased 1/1/20X4 - given) 100 000 Accumulated depreciation 1/1/20X7 (per calc 1) (30 000) Carrying amount 1/1/20X7 70 000 Depreciation 1/1/20X7 – 31/12/20X7 (R100 000/10 years) (10 000) Carrying amount 31/12/20X7 (R100 000/10 years x 6 years remaining)

60 000

6. Realisation of revaluation surplus 31/12/20X7 (before tax) R Depreciation on revalued amount (calc 4) 15 000 Depreciation on historical cost basis (calc 5) 10 000 Thus realisation of revaluation surplus 31/12/20X7 5 000 7. Tax base R Cost price 1/1/20X4 (given) 100 000 Wear and tear 1/1/20X4 – 31/12/20X6 (R100 000 x 12% x 3 years) (36 000) Tax base 31/12/20X6 64 000 Wear and tear 1/1/20X7 – 31/12/20X7 (R100 000 x 12%) (12 000) Tax base 31/12/20X7 52 000 8. Balance on revaluation surplus 31/12/20X7 (after tax) Arising on revaluation 1/1/20X7 (R35 000 calc 3 x 72%) 25 200 Realised based on use (R5 000 calc 6 x 72%) (3 600) Balance on 31/12/20X7 21 600


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9. Deferred tax

CA (calc 1 & 4)

TB (calc 7)

TD DT (28%) (dr)/cr

R R R R 31/12/20X6 Equipment 70 000 64 000 6 000 1 680

31/12/20X7 Equipment 90 000 52 000 38 000 10 640

R Movement on the Deferred tax account 31/12/20X7:

Balance on Deferred tax account 31/12/20X6 1 680 Cr Balance on Deferred tax account 31/12/20X7 10 640 Cr Thus total movement on Deferred tax account 31/12/20X7 in SFP 8 960 Cr Movement already recognised in OCI (revaluation surplus)(jnl 2) 9 800 Dr Thus movement to be recognised in P/L (Income tax expense)(jnl 4)

840 Cr

Explanation:

The R1 680 credit balance represents the balance of deferred tax in the statement of financial position on 31/12/20X6.

The R10 640 credit balance represents the balance of deferred tax in the statement of financial position on 31/12/20X7.

The total movement in the deferred tax account for 20X7 is thus R8 960 credit (increase). This will be recognised in the statement of profit or loss and other comprehensive income. This is made up of two distinct elements: R9 800 arises on the revaluation surplus of the asset. The revaluation was recognised in other comprehensive income (revaluation surplus). Since the deferred tax must follow the transaction, the deferred tax charge must therefore also be recognised in other comprehensive income.

R840 arises on the difference between depreciation for accounting purposes and wear and tear for tax purposes. The depreciation amount is recognised in profit or loss. The deferred tax charge must therefore also be recognised in profit or loss.

NB: First work out the total movement on the deferred tax account in the statement of financial position (SFP). Then remove the movement related to transactions recognised in other comprehensive income (OCI). A journal entry would have been done for this on the date of the revaluation. The remaining total movement is what is then recognised in profit or loss (P/L) and a single journal entry is processed for this at the end of the year.

Alternatively, the “Deferred tax” account in the general ledger account can be reconstructed to calculate the movement on the deferred tax account that will be recognised in profit or loss, as follows:


44

Deferred tax account

R R 31/12/20X7 Bal c/f 10 640 31/12/20X6 Bal b/f 1 680 31/12/20X7 Tax expense

(P/L) (balancing)

840 01/01/20X7 Reval

surplus (OCI)

9 800 11 480 11 480 11 480 01/01/20X8 Bal b/f 10 640

10. Current tax

R Profit for year before tax per P/L (R600 000 given – R15 000 depreciation calc 4)

585 000

Temporary differences Depreciation (calc 4) 15 000 Wear and tear (calc 7) (12 000)

Taxable income 588 000

Current tax (R588 000 x 28%) 164 640 Part a – Journal entries for the year ended 31 December 20X7

Dr R

Cr R

1 January 20X7

1. Equipment (SFP) 5 000 Accumulated depreciation - equipment (SFP) 30 000 Revaluation surplus (OCI) 35 000 (refer calc 1 – 3) Recognition of revaluation of the equipment

Alternative (i) journals for journal 1 (i. e : BOTH needed):

