Section A

Gamma Co revalued its land upwards by $2 million during the year. The tax base of the land remains at its original historical cost. The corporate tax rate is 25%. Gamma Co has no intention of selling the land in the foreseeable future.

How should the deferred tax implication of this revaluation be accounted for?

Under IAS 12 Income Taxes, a revaluation of an asset creates a taxable temporary difference because the carrying amount increases while the tax base remains the same. A deferred tax liability must be recognized ($2m * 25% = $500,000). Since the revaluation gain is recognized in Other Comprehensive Income (OCI), the related deferred tax expense must also be recognized in OCI.