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.