Accumulated depreciation - equipment (SFP) 30 000 Equipment (SFP) 30 000 (refer calc 1)

Equipment (SFP) 35 000 Revaluation surplus (OCI) 35 000 (refer calc 1 – 3) Recognition of revaluation of the equipment

Alternative (ii) journal for journal 1:

Equipment (at revalued amount) (SFP) 105 000 Accumulated depreciation - equipment (SFP) 30 000 Equipment (at cost) (SFP) 100 000 Revaluation surplus (OCI) 35 000 (refer calc 1 – 3) Recognition of revaluation of the equipment


45

Dr

R Cr R

2. Revaluation surplus (OCI) (R35 000 above x 28%) 9 800 Deferred tax (SFP) 9 800 Recognition of deferred tax on revaluation

31 December 20X7

3. Depreciation - equipment (P/L) (calc 4) 15 000 Accumulated depreciation - equipment (SFP) 15 000 Recognition of depreciation for the year

4. Deferred tax (SFP) (calc 9) 840 Income tax expense (P/L) 840 Recognition of movement on deferred tax in P/L

5. Income tax expense (P/L) (calc 10) 164 640 Current tax payable (SFP) 164 640 Recognition of liability for current tax

6. Revaluation surplus (equity) 3 600 Retained earnings (equity) 3 600 (R5 000 (calc 6) x 72% after tax) Recognition of realisation of revaluation surplus

Part b – presentation for the year ended 31 December 20X7 Mars Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X7 Note R Profit before tax (R600 000 – R15 000 depreciation calc 3)

4 585 000

Income tax expense (R164 640 current tax calc 10 - R840 deferred tax calc 4)

5 (163 800)

Profit for the year 421 200

Other comprehensive income: Items that will not be reclassified to profit or loss Revaluation of equipment 25 200 Gain on revaluation of equipment (calc 3) 35 000 Income tax expense (R35 000 x 28%) (9 800)



46

Mars Limited Extract from the statement of changes in equity for the year ended 31 December 20X7 Revaluation



Part c – disclosure in notes for year ended 31 December 20X7

Mars Limited Notes for the year ended 31 December 20X7




Depreciation on equipment is written off on the straight-line basis over the expected useful life of the asset. The useful life is estimated at 10 years with no significant residual value.


20X7 R


Movements during the year: 20 000 Depreciation (calc 4) (15 000) Revaluation surplus (calc 3) 35 000

Carrying amount at end of year (calc 4) 90 000 Gross carrying amount 105 000 Accumulated depreciation (15 000)


If the equipment was carried on the cost model, the carrying amount would have been R60 000 (calc 5).


47

3. Deferred tax

R Analysis of temporary differences

Accelerated wear and tear for tax purposes (*) 2 240 Revaluation net of depreciation (**) 8 400 10 640

* based on the comparison of the carrying amount on cost model and tax base (both calculated using original cost of asset)

** based on the difference between the carrying amount on the cost model and the carrying amount on the revaluation model

[This is disclosure is illustrated in the Part B2 of the IFRS textbook in Example 2 of IAS 12] R R R Revalued carrying amount (calc 4)

90 000

30 000 x 28% 8 400 Historical carrying amount (calc 5)

60 000

8 000 x 28% 2 240 Tax base (calc 7) 52 000 Per deferred tax calc 9 38 000 10 640

4. Profit before tax R Profit before tax is stated after the following items have been taken into account:


5. Income tax expense

R Main components of the income tax expense:

Current tax – current (calc 10) 164 640 Deferred tax – origination and reversal of temporary differences (calc 9)

(840)

163 800


48

Part d – journal entries for sale of equipment on 1 January 20X8 Calculations: 1. Carrying amount 31/12/20X7 (on revalued basis) R Carrying amount 1/1/20X7 70 000 Revaluation surplus 1/1/20X7 (calc 4 part a) 35 000 Net replacement cost (revalued amount) 1/1/20X7 105 000 Accumulated depreciation 31/12/20X7 (15 000) Depreciation 1/1/20X7 – 31/12/20X7 (calc 4 part a) (15 000) Carrying amount 1/1/20X8 date of disposal (calc 4 part a) 90 000 2. Balance on revaluation surplus 1/1/20X8 (after tax) Revaluation surplus arising on 1/1/20X7 after tax (calc 8 part a) 21 600 Realisation of surplus on 1/1/20X8 on sale of asset (21 600) Thus balance on 31/12/20X8 -

