Question

Discuss the difference in accounting treatments between revaluation increments and decrements. Focus your discussion on the difference in the accounting treatment for the tax effect of them.

Answer 1

Tax effect plays an important role in revaluation increments and decrements of assets. Below are some of the differences in accounting treatments of revaluation between increments and decrements:

• revaluation decrements are not to be debited to the balance of the asset revaluation reserve in respect of a class of non-current assets to the extent that they would cause the balance of the asset revaluation reserve.

• current tax and deferred tax are not to be debited to the balance of the asset revaluation reserve in respect of a class of non-current assets to the extent that they would cause the balance of the asset revaluation reserve in respect of that class of non-current assets to be a debit balance.

• When revaluation increments and decrements are recognised in respect of the same asset, the unrealised capital loss is the amount by which the revaluation decrement exceeds the revaluation increment. And if a deferred tax asset fails the criteria for recognition then the unrecognised asset is limited to the tax effect of the net decrement.

• when revaluation increments and decrements are recognised in respect of different assets within the same class the amount of the deferred tax asset that may fail the criteria for recognition maybe equal the tax effect of the entire revaluation decrement. The unrecognised credit to the asset revaluation reserve would also be different, and this can affect the extent to which revaluation decrements for a class of assets can be debited to the asset revaluation reserve.