DTL charged directly to equity

CFAI text Vol 3. P468, 2nd last paragraph, it is stated :

The revaluation surplus is reduced by the tax provision associated with the excess of the fair value over the carry value and it affects retained earnings (300,000 x 40% = 120,000).

Is it that a tax expense of 120,000 shall be recorded on the income statement and paid to tax authority in the year of the revaluation ? Can anyone help ? Thanks !

Anyone ?

In general, taxes are paid only on realized gains (there are a few odd exceptions); the revaluation results in an unrealized gain, so it would not be taxable. It would, however, increase potential future taxes; thus, it would appear as a deferred tax liability (DTL) of 120,000.

So, in summary, assets increase by 300,000, liabilities increase by 120,000, equity (retained earnings) increase by 180,000.

My pleasure.

S2000magician, following an upward revaluation of 300, we would indeed see assets go up by 300, the DTL increase by 120 but the reamaining 180 would be taken to revaluation surplus within equity (via O.C.I). Under IFRS, the revaluation surplus would be stated net of the deferred tax effect which the revaluation gives rise to.

Alpha668, I read this example in the book, but I really don’t get what they are trying to do there??? It seems to suggest that we do not recognise the DTL on the revaluation.

Thanks, Wojtek!

I always enjoy the rare occasions when I get this stuff right.

My confusion is that it is stated that (in the last paragraph) the DTL reflected on 2006 B/S shall be only 56,000 [(1,140,000-700,000)x40% - 300,000x40%]. If no tax shall be paid for unrealized gains on PP&E (my understanding is same as that indicated by S2000magician), then why only 56,000 is recognized on its 2006 B/S?

Anyway, thank Wojtek and S2000magician, thank you so much !

As I don’t have the curriculum, I don’t know the origins of the 1,140,000 and 700,000; I also don’t understand why the DTL is decreased by 300,000 × 40%: it should be increased by that amount.

Anything you can post - without violating CFA Institute’s copyright - will be useful. I’ll try to help as much as I can.

My pleasure.

Alpha668, I share your pain. I find this example impossible to reconcile.

S2000magician, this is the setup:

On 1 January 2006 a bulding is revalued to €1,200,000. Its book value just prior to the revaluation was €900,000 and its tax base was €800,000. The revaluation is of course not recognised for tax purporses.

Over the course of the year 2006, the building is depreciated at 5% straigh-line (€60,000). At the same time, depreciation for tax purposes is charged at €100,000. The tax rate is 40% and the DTL recognised on the B/S prior to the revaluation is €40,000.

When you combine the effects of the revaluation and depreciation at different rates, you see that 2006 gives rise to a €340,000 overall widening in the gap between carrying amount and tax base (€300,000 from the revaluation and €40,000 from the difference in depreciation rates).

IMO, the proper accounting for this would be:

Revaluation (1 January 2006):

  • Building (assets): increase by €300,000
  • Revaluation surlpus( equity): increase by €180,000
  • DTL (liabilities): increase by €120,000

The different accounting and tax depreciations charged over the course of the year would give rise to a further increase in the DTL, but this time it would be charged to the income statement and not the revaluation surplus:

  • DTL (liabilties): increase by €16,000 (40% x €40,000)

  • Deferred tax charge (Income Statement ): €16,000

What the Curriculum seems to suggest is that the DTL is only increased due to the difference in depreciation rates, i.e. 40% of €40,000 - €16,000. If that is the case, the DTL recognised as at 31 December 2006 would only be €56,000 (€16,000 higher than at the beginning of the year). This is the €56,000 which alpha668 was referring to in previous posts. This is a treatment which I find baffling and it goes against my understanding of IFRS.

all the best!

S2000magician & Wojtek,

Thank you so much again ! Maybe it’s better to have someone to send an e-mail to CFAI for clarifing this issue.

Alpha668, this example certainly qualifies for reporting to CFAI. Will write to them and we’ll see. In any case, well done for spotting this!

I am looking forward to seeing your post regarding the clarifications from CFAI. Thanks again !

This is an example from hell. :frowning: I don’t even get what they’re saying.

Are they saying that DTL reflected on the balance sheet should amount

DTL = tax rate * (new carrying amount - tax base) - revaluation surplus * tax rate

which equals $56,000?

I don’t understand this at all. If only a $56,000 increase is reflected on the balance sheet under liabilities, and the assets have increased by $300,000, is the increase in equity $244,000 ?? So confusing…


Would you please kindly advise the response from CFAI regarding this issue ? Thanks !

Initially, the CFAI’s response was that the solution is correct. I replied with further arguments but got no further response. I didn’t really have time to fight a battle :slight_smile: but will surely follow up soon.

Thank you so much for your quick response ! Anyway, I am looking forward to having their conclusion, with their convincing rationales.

I consulted with many people in accounting field but no one agreed to those statements in this example. I am very disappointed that CFAI has not responded to this issue until now, maybe they don’t have the rationales supporting their statements in this example at all.

One more fundamental question :

If the revaluation of the building resulted in a tax provision of 120K, a revaluation surplus of 180K and a DTL of 16K whereas the carrying amount of the building (an asset) was increased by 240K (from 900K to 1140K), would the left side and the right side of 2006 balance sheet be equal ?

S2000magician :

I sent the relevant portion of the curriculum to you by e-mail yesterday, would you please read those statements and comment ? Thanks !


I just wondered if there is some comment from CFA or rational explanation regarding revaluation surplus treatment, as mentioned example is the same in CFAI 2014 curriculum.

And as of 14 Sep 2019, I am still perplexed by this exact same example. Nothing seems to have changed for this example.

Even Mark Meldru’s video clip seems to confirm CFAI’s proposition, that

  1. Upward revaluation – does NOT result in changes to DTL 2) Only the original cost, less new depreciation rates (which DOES include the impact of the revaluation, and newly assessed useful life) is used to work out the DTL post revaluation. https://www.youtube.com/watch?v=nPurdWeYJSs

If anyone got an answer from the CFAI would you please kindly share it with new candidates? Many thanks.