3. Deferred tax

CA

TB

TD DT (28%) (dr)/cr

31/12/20X7 R R R R Equipment (calc 9 part a)

90 000 52 000 38 000 10 640

31/12/20X8 Equipment (sold 1/1/20X8)

- - - -

Movement on the deferred tax account 31/12/20X8: R Balance on Deferred tax account 31/12/20X7 10 640 Cr Balance on Deferred tax account 31/12/20X8 - Thus total movement on Deferred tax account 31/12/20X8 in SFP 10 640 Dr Movement already recognised in OCI (revaluation gain/deficit) - Thus movement to be recognised in P/L (income tax expense) (jnl 3)

10 640 Cr

4. Current tax R Profit before tax per P/L (given) 450 000 Temporary differences: Profit on sale of equipment (Jnl 1) (10 000) Recoupment on sale of equipment (R100 000 proceeds – R52 000 tax base (calc 3))

48 000

Taxable income 488 000

Current tax (R488 000 x 28%) 136 640


49

General journal for year ended 31/12/20X8

Dr R

Cr R

1 January 20X8 1. Bank (SFP) [proceeds – given] 100 000 Accumulated depreciation - equipment (SFP) 15 000 Equipment (SFP) 105 000 Profit on sale of equipment (P/L) 10 000 Derecognition of equipment on sale 2. Revaluation surplus (equity) (calc 2) 21 600 Retained earnings (equity) 21 600 Realisation of balance on revaluation surplus as

equipment sold

31 December 20X8 3. Deferred tax (SFP) (calc 3) 10 640

Income tax expense (P/L) 10 640 Recognition of movement on deferred tax account in P/L

4. Income tax expense (P/L) (calc 4) 136 640

Current tax payable (SFP) 136 640 Recognition of current tax for year

Class Example 12 [gross carrying amount adjusted on revaluation; revaluation at beginning of year; revaluation deficit with sufficient revaluation surplus, deferred tax and current tax calculations, journal entries; presentation; notes] VENUS LIMITED has a reporting date of 31 December. The company has equipment that was purchased on 1 January 20X1 for R3,2 million. The equipment was available for use as intended by management immediately and was also taken into use for the first time on this date. The equipment is depreciated at 25% per annum on the straight-line method and there is no residual value. During the year ended 31 December 20X1, there was no change in the depreciation method, useful life or residual value of the equipment. It is the accounting policy of Venus Limited to revalue its equipment annually. On revaluation, the gross carrying amount of the equipment is adjusted. Depreciation on revalued assets is calculated on the latest revalued amount. All revalued amounts are determined by an independent professional valuator. The revaluation surplus realises with use of the asset. On 1 January 20X2, the equipment was revalued for the first time. A revaluation surplus (before tax) of R1 800 000 arose on this revaluation. There was no change in the depreciation method, useful life or residual value on the date of revaluation. When the


50

equipment was revalued on 1 January 20X2, Venus Limited adjusted the gross carrying amount by restating it proportionately to the change in the carrying amount of the equipment. On 1 January 20X3, the equipment was revalued once again. The net replacement cost on 31 December 20X3 for similar equipment was R950 000. There was no change in the depreciation method, useful life or residual value on the date of revaluation. When the equipment was revalued on 1 January 20X3, Venus Limited adjusted the gross carrying amount by restating it proportionately to the change in the carrying amount of the equipment The tax rate is 28%. Wear and tear on this equipment is granted at 25% per annum on cost. The profit before tax for the year ended 31 December 20X3 was R1,75 million after dividend income of R15 000 and traffic fines of R5 000. There are no temporary differences other than those that related to the equipment. Disclosable income and expenses are presented in a “Profit before tax” note by Venus Limited. Tax rate reconciliations are prepared using the Rand value format, when required. Retained earnings on 31 December 20X2 was R260 000. Required:

a) Prepare the general journal entries of Venus Limited for the year ended 31 December 20X3 in accordance with International Financial Reporting Standards (IFRS) from the above information. Closing journal entries are not required. Journal narrations are not required.

b) Present the above information in an extract from the statement of profit or loss and other comprehensive income and an extract from the statement of changes in equity of Venus Limited for the year ended 31 December 20X3 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

c) Disclose the above information in the notes to the financial statements of Venus Limited for the year ended 31 December 20X3 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

