During the year Smew Co revalued its land upwards by $400,000. The revaluation does not affect taxable profit, but the land would be taxed if sold at its revalued amount. The tax rate is 20%. How should the deferred tax on the revaluation be recognised?

Correct answer: A) Deferred tax liability of $80,000 charged to OCI, so the revaluation surplus is $320,000 net

Explanation

The revaluation makes the carrying amount higher than the tax base, creating a taxable temporary difference of $400,000 and a deferred tax liability of $400,000 x 20% = $80,000. IAS 12 requires deferred tax to be recognised in the same place as the item it relates to. The revaluation gain is in OCI, so the deferred tax is charged to OCI, leaving a net surplus of $320,000.