The HKICPA has recently issued amendments to HKAS 12,
Income taxes
– Deferred tax: Recovery of underlying assets, to maintain
convergence of HKFRS with IFRS. The amendments to HKAS 12
are identical to those made to IAS 12, issued by the IASB
in December, with the same effective date.
The amendments stem from the proposals published by the IASB for
comment in September 2010. As highlighted in our
Financial Reporting Update Issue 59, the proposals
addressed concerns, which have been expressed in Hong Kong
and a number of other jurisdictions, that the
current requirements of IAS 12, and consequently HKAS 12, result in deferred tax being accrued on
revaluation gains which may never be taxable or may be
taxed at a significantly different rate on disposal than
has been used to measure the deferred tax liability.
In response to
the above concerns, the IASB has now amended IAS 12 by introducing a
rebuttable presumption that deferred tax on investment property
carried at fair value under IAS 40,
Investment property, shall
be measured reflecting the tax consequences of recovering the
carrying amount of the investment property entirely through sale.
For example, in Hong Kong, this will generally result in the deferred tax
liability on investment properties being limited to the
tax effect of any claw back of depreciation allowances that would
occur on sale at the current carrying amount, as there is currently
no capital gains tax in Hong Kong. This
rebuttable presumption is contained in a new paragraph 51C.
The rebuttable
presumption shall also apply when deferred tax arises from measuring
investment property at fair value in a business combination if the
entity will use the fair value model when subsequently measuring
that investment property. This is intended to ensure that the
measurement of deferred taxes at the acquisition date is
consistent with the subsequent measurement of the same deferred
taxes.
According to paragraph 51C, the presumption is rebutted when the
investment property is depreciable and is “held within a
business model whose objective is to consume substantially all of the economic benefits
embodied in the investment property over time, rather than through sale”. This rebuttal will only
apply where the property's economic life is limited to such an extent that the entity expects
that the asset’s income-generating ability will wear out while the asset is
still owned by the entity. For example, this rebuttal would apply when the title to the properties is for a limited period, which
cannot be renewed without the payment of a market-based premium, and the entity
expects to hold the properties until the current title expires. This is not expected to be common in Hong Kong
given the Government's current land policy in respect of lease renewals, but may be
encountered
outside of Hong Kong, for example in the PRC. If the presumption is rebutted
then the deferred tax arising from the revaluation of the investment property is
measured on the basis of the tax consequences of recovering the carrying amount
through use.
The exposure
draft published in September proposed that the above exception would
also apply to property, plant and equipment or intangible assets
measured using the revaluation model in IAS 16,
Property, plant and equipment
or IAS 38, Intangible
assets. However, in view of the comments from respondents
stating that many assets in this category are recovered by use
rather than sale, the IASB decided to limit the scope of the
exception to investment properties carried at fair value under IAS
40.
The amendments
are effective for annual periods beginning on or after 1 January 2012
with earlier application permitted. The amendments do not contain
any transitional provisions, which means that they need to be applied
retrospectively in accordance with HKAS 8,
Accounting policies, changes
in accounting estimates and errors. The amendments also
incorporate the guidance in HK(SIC) Interpretation 21,
Income taxes – Recovery of revalued non-depreciable assets into the
text of HKAS 12 in the form of a new paragraph 51B. Therefore, the
Interpretation will be superseded upon the effective date of the
amendments.
Please talk
with your usual KPMG contact if you would like further assistance on
the matters discussed.
KPMG China's Financial Reporting Updates are produced
regularly to highlight developments in Hong Kong Financial Reporting
Standards. If at any time you would like further information on the
matters discussed in the Updates, please talk to your usual KPMG
contact. An archive of recent issues of Financial Reporting Update
can be found at
http://www.kpmg.com/cn/en/IssuesAndInsights/
ArticlesPublications/Newsletters/Financial-Reporting-Update/
Pages/default.aspx.
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