Calculations: 1. Carrying amount on 31/12/20X1 R Cost (given) 3 200 000 Accumulated depreciation (R3 200 000 x 25%) (1/1/20X1 - 31/12/20X1)

(800 000)

Carrying amount 31/12/20X1 2 400 000 2. Net replacement cost 1/1/20X2 Carrying amount 31/12/20X1 (calc 1) 2 400 000 Revaluation surplus before tax (given) 1 800 000 Thus net replacement cost 1/1/20X2 4 200 000


51

3. Restatement on 1/1/20X2 Carrying

amount 1/1/20X2

R


R

Difference to be recognised

R

Gross carrying amount 3 200 000 (b) 5 600 000 2 400 000 Dr Accumulated depreciation (800 000) (c) (1 400 000) (600 000) Cr Carrying amount Net replacement cost

2 400 000 (a) 4 200 000

Revaluation surplus (calc 2) (d) (1 800 000) Cr

(a) Net replacement cost as calculated (calc 2) (b) R4 200 000/ R2 400 000 x R3 200 000 = R5 600 000 (i.e.: gross replacement

cost) (c) R5 600 000 – R4 200 000 = R1 400 000 (balancing amount) (d) Given 4. Carrying amount 31/12/20X2 R Gross carrying amount restated (calc 3) 5 600 000 Accumulated depreciation: (2 800 000) Restated amount (calc 3) (1 400 000) Depreciation 1/1/20X2 – 31/12/20X2 (1 400 000) (R4 200 000/(4 years – 1 year) This carrying amount 31/12/20X2 2 800 000 R 5. Balance on revaluation surplus 31/12/20X2

Arising on revaluation 1/1/20X2 (given) (R1 800 000 given x 72% after tax)

1 296 000

Realised 1/1/20X2 – 31/12/20X2 (calc 6) (432 000) Thus balance on 31/12/20X2 864 000 6. Realisation of revaluation surplus 20X2 R

Depreciation on revalued amount (calc 4) 1 400 000 Depreciation on original cost (calc 1) (800 000) Realised before tax 600 000 Thus after tax (R600 000 x 72%) 432 000

7. Revalued amount 1/1/20X3 R

Net replacement cost 31/12/20X3 (given) 950 000 This is for an asset that is one year older than the asset being revalued, so the net replacement cost at the beginning of the year must be calculated and accounting policy is to revalue at the beginning of the year

Thus net replacement cost 1/1/20X3 (R950 000/1 year remaining life end of 20X3 x 2 years remaining life beginning of 20X3)

1 900 000


52

8. Restatement on 1/1/20X3 and calculation of revaluation deficit Carrying

amount 1/1/20X3 (calc 4)

R


R

Difference to be

recognised

R Gross carrying amount 5 600 000 (b) 3 800 000 (1 800 000) Cr Accumulated depreciation (2 800 000) (c) (1 900 000) 900 000 Dr Carrying amount Net replacement cost

2 800 000 (a) 1 900 000

Revaluation deficit (calc 2) (d) 900 000 Dr

a) Net replacement cost as calculated (calc 7) b) R1 900 000/ R2 800 000 x R5 600 000 = R3 800 000 (i.e.: gross replacement

cost) c) R3 800 000 – R1 900 000 = R1 900 000 (balancing amount) d) R2 800 000 – R1 900 000 = R900 000 9. Revaluation deficit after tax 1/1/20X3 R

Amount before tax (calc 8) 900 000 Thus amount after tax (R900 000 x 72%) 648 000 10. Balance on revaluation surplus 31/12/20X3 R

Balance 1/1/20X3 (calc 5) 864 000 Utilised for revaluation deficit (calc 9) (648 000) Realised 1/1/20X3 – 31/12/20X3 (calc 11) (108 000) Thus balance on 31/12/20X3 108 000

11. Realisation of revaluation surplus 20X3

Depreciation on revalued amount (R1 900 000calc 8/2 years) 950 000 Depreciation on original cost (calc 1) (800 000) Realised before tax 150 000 Thus after tax (R150 000 x 72%) 108 000

12. Carrying amount 31/12/20X3

Revalued amount 1/1/20X3 (calc 8) 1 900 000 Depreciation 1/1/20X3 – 31/12/20X3 (calc 11) (950 000) Thus carrying amount (R1 900 000/2 years x 1 year) 950 000

