Reading 31 : Example 5

Reading 31 : Example 5 (CFAI curriculum, Volume 3, Page 467~469)

I just can not understand what are stated in the last 3 paragraphs on Page 468 and the one paragraph on Page 469.

Why the accumulated DTL is only $56,000 on 2006 B/S (an increase of only 16,000 from 2005) after the revaluation of the building from 90,000 to 120,000 ?

Why the increase of DTL of 16,000 in 2006 is even less than 20,000 in 2004 and 2005 respectively (before the revaluation) ?

Anyone can help ?

Asuka

I suggest you go through this thread first:

http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91319071

This example has been discussed extensively before. In my opinion, and others, it is simply wrong. CFAI does not want to take the reasoning on board however and the same example is included in the 2014 boos as well :frowning:

Thank you for your directing me to another thread. I really think that those statements and figures are wrong. My logic is very simple.

The book value of the building was increased from 900,000 to 1,200,000, the depreciation expense of the building shall be higher after the revaluation and the difference between the carrying value and tax base of the building shall be higher than that before the revaluation. As a result, the annual DTLs (from 2006 onward) shall be higher that before the revaluation.

Do you mean that CFAI does not correct the wrong statements and figures in its 2014 curriculum ? I checked CFAI’s errata, no correction regarding this was found.

CFAI claim the approach presented in that example is correct, hence no correction is needed. I have exchanged emails with the Institute, sent a full explanation… without success.

As a chartered accountant specialising in IFRS, I can assure you that the deferred tax consequences of a revaluation are absolutely not what is presented in that example. Morever, I have asked experienced Big 4 auditors for their comments on this and all have come back saying it makes no sense at all.

For your sake, I hope this does not come up on the exam.

I consulted some specialists in IFRS in last week and all of them said the statements and the figures in the example are absolutely wrong ! It is incredible to me that CFAI is so stubborn if they insist on their wrong statements/figures as said by you !

Anyway, thank you so much for your advices.

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

Having done the Chartered Accountant Program (equivalence of CPA in others) in Australia which focuses on IFRS, I have come across examples that over and over again suggests otherwise.

Kind of disappointed to know that they insist on something that appear to be wrong over so many years.

HZ