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Page 1: Hong Kong accounting Deferred tax for investment property gainapp1.hkicpa.org.hk/APLUS/1102/38-39-deferred-tax.pdf · Deferred tax for investment property gain ... KAS 12 Income Taxes

Hong Kong accounting

38 February 2011

Deferred tax for investment property gainStephen Chan explains the latest developments on the accounting standard

H KAS 12 Income Taxes applies the principle that the measurement of deferred tax liabilities and deferred tax assets

should reflect the tax consequences that would follow from the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities.

In many cases, however, an entity expects to rent out investment property to earn rental income and then sell it to gain from capital appreciation in the future. Without specific plans for the disposal of the investment property, it is difficult and subjective to estimate how much of the property’s carrying amount will be recovered through cash flows from rental income and from selling the asset.

One particularly tricky area is determining the entity’s expected manner of recovery for investment property, which is measured using the fair value model in HKAS 40 Investment Property. To address this, HKAS 12 has been amended to introduce an exception to the HKAS 12 principles. The purpose of the exception is to reflect the entity’s expectation of recovery of the investment property in a practical manner that involves little subjectivity.

The amendments are effective for annual periods beginning on or after 1 January 2012. Earlier application is permitted.

Rebuttable presumption exception• If a deferred tax liability or deferred tax asset arises from investment property that is measured using the fair value model in HKAS 40, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale. This is an exception to the

HKAS 12 principles.• If that is the case, the measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying

Page 2: Hong Kong accounting Deferred tax for investment property gainapp1.hkicpa.org.hk/APLUS/1102/38-39-deferred-tax.pdf · Deferred tax for investment property gain ... KAS 12 Income Taxes

A PLUS

February 2011 39

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Stephen Chan is a partner and head of technical and training at BDO Ltd. Hong Kong and a member of the Institute’s financial reporting standards committee.

Basis for Conclusions that it chose to use the term “business model” because it is already used in IFRS 9 Financial Instruments and would not depend on management’s intentions for an individual asset.

• If that is the case, the normal deferred tax accounting requirements shall be followed.

• The rebuttable presumption also applies when a deferred tax liability or a deferred tax asset arises from measuring invest-ment property in a business combination if the entity will use the fair value model when subsequently measuring that invest-ment property.

A practical solution The rebuttable presumption exception to the HKAS 12 principles provides a practical approach for measuring deferred tax lia-bilities and deferred tax assets when it would be difficult and subjective to deter-mine the expected manner of recovery of an investment property at fair value.

The amendments address an issue facing many Hong Kong entities and also entities in certain IFRS jurisdictions such as Singapore, New Zealand and South Africa because these territories either have no capital gains tax or their capital gains tax rate is different from the income tax rate.

As a result of the amendments, deferred tax assets or deferred tax liabilities arising from investment property at fair value are likely to be affected. Management is therefore advised to start considering the implications of the amendments, in particular:• Whether the amendments should be adopted early for the 2010 year-end reporting

• The impact of the amendments on pre-vious business combinations involving investment property.

amount of the investment property entirely through sale.

• This presumption is rebutted if the invest-ment property is depreciable and is held within a business model of which the objective is to consume substantially all

of the economic benefits embodied in the investment property over time, rather than through sale. The International Accounting Stan-dards Board explained in the