Amendments to HKAS 12 “Income Taxes-Deferred Tax: Recovery of Underlying Assets

The Amendments to HKAS 12 are issued in December, 2010 to introduce a practical approach to an entity for the measurement of deferred tax assets or liabilities arising from investment property carried at fair value. 

The Amendments are mandatory for annual accounting periods beginning on or after 1 January, 2012 but early adoption is permitted.  If the Amendments are applied in an earlier period, the entity is required to disclose that fact in the financial statements.  As the Amendments do not contain any transitional provisions, they need to be applied retrospectively in accordance with HKAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.

Key issues

The current principle in HKAS 12 requires an entity to measure the deferred tax of an asset to reflect the tax consequences that would follow from the manner that the entity expected to recover or settle the carrying amount of the asset.  Hence, the tax base and the tax rates applicable to measure the deferred tax will be varied depending on the management’s expected manner of recovery or settlement.  However, it is difficult and subjective to determine the management’s expectation on whether the carrying amount of the asset will be recovered through sale or use if specific plans for disposal of the asset is not available at a particular time.  This is particularly difficult and subjective to assess the expected manner of recovery of the carrying amount of investment property measured using the fair value model in HKAS 40.

In response to the above concern, the Amendments introduce a rebuttable presumption that the deferred tax on investment property carried at fair value shall reflect the tax consequence of recovering the carrying amount of the investment property entirely through sale.  However, this presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.

The above rebuttable presumption is also applied when deferred tax liability or asset arises from measuring the investment property in a business combination if the entity will use fair value model to measure the investment property subsequently.  Moreover, if deferred tax arises from a non-depreciable asset measured using the revaluation model in HKAS 16, this rebuttable presumption is also applicable regardless of the basis of measuring the carrying amount of that asset.  Accordingly, the entity should apply the tax rate applicable to the taxable amount derived from selling an asset in measuring the deferred tax if such rate is different from the tax rate applicable to taxable amount derived from using the asset.

Disclaimer:

The publication contains information in summary form and is therefore intended for general guidance only.  This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such.  If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought.  Neither Reanda Lau & Au Yeung nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.

For details, please refer to the Amendments to HKAS 12 “Income Taxes-Deferred Tax: Recovery of Underlying Assets” issued by the HKICPA in December, 2010.