Comprises: Restated gross carrying amount on 1/1/20X3 (calc 8) 3 800 000 Accumulated depreciation 31/12/20X3 (2 850 000) Restated amount on 1/1/20X3 (calc 8) 1 900 000 Depreciation 1/1/20X3 – 31/12/20X3 (calc 12) 950 000 Thus carrying amount 31/12/20X3 950 000


53

13. Carrying amount on cost model 31/12/20X3 R

Cost 1/1/20X1 (given) 3 200 000 Accumulated depreciation 1/1/20X1 – 31/12/20X3 (R3 200 000 x 25% x 3 years)

(2 400 000)

Thus carrying amount 31/12/20X3 (R3 200 000/4 years total life x 1 year remaining life)

800 000

14. Tax base R

Cost 1/1/20X1 3 200 000 Wear tear 1/1/20X1 – 31/1/2/20X2 (R3 200 000 x 25% x 2 years)

(1 600 000)

Tax base 31/12/20X2 1 600 000 Wear tear 1/1/20X3 – 31/1/2/20X3 (R3 200 000 x 25%)

(800 000)

Tax base 31/12/20X3 800 000 15. Deferred tax

CA (calc 4 & 12)

TB (calc 14)

TD DT (28%) (dr)/cr

31/12/20X2 R R R R Equipment 2 800 000 1 600 000 1 200 000 336 000 31/12/20X3 Equipment 950 000 800 000 150 000 42 000

Movement on the deferred tax account 31/12/20X3: R Balance on Deferred tax account 31/12/20X2 336 000 Cr Balance on Deferred tax account 31/12/20X3 42 000 Cr Thus total movement on Deferred tax account 31/12/20X3 in SFP 294 000 Dr Movement already recognised in OCI (revaluation deficit) (R900 000 calc 8 x 28%)

(252 000) Cr

Thus movement to be recognised in P/L (income tax expense) (42 000) Cr Alternatively, the “Deferred tax” account in the general ledger account can be reconstructed to calculate the movement on the deferred tax account that will be recognised in profit or loss, as follows:


(OCI) [deficit]

252 000

294 000 31/12/20X3 Tax expense

(P/L) (balancing) 42 000

336 000 336 000 01/01/20X4 Bal b/f 42 000


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16. Current tax R Profit before tax per P/L (given) 1 750 000 Non-taxable income – dividends (given) (15 000) Non- deductible expenses – fines (given) 5 000 Temporary differences: Depreciation on equipment (calc 11) 950 000 Wear and tear on equipment (calc 14) (800 000) Taxable income 1 890 000

Current tax (R1 890 000 x 28%) 529 200 Part a – journal entries for the year ended 31 December 20X3

Dr R

Cr R

1 January 20X3 1. Accumulated depreciation - equipment (SFP)

(calc 8) 900 000

Equipment (SFP) (calc 8) 1 800 000 Revaluation surplus (OCI) (calc 8) 900 000 2. Deferred tax (SFP) (R900 000 Jnl 1 x 28%) 252 000 Revaluation surplus (OCI) 252 000 31 December 20X3 3. Depreciation (P/L) (calc 11) 950 000 Accumulated depreciation – equipment (SFP) 950 000 4. Revaluation surplus (equity) (calc 11) 108 000 Retained earnings (equity) 108 000 5. Deferred tax (SFP) (calc 15) 42 000 Income tax expense (P/L) 42 000 6. Income tax expense (SFP) (calc 16) 529 200 Current tax payable (SFP) 529 200


55

Part b – presentation for the year ended 31 December 20X3

Venus Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X3 Note R Profit before tax (given) 4 1 750 000 Income tax expense (R529 200 calc 16 current tax - R42 000 calc 15 deferred tax)

5 (487 200)

Profit for the year 1 262 800 Other comprehensive income: Items that will not be reclassified to profit or loss Revaluation of equipment (648 000) Deficit on revaluation of equipment (calc 8) (900 000) Income tax benefit (R900 000 x 28%) 252 000 Total comprehensive income for the year 614 800

Venus Limited Extract from the statement of changes in equity for the year ended 31 December 20X3 Revaluation


R R Balance beginning of the year (calc 5) / (given) 864 000 260 000 Total comprehensive income for the year (above) (648 000) 1 262 800 Profit for the year - 1 262 800 Other comprehensive income for the year (648 000) - Transfer to retained earnings (calc 11) (108 000) 108 000 Balance end of the year 108 000 1 630 800

Part c – disclosure in the notes for the year ended 31 December 20X3 Venus Limited Notes for the year ended 31 December 20X3



Equipment is stated at revalued amount, being net replacement cost less accumulated depreciation and accumulated impairment losses. On revaluation, the gross carrying amount of the asset is adjusted. The revaluation surplus realises with use of the asset.



