The International Accounting Standards Board (IASB) has published Exposure Draft ED/2019/5: Deferred Tax related to Assets and Liabilities arising from a Single Transaction, Proposed amendments to IAS 12. This could be particularly relevant on the adoption of IFRS 16 Leases.
IAS 12 prohibits entities from recognising deferred tax assets and liabilities for deductible or taxable temporary differences arising from the initial recognition of an asset or a liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit.
The proposed changes were prompted by the diversity in views and practice as to whether the initial recognition exemption applies to transactions that result in the recognition of both an asset and a liability in a situation in which an entity receives tax deductions only for payments made, such as leases and decommissioning obligations.
In the case of leases, depending on the tax laws that apply in particular jurisdictions, the entity determines whether tax deductions relate to either:
a. the lease asset, because they relate to expenses from the lease, ie depreciation and interest expense; or
b. the lease liability, because they relate to the repayment of the lease liability and interest expense.
Under IAS 12, temporary differences would arise only when the entity determines that tax deductions relate to the lease liability, not the lease asset.
The proposals would narrow the scope of the initial recognition exemption and clarify that deferred tax must be recognised in case a transaction gives rise to both an asset and a liability on initial recognition. As a result, an entity will be recognising the tax effects of a lease as it recovers the lease asset and settles the lease liability, thereby aligning the accounting for deferred tax related to leases with the general principle in IAS 12.
Broadly speaking, HMRC’s changes to the tax code on IFRS 16 from 1 January 2019 is aimed at maintaining the status quo which allows tax to follow the accounting. However, the choice of route to adopt IFRS 16 may give rise to transitional adjustments which may be spread for tax purposes and, therefore, give rise to corresponding deferred taxes. Deferred taxes may also arise where subsidiaries are using different GAAPs and overseas subsidiaries may be subject to different tax rules.
The Exposure Draft is open for comment until 14 November 2019.
If you need any further information, please contact Stella Cooper.