SIC-21, or the “Income Taxes – Recovery of Revalued Non-Depreciable Assets” is a standard issued by the International Financial Reporting Interpretations Committee (IFRIC) that provides guidance on how to account for the recovery of revalued non-depreciable assets in the context of income taxes in the financial statements of an entity.
Definition:
SIC-21 defines revalued non-depreciable assets as assets that are accounted for at fair value through revaluation, but are not subject to depreciation or amortization. These assets may include land or other types of property, plant, and equipment that are measured at fair value with changes in fair value recognized in the financial statements.
Explanations:
SIC-21 provides guidance on how to account for the recovery of revalued non-depreciable assets in the context of income taxes. It states that when an entity recovers the carrying amount of a revalued non-depreciable asset through a transaction that is not a sale, the entity should recognize the tax effects of the recovery in the income statement. This means that any income tax effects related to the recovery of the revalued non-depreciable asset should be recognized as income tax expense or income in the income statement, and not as an adjustment to the carrying amount of the asset or to equity.
Examples:
Let’s consider an example to understand the application of SIC-21. Company A owns a revalued non-depreciable asset, which is land, with a carrying amount of $1 million. The fair value of the land has increased to $1.5 million, resulting in a revaluation surplus of $500,000. During the reporting period, Company A enters into an arrangement to recover the carrying amount of the land through a transaction that is not a sale, such as a lease or a license agreement, and the entity expects to receive $1 million as the recovery amount. According to SIC-21, Company A should recognize the tax effects of the recovery in the income statement. If the applicable tax rate is 30%, Company A should recognize an income tax expense of $150,000 (30% of $500,000) related to the recovery of the revalued non-depreciable asset in its income statement.
Case Studies:
XYZ Corporation owns a revalued non-depreciable asset, which is a building, with a carrying amount of $5 million. The fair value of the building has increased to $6 million, resulting in a revaluation surplus of $1 million. During the reporting period, XYZ Corporation enters into an arrangement to recover the carrying amount of the building through a lease agreement, and the entity expects to receive $5 million as the recovery amount. According to SIC-21, XYZ Corporation should recognize the tax effects of the recovery in the income statement. If the applicable tax rate is 25%, XYZ Corporation should recognize an income tax expense of $250,000 (25% of $1 million) related to the recovery of the revalued non-depreciable asset in its income statement.
Company P owns a revalued non-depreciable asset, which is a piece of artwork, with a carrying amount of $2 million. The fair value of the artwork has increased to $2.5 million, resulting in a revaluation surplus of $500,000. During the reporting period, Company P enters into an arrangement to recover the carrying amount of the artwork through a license agreement, and the entity expects to receive $2 million as the recovery amount. According to SIC-21, Company P should recognize the tax effects of the recovery in the income statement. If the applicable tax rate is 20%, Company P should recognize an income tax expense of $100,000 (20% of $500,000) related to the recovery of the revalued non-depreciable asset in its income statement.
ABC Ltd owns a revalued non-depreciable asset, which is a patent, with a carrying amount of $3 million. The fair value of the patent has increased to $4 million, resulting in a revaluation surplus of $1 million. During the reporting period, ABC Ltd enters into an arrangement to recover the carrying amount of the patent through a licensing agreement, and the entity expects to receive $3.5 million as the recovery amount. According to SIC-21, ABC Ltd should recognize the tax effects of the recovery in the income statement. If the applicable tax rate is 15%, ABC Ltd should recognize an income tax expense of $150,000 (15% of $1 million) related to the recovery of the revalued non-depreciable asset in its income statement.
In each of these case studies, the entities recognized the tax effects of the recovery of revalued non-depreciable assets in their income statements, in accordance with the guidance provided by SIC-21.
In conclusion, SIC-21 provides guidance on how to account for the recovery of revalued non-depreciable assets in the context of income taxes in the financial statements of an entity. It emphasizes that any tax effects related to the recovery of such assets should be recognized in the income statement, and not as an adjustment to the carrying amount of the asset or to equity. Examples and case studies illustrate the application of SIC-21 in various scenarios. It is important for entities to carefully apply the provisions of SIC-21 and ensure compliance with the relevant accounting standards and regulations when accounting for the recovery of revalued non-depreciable assets in their financial statements.