56


20X3 R

Carrying amount at beginning of year (calc 4) 2 800 000 Gross carrying amount 5 600 000 Accumulated depreciation (2 800 000)

Movements during the year: (1 850 000) Revaluation deficit (calc 8) (900 000) Depreciation (calc 11) (950 000)

Carrying amount at end of year (calc 12) 950 000 Gross carrying amount 3 800 000 Accumulated depreciation (2 850 000)

The equipment was revalued by an independent professional valuator on 31 December 20X3.

If the equipment was carried on the cost model, the carrying amount would have been R800 000 (calc 13). 3. Deferred tax

Analysis of temporary differences R Accelerated wear and tear for tax purposes (*) - Revaluation net of depreciation (**) 42 000 42 000

* based on the comparison of the carrying amount on cost model and tax base (both calculated using original cost of asset)

** based on the difference between the carrying amount on the cost model and the carrying amount on the revaluation model

[This is disclosure is illustrated in the Part B2 of the IFRS textbook in Example 2 of IAS 12]

R R R Revalued carrying amount (calc 12 or note 2)

950 000

150 000 x 28% 42 000 Historical carrying amount (calc 13 or note 2)

800 000

Nil x 28% Nil Tax base (calc 14) 800 000 Per deferred tax calc 15 150 000 42 000


57



5. Income tax expense R

Main components of the income tax expense: Current tax – current (calc 16) 529 200 Deferred tax – origination and reversal of temporary differences (calc 15)

(42 000)

487 200

Reconciliation between the income tax expense and accounting profit R Standard tax rate 28% Profit before tax per profit or loss (given) 1 750 000 Tax at standard rate (R1 750 000 x 28%) 490 000 Tax effect of income not taxable

Dividend income (R15 000 x 28%) (4 200) Tax effect of expenses not deductible Fines (R5 000 x 28%) 1 400

Total income tax expense (per note above) 487 200

The standard tax rate of 28% is the rate announced by the South African tax authority.

Class Example 13

[elimination method; revaluation at beginning of year; net replacement cost at beginning of year, revaluation deficit with insufficient revaluation surplus, deferred tax and current tax calculations; journal entries, presentation, notes]

PLUTO LIMITED has a reporting date of 31 December. The company has equipment that was purchased on 1 January 20X1 for R3,2 million. The equipment was available for use as intended by management immediately and was also taken into use for the first time on this date. The equipment is depreciated at 25% per annum on the straight-line method and there is no residual value. During the year ended 31 December 20X1, there were no changes in the depreciation method, useful life or residual value of the equipment.

It is the accounting policy of Pluto Limited to revalue its equipment annually. On revaluation, the accumulated depreciation is eliminated against the gross carrying amount of the asset. The revaluation surplus realises with use of any depreciable assets. Depreciation on revalued assets is calculated on the latest revalued amount. All revalued amounts are determined by an independent professional valuator.

On 1 January 20X2, the equipment was revalued for the first time. A revaluation surplus (before tax) of R1,8 million arose on this revaluation. There was no change in the depreciation method, useful life or residual value on the date of revaluation.


58

On 1 January 20X3, the equipment was revalued once again. The net replacement cost on 1 January 20X3 for similar equipment was R1,3 million. There was no change in the depreciation method, useful life or residual value on the date of revaluation.

The tax rate is 28%. The equipment is written off for tax purposes in equal amounts over three years. The profit before tax for the year ended 31 December 20X3 was R1,25 million. There are no temporary differences other than those that related to the equipment. On 31 December 20X3, there is sufficient other taxable income that will be generated from tax planning opportunities to recognise any deferred tax asset that may arise.

Disclosable income and expenses are presented in a “Profit before tax” note by Pluto Limited. Tax rate reconciliations are prepared using the Rand value format, when required.

