Under IAS 12 Income Taxes, the measurement of deferred tax reflects the tax consequences that would follow from the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities. As a result, the amount of deferred tax applicable to revalued assets depends on whether the value of the asset will be recovered by use or sale.

If the entity expects to recover the carrying amount by use, the deferred tax liability is calculated based on the difference between the accounting value of the asset and the tax base of the asset. However, if the entity expects to recover the value by sale, the deferred tax liability is calculated based on the tax consequences of selling the asset at its carrying amount. As any capital gain will generally be exempt from tax, the deferred tax liability is calculated based on the amount of any tax depreciation recovery. In most cases, the deferred tax liability calculated on a sale basis is much less than the deferred tax liability calculated on a use basis.

In September 2010, the International Accounting Standards Board (IASB) issued an exposure draft to amend IAS 12. The proposed amendment stated that deferred tax should be measured based on a rebuttable presumption that the carrying value of the asset will be recovered entirely by sale. It was proposed that this change would apply to:

• investment properties, where the entity applies the fair value model; and
• property, plant, and equipment (PPE) or intangible assets, where the entity applies the revaluation model.

Many entities currently recognise large deferred tax liabilities for revalued assets. This change would significantly reduce these deferred tax liabilities.

The IASB received 74 submissions on the proposed amendment. In summary, 25 of the submissions agreed with the proposal, nine considered that the proposal should only be applied to investment properties, and 40 disagreed with the proposal. Of those that agreed with the proposal, 12 came from New Zealand or Hong Kong (both countries without a capital gains tax).

The IASB has now completed its review of the comments received on the proposed amendment to IAS 12 and has tentatively decided to limit the scope of the exception to revalued investment properties, and therefore not to allow the exception to apply to revalued PPE.

The amendment to IAS 12 will require deferred tax on revalued investment properties to be measured using a presumption of recovery through sale. The presumption must be rebutted if the asset is held within a business model that aims to consume the asset's economic benefits throughout its economic life.

The amendment is to be applied retrospectively, and will take effect from the financial year beginning on or after 1 January 2012, with earlier application permitted.

Page last updated: 9 December 2010