Remeasurement of deferred tax liability recognised as the result of retrospective application
An entity”s date of transition to IFRS was 1 January 2004. As a result of the adoption of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, its first IFRS financial statements (prepared for the year ended 31 December 2005) showed an additional liability for environmental rectification costs of €5 million as an adjustment to opening reserves, together with an associated deferred tax asset at 40% of €2 million.
The environmental liability does not change substantially over the next few accounting periods, but during the year ended 31 December 2013 the tax rate falls to 30%. This requires the deferred tax asset to be remeasured to €1.5 million giving rise to tax expense of €500,000. Should this expense be recognised in profit or loss for the period or in equity?