Retained earnings on 31 December 20X2 was R400 000.

Required: a) Prepare the general journal entries of Pluto Limited for the year ended

31 December 20X3 in accordance with International Financial Reporting Standards (IFRS) from the information provided above. Closing journal entries are not required. Journal narrations are not required.


and other comprehensive income and an extract from the statement of changes in equity of Pluto Limited for the year ended 31 December 20X3 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

c) Disclose the above information in the notes to the annual financial statements of

Pluto Limited for the year ended 31 December 20X3 in accordance with International Financial Reporting Standards (IFRS). No comparative information is required.

Calculations: 1. Carrying amount on 31/12/20X2 R Cost (given) 3 200 000 Accumulated depreciation (R3 200 000 x 25%) (1/1/20X1 - 31/12/20X1)

(800 000)

2 400 000 Revaluation surplus 1/1/20X2 (given) 1 800 000 Thus revalued amount 1/1/20X2 4 200 000 Depreciation (1/1/20X2 – 31/12/20X2) (R4 200 000/3 years remaining life)

(1 400 000)

This carrying amount 31/12/20X2 2 800 000


59


Arising on revaluation 1/1/20X2 (given) (R1 800 000 x 72%)

1 296 000

Realised 1/1/20X2 – 31/12/20X2 (calc 3) (432 000) Thus balance on 31/12/20X2 864 000

3. Realisation of revaluation surplus 20X2

Depreciation on revalued amount (calc 1) 1 400 000 Depreciation on original cost (calc 1) (800 000) Realised before tax 600 000 Thus after tax (R600 000 x 72%) 432 000

4. Revaluation deficit 1/1/20X3

Carrying amount 1/1/20X3 (calc 1) 2 800 000 Net replacement cost 1/1/20X3 (given) 1 300 000 Thus revaluation deficit 1/1/20X3 1 500 000 Recognised as follows: Revaluation surplus (limited to balance available: R864 000 calc 2/72%)

1 200 000

Thus recognised in profit or loss 300 000 1 500 000

5. Balance on revaluation surplus 31/12/20X3

Balance 1/1/20X3 864 000 Utilised for revaluation deficit (calc 4) (R1 200 000 x 72%) (864 000) Thus balance on 31/12/20X3 -

6. Carrying amount 31/12/20X3

Revalued amount 1/1/20X3 (given) 1 300 000 Depreciation 1/1/20X3 – 31/12/20X3 (R1 300 000/2 years remaining life)

(650 000)

Thus carrying amount (R1 300 000/2 years x 1 year) 650 000

7. Carrying amount on cost model 31/12/20X3

Cost 1/1/20X1 (given) 3 200 000 Accumulated depreciation 1/1/20X1 – 31/12/20X3 (R3 200 000 x 25% x 3 years)

(2 400 000)

Thus carrying amount 31/12/20X3 (R3 200 000/4 years total life x 1 year remaining life)

800 000

8. Tax base

Cost 1/1/20X1 3 200 000 Wear tear 1/1/20X1 – 31/1/2/20X2 (R3 200 000/3 years x 2 years)

(2 133 333)

Tax base 31/12/20X2 1 066 667 Wear tear 1/1/20X3 – 31/1/2/20X3 (R3 200 000/3 years)

(1 066 667)

Tax base 31/12/20X3 -


60

9. Deferred tax

CA (calc 1 & 6)

TB (calc 8)

TD DT (28%) (dr)/cr

31/12/20X2 R R R R Equipment

2 800 000 1 066 667 1 733 333 485 333

31/12/20X3 Equipment 650 000 - 650 000 182 000

Movement on the Deferred tax account 31/12/20X3: R Balance on Deferred tax account 31/12/20X2 485 333 Cr Balance on Deferred tax account 31/12/20X3 182 000 Cr Thus total movement on Deferred tax account 31/12/20X3 in SFP 303 333 Dr Movement already recognised in OCI (revaluation deficit) (R1 200 000 calc 4 x 28%)

(336 000) Cr

Thus movement to be recognised in P/L (income tax expense) 32 667 Dr Alternatively, the “Deferred tax” account in the general ledger account can be reconstructed to calculate the movement on the deferred tax account that will be recognised in profit or loss, as follows:


(OCI) [deficit]

336 000 31/12/20X3 Tax expense (P/L)

