IASB Proposes Amendments to Accounting for Deferred Tax on Leases

IAS 12 prohibits an entity from recognizing deferred tax arising from the initial recognition of an asset or a liability in particular situations (recognition exemption). IFRS Interpretations Committee received a request asking whether the recognition exemption in IAS 12 applies to a transaction that results in the recognition of both an asset and a liability—in other words, the request asked whether an entity is required to recognize deferred tax for items such as leases and decommissioning obligations. The Committee observed that views differ on whether the recognition exemption applies to temporary differences that might arise from such a transaction. Such different views could reduce comparability between the financial statements of entities with leases or decommissioning obligations.

Furthermore, the application of IFRS 16 on leases would increase the potential for differences to arise because an entity would recognize an asset and a liability for many more leases applying that Standard than when applying IAS 17 on leases. Consequently, the Committee recommended that IASB amend IAS 12 to narrow the application of the recognition exemption so that it would not apply to such transactions. IASB agreed with the Committee’s recommendation. IASB expects that applying the proposed amendments would not only increase comparability between entities’ financial statements, but would also result in useful information for users of financial statements. The proposed amendments would align the accounting for the tax effects of particular transactions with the general principle in IAS 12 of recognizing deferred tax for all temporary differences.

Comment Due Date: November 14, 2019

Keywords: International, Accounting, Leases, IFRS 16, Deferred Tax, Recognition Exemption, IASB