Prepare any necessary entries in E”s financial statements as at Dec 31 for the years 01 and 02.

Revaluation of non-deductible asset (2)

On 1 January 2013 an entity paying tax at 30% acquires a non tax-deductible office building for €1,000,000 in circumstances in which IAS 12 prohibits recognition of the deferred tax liability associated with the temporary difference of €1,000,000. The building is depreciated over 20 years at €50,000 per year to a residual value of zero. The entity”s financial year ends on 31 December.

At 1 January 2015, the carrying amount of the building is €900,000, and it is revalued upwards by €450,000 to its current market value of €1,350,000. As there is no change to the estimated residual value of zero, or to the life of the building, this will be depreciated over the next 18 years at €75,000 per year.

Following the revaluation, the temporary difference associated with the building is €1,350,000. Of this amount, only €900,000 arose on initial recognition, since €100,000 of the original temporary difference of €1,000,000 arising on initial recognition of the asset has been eliminated through depreciation of the asset. The carrying amount (which equals the temporary difference, since the tax base is zero) and depreciation during the year ended 31 December 2015 may then be analysed as follows.

Total carrying amount e

arising initial revaluation e

Arising on revolution e

1 January 2015

1,350,000

900,000

450,000

Depreciation”

75,000

50,000

25,000

31 December 2015

1,275,000

850,000

425,000

1 The depreciation is allocated pro-rata to the cost clement and revalued element of the total carrying amount.

On 1 January 2015 the entity recognises a deferred tax liability based on the temporary difference of €450,000 arising on the revaluation (i.e. after initial recognition) giving a deferred tax expense of €135,000 (€450,000 @ 30%), recognised in other comprehensive income . This has the result that the effective tax rate shown in the financial statements for the revaluation is 30% (€450,000 gain with deferred tax expense of €135,000).

As can be seen from the table above, at the end of the period, €425,000 of the total temporary difference arose after initial recognition. The entity therefore provides for deferred tax of €127,500 (€425,000 @ 30%), and deferred tax income of €7,500 (the reduction in the liability from €135,000 to €127,500) recognised in profit or loss.

The deferred tax income can be explained as tax effect at 30% of the €25,000 depreciation relating to the revalued element of the building (see table above).

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