(balancing) 32 667

518 000 518 000 518 000 01/01/20X4 Bal b/f 182 000

10. Current tax R Profit before tax per P/L (given) 1 250 000 Temporary differences: Depreciation on equipment (calc 6) 650 000 Revaluation deficit (calc 4) 300 000 Wear and tear on equipment (calc 8) (1 066 667) Taxable income 1 133 333

Current tax (R1 133 333 x 28%) 317 333


61

Part a – journal entries for the year ended 31 December 20X3

Dr R

Cr R

1 January 20X3 1. Equipment (SFP) 1 400 000 Accumulated depreciation - equipment (SFP)

(calc 1) 1 400 000

2. Revaluation surplus (OCI) (calc 4) 1 200 000 Revaluation deficit (P/L) (calc 4) 300 000 Equipment (SFP) 1 500 000 Aternative for J1 and J2 Accumulated depreciation – equipment

(SFP) (calc 1) 1 400 000

Equipment (at revalued amount) (SFP) (calc 1)

4 200 000

Equipment (at revalued amount) (SFP) 1 300 000 Revaluation surplus (OCI) (calc 4) 1 200 000 Revaluation deficit (P/L) (calc 4) 300 000 3. Deferred tax (SFP) (R1 200 000 x 28%) 336 000 Revaluation surplus (OCI) 336 000

31 December 20X3 4. Depreciation (P/L) (calc 6) 650 000 Accumulated depreciation – equipment

(SFP) 650 000

5. Income tax expense (P/L) 32 667 Deferred tax (SFP) (calc 9) 32 667 6. Income tax expense (SFP) (calc 10) 317 333 Current tax payable (SFP) 317 333


62

Part b – presentation for the year ended 31 December 20X3

Pluto Limited Extract from the statement of profit or loss and other comprehensive income for the year ended 31 December 20X3 Note R Profit before tax (given) 4 1 250 000 Income tax expense (R317 333 current tax calc 10 + R32 667 deferred tax calc 9)

5 (350 000)

Profit for the year 900 000 Other comprehensive income: Items that will not be reclassified to profit or loss Revaluation of equipment (864 000) Deficit on revaluation of equipment (calc 4) (1 200 000) Income tax expense (R1 200 000 x 28%) 336 000 Total comprehensive income for the year 36 000

Pluto Limited Extract from the statement of changes in equity for the year ended 31 December 20X3 Revaluation


R R Balance beginning of the year (calc 2) (given) 864 000 400 000 Total comprehensive income for the year (above) (864 000) 900 000 Profit for the year - 900 000 Other comprehensive income for the year (864 000) - Balance end of the year - 1 300 000

Part c – disclosure in the notes for the year ended 31 December 20X3 Pluto Limited Notes for the year ended 31 December 20X3






63


20X3 R

Carrying amount at beginning of year (calc 1) 2 800 000 Gross carrying amount 4 200 000 Accumulated depreciation (1 400 000)

Movements during the year: (2 150 000) Revaluation deficit (calc 4) (1 500 000) Depreciation (calc 6) (650 000)

Carrying amount at end of year (calc 6) 650 000 Gross carrying amount 1 300 000 Accumulated depreciation (650 000)


If the equipment was carried on the cost model, the carrying amount would have been R800 000 (calc 7).

3. Deferred tax R Analysis of temporary differences Accelerated wear and tear for tax purposes (*) 224 000 Revaluation net of depreciation (**) (42 000) 182 000

* based on the comparison of the carrying amount on cost model and tax base (both

calculated using original cost of asset) ** based on the difference between the carrying amount on the cost model and the

carrying amount on the revaluation model [This is disclosure is illustrated in the Part B2 of the IFRS textbook in Example 2 of IAS 12] R R R Revalued carrying amount (calc 6 or note 2)

650 000

(150 000) x 28% (42 000) Historical carrying amount (calc 7 or note 2)

800 000

800 000 x 28% 224 000 Tax base (calc 8) - Per deferred tax calc 9 650 000 182 000


64


Expenses Depreciation (calc 6) 650 000 Revaluation deficit (calc 4) (assume material) 300 000

5. Income tax expense

R Main components of the income tax expense:

Current tax – current (calc 10) 317 333 Deferred tax – origination and reversal of temporary differences (calc 9)

32 667

350 000

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