The new conservative coalition government revised the Budget on 8 November
Tax Matters — Propertymarketupdates 5: But what some may not have realised is that the new standard could also introduce a tax element into the equation — which will hit bottomlines, in a significant way, from this financial year. In a nutshell, it could mean that companies would have to account for revaluation gains and losses on their investment properties through the income statement, together with the related deferred tax provisions.
And with property prices soaring as much as they have this year, it will mean substantial revaluation gains for most — and also substantial deferred tax provisions.
Property companies are expected to be the most affected, because they have extensive portfolios of investment property. Some have played down the move as no more than an accounting adjustment. But others have expressed their displeasure with the need to provide for deferred tax on revaluation gains.
From Jan 1,companies will have to adopt Financial Reporting Standard FRS 40 — which prescribes accounting and disclosure treatments for investment properties. Under FRS 40, any changes in the fair value of an investment property held have to be taken to the profit and loss account — instead of to a revaluation reserve in the balance sheet, as previously allowed.
In other words, an upward revaluation of investment property will add to the bottomline, while a downward revaluation will eat into earnings.
Under another standard already in place — FRS 12, on income taxes — companies should have to account for the future tax related to this increase in property value.
Looking at future rental stream It would mean that an upward revaluation of any investment property would indicate an increase in the amount of future rental income or proceeds from disposal of the property.
This increase is recognised in the income statement and, hence, there would need to be a corresponding recognition of the deferred income tax expense in the income statement. Still, they will have to recognise these deferred taxes as an expense in their income statement as long as there is no plan to sell the properties — hurting their bottomlines.
And the impact could be significant. Therefore, the amount of deferred tax vis-a-vis the net asset value of companies would generally be less significant and may be immaterial. Therefore, the deferred tax expense on fair value gains would be more material on adoption of FRS And some property companies feel that revaluation gains in investment property should be treated as a capital gain, and not subject to tax.
Under FRS 12, deferred income tax is recognised in the books — but companies are only taxed when the profit is realised. That is entirely correct. However, where there is no expectation of a tax liability payable now or in future, it would be inappropriate to book a liability. Yet, when the rental income is received, a further tax liability is set aside again.
The tax is payable just once, but the liability would be set up twice. This distorts the accounts. When the asset is sold and assuming this is a non-taxable capital gain, it becomes clear that there is no tax liability to pay from the disposal.
A gain gets recorded as a result of the reversal of the deferred tax liability previously recorded.
Other anomalies could also arise from careless interpretations of the standard, such as a company recording a loss immediately when it buys a property because of the deferred tax liability that will be recorded.
And a property that requires no deferred tax provision might require one when the business decides it is no longer held for sale but is to be rented out instead.
Mr Tham also worries that the issue could be blind-sided by the current buoyant property market in Singapore. It falls on everyone concerned to apply business sense and professional judgement so that this accounting standard is applied correctly, ultimately so that the accounts make sense when they are issued.
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Fill the GAAP • FASB issues ASU simplifying the balance sheet classification of deferred taxes 1 24 November No. affected. The amendme financial position. FASB issues ASU simplifying the balance sheet classification of deferred taxes pricing by the. Tax-Related Issues [Mathew DeMong] Slide 13 – Slide 52 Valuation Issues Arising With Deferred Tax Assets [Douglas Sayuk] Slide 53– Slide OVERVIEW OF MATERIAL ASC and Valuations of Deferred Tax Assets.
deferred tax assets (DTAs) on outside basis difference A DTA is recognized for an excess of tax basis over financial reporting amount of an investment in a subsidiary or corporate joint.
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