IASB proposed changes to the IFRS Standard for income tax (IAS 12), which clarifies how companies account for deferred tax on leases and decommissioning obligations. The proposed amendments would require an entity to recognize deferred tax on initial recognition of particular transactions to the extent that the transaction gives rise to equal amounts of deferred tax assets and liabilities. The proposed amendments would apply to the transactions for which an entity recognizes both an asset and a liability, such as leases and decommissioning obligations. Comments are requested until November 14, 2019. IASB also published a summary of the proposed changes and the reasons for these changes as explained by Gary Kabureck, who is an IASB member.
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
Across 15 years as a consultant and practitioner, Chris worked on a range of strategy, risk management and operational transformation initiatives with leading financial institutions throughout North America. From this collection of abstract, “what now?” challenges, he has developed specialties in credit optimization, business combinations and system implementations. Chris joined Moody’s in 2020 after leading CECL implementation and dual risk rating expansion at a $50 billion bank.
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