Deferred Tax on Revaluation and Fair Value | Ind AS 12

1. Facts

Delight Solutions Limited (hereinafter referred to as “the Company”) is engaged in the manufacturing of agro-machinery.The company prepares its financial statements in accordance with Ind AS framework. During the financial year ended 31^st March 2025, the company undertook several revaluation and fair value measurements in compliance with various Ind AS requirements. These measurements resulted in differences between the carrying amounts of certain assets and liabilities in the financial statements and their corresponding tax bases, thereby giving rise to temporary differences and the need to evaluate deferred tax recognition under Ind AS 12.During the year under consideration, the company undertook the following transactions:

2. Revaluation of Freehold Land under Ind AS 16

The company revalued its freehold land by applying the revaluation model under Ind AS 16. The resulting revaluation surplus was recognised in Other Comprehensive Income (OCI) and accumulated in equity, giving rise to a question on whether the related deferred tax should also be recognised in OCI or routed through profit and loss.

3. Fair Value Gain on Strategic Equity Investments under Ind AS 109 – FVOCI

The Company held strategic equity investments designated as fair value through OCI. During the year, the fair value of these investments increased and the resulting gains were recognised in OCI, leading to differing views on whether deferred tax arising from such OCI-recognised gains should likewise be recognised in OCI or in profit and loss.

4. Fair Value Gain on Long-term Debentures Ind AS 109 – FVTPL

The Company had issued long-term debentures designated at fair value through profit or loss. Due to changes in market conditions, the fair value of the debentures decreased, resulting in a gain recognised in profit and loss.

Accordingly, the central issue in the aforementioned casesis the appropriate recognition and presentation of deferred tax under Ind AS 12, particularly whether deferred tax should be recognised in other comprehensive income or in profit and loss based on the component of the financial statements in which the underlying revaluation or fair value adjustment is recognised?

5. Relevant Provision

Ind AS 12 – Income Taxes

• Para 58 of Ind AS 12

Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:

(a) a transaction or event which is recognised, in the same or a different period, outside profit or loss, either in other comprehensive income or directly in equity, or

(b) a business combination (other than the acquisition by an investment entity, as defined in Ind AS 110, Consolidated Financial Statements, of a subsidiary that is required to be measured at fair value through profit or loss)

• Para 61A of Ind AS 12

Current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period:

(a) in other comprehensive income, shall be recognised in other comprehensive income.

(b) directly in equity, shall be recognised directly in equity.

• Para 62 of Ind AS 12

Indian Accounting Standards require or permit particular items to be recognised in other comprehensive income. Examples of such items are:

a) a change in carrying amount arising from the revaluation of property, plant and equipment; and

b) exchange differences arising on the translation of the financial statements of a foreign operation

6. Analysis

Based on the relevant provisions of Ind AS 12, the following analysis can be made in respect of the above cases:

• Revaluation of Freehold Land:

The company revalued its freehold land under the revaluation model, with the surplus recognised in OCI and accumulated in equity. Considering the Paras 58, 61A, and 62, deferred tax arising from such temporary differences must also be recognised in OCI, consistent with the treatment of the underlying revaluation. This ensures that neither profit or loss nor retained earnings are affected by deferred tax on revaluation gains.

• Fair Value Gain on Strategic Equity Investments – FVOCI

The fair value gains on strategic equity investments designated as FVOCI were recognised in OCI. As per Ind AS 12, Para 58 and 61A, the deferred tax attributable to these gains must also be recognised in OCI, aligning the tax effect with the component in which the gain is recorded. This treatment preserves the integrity of OCI and ensures that the profit or loss is unaffected by such deferred tax.

• Fair Value Gain on Long-term Debentures – FVTPL (Ind AS 109):

The company recorded a gain due to changes in fair value of debentures designated at FVTPL in profit or loss. Consistent with Ind AS 12, Para 58, the related deferred tax should also be recognised in profit or loss, ensuring that the tax effect follows the accounting treatment of the underlying FVTPL instrument. This prevents mismatch between the recognition of the gain and the associated deferred tax.

7. Conclusion

In accordance with Ind AS 12, deferred tax must be recognised in the same component of the financial statements as the item that gives rise to the temporary difference. Accordingly, deferred tax on items recognised in OCI, such as the revaluation surplus on freehold land and FVOCI equity investments, should also be recognised in OCI, while deferred tax on items recognised in profit or loss, such as fair value gains on FVTPL debentures, should be recognised in profit or loss. This approach ensures consistency, avoids distortion of profit or loss, and faithfully reflects the tax consequences of the underlying transactions.

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