For example, company A bought an asset in 2010 for 4000, using straight-line depreciation of 10 years with no residual value. In tax purpose, the asset is depreciated straight-line with 5 years of usable life. Tax rate is 40%.
After 3 years, at the end of 2012, for accounting purpose, the asset has accumulated depreciation of 3*(4000/10) = 1200, so the carrying value is 4000-1200 = 2800. For tax purpose, the depreciation would be 3*(4000/5) = 2400, and the tax base would be 4000-2400 = 1600. So, at this point, the DTL is (2800-1600) * 40% = 480
If at this point, the asset is revalued up under IFRS to 5000, and the new estimated life is 10 years, how is this going to affect the DTL? The valued up amount (5000-2800 = 2200) goes through the OCI and does not affect the income statement, so we do not need to pay tax for them, so the DTL should not change. But later, when the new carrying value of 5000 is depreciated, we will actually pay (5000-1600)*40% more tax, so the DTL should increase…which one is correct…? If we the DTL should not change, how are we going to book the later excess amount of tax payble to tax expense as there is no more DTL to decrease??
Thank you!!