Question

Discuss the difference in accounting treatments between revaluation increments and decrements. Focus your discussion on the difference in the accounting treatment for the tax effect of them.

Answer 1

Accounting Treatment

Entry for Increments

Concerned Asset A/c Dr.

To Revaluation A/c

From the above treatment there will be appraisal in the value of the assets,wherby improving leverage of the entity

Entry for Decrements

Revaluation A/c Dr

To Concerned Asset A/c

From the above treatment there will be deterioration in the value of the assets,whereby negatively impact the leverage of the entity.

Tax Treatment

Increments

When the value of the asset is increased from its present value,without corresponding increase in salvage value and useful lifes,it will lead to charging of additional depreciation per year.In most of the countries depreciation is an alllowable expenses,thus an increased Depreciation will substantially reduce the taxable income and thereby tax.Another impact of increased asset value is that it will indicate that a lower depreciation was charged during the previous period.This will in fact create a deferred asset indicating a higher tax paid than the accounting perspective of tax.

Decrements

When the value of the asset is decreased from its present value,without correspondimg changes in salvage value and useful life,it will lead to charging of lower depreciation per year.In most of the countries depreciation is an alllowable expenses,thus a decreased Depreciation will substantially increase the taxable income and thereby tax.Another impact of decreased asset value is that it will indicate that a higher depreciation was charged during the previous period.This will in fact create a deferred liabilty indicating a lower tax are paid in the accounting perspective of tax compared to the tax perspective.