Misnomer between FRS12 and FRS40?

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The second part of Tan Eng Juan/Tan Kai Guan’s article on Accounting for Deferred Tax in Sep/Oct2009 Singapore Accountant touched on the following areas:-

What if disposal of investment properties “attracts a badge of trade” ==> Consequently, gain/loss from such transactions would be subject to tax. Both professors got no issue with that.

The two professors are however unhappy with when such entities SHOULD have started accounting for deferred tax on these properties. They posit that:-
a) deferred tax should have been provided for when FRS12 was adopted in year 2001 and;
b) accounting for deferred tax should not started only year 2007 ie. the year FRS40 was adopted.


1. SAS12 to FRS12 effected on April 1, 2001
Assuming gain on disposal is taxable, SAS12, in the past, said deferred tax has to be provided for IF the timing differences affect P&Ls.
But now FRS12 said we must provide for deferred tax on ALL temporary differences, regardless or not they affect P&Ls.

2. FRS25 to FRS40 effected on January 1, 2007
Under the extinct FRS25, revaluation surplus is taken to reserve (ie. never to P&L).
Under the currently in force FRS40, fair value gain is taken to P&L.

The simple point is that while FRS12 has been in force about 6 years earlier than FRS40, have most companies been accounting for deferred tax as tax expense in P&L since 2001? The two professors seem to imply that most did not. During those 6-7 years, deferred tax on revaluation of investment property will be debited to “revaluation reserve” (instead of P&L).

Impact? – Profit figures are overstated over those years while the overall value of shareholders’ equity remain neutral.

Accounting for Deferred Tax – A Mispractice

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Tan Eng Juan and Tan Kai Guan, two Associate Professors from NTU wrote a very interesting article on “Accounting for Deferred Tax on Investment Property in Sep/Oct2009 Student Accountant.

Their paper argued that we should NOT provide for deferred tax on investment property if the gain on disposal of those properties is NOT taxable. If gain on disposal is a badge of trade ie. such gains are thus taxable, then deferred tax should be accounted for.

Their supporting arguments in favour of their position:-

a) FRS12 said deferred tax should only be accounted for if and only if “it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) …” ==> In the absence of capital gains tax in Singapore and if the profit/loss on disposal has no tax implication, then why are we wasting time accounting for deferred tax?

b) If fair value adjustment to asset values have no tax implications on disposal, then why are we accounting for deferred tax? We should NOT account for deferred tax for reason that the fair value adjustments are reflected in P&L and thus affect the current profitability and thus tax expense.

c) Even if higher fair value is due expected higher rental for its properties, there is still NO basis to account for deferred tax on the higher fair value. Why?
As the higher rental income for each future period would be subject to income tax and thus higher tax expense for that future period, there is thus no basis to subject changes in fair value to deferred tax.

If both these professors are correct, what are the implications for entities that had been accounting for deferred tax all these years on non-taxable gains even if they were to be realised in the future?