Date recorded:

Deferred tax relating to assets and liabilities arising from a single transaction (Proposed amendments to IAS 12) (Agenda Papers 12 A–C)

Background (Agenda Paper 12 A)

The IFRS Interpretations Committee received a submission on the recognition of deferred tax when a lessee recognises a liability and includes in the cost of an item of property, plant and equipment the costs of decommissioning that asset. The submitter described a fact pattern in which the lease payments and decommissioning costs are deductible for tax purposes when paid.

The Committee observed that offsetting temporary differences might arise on initial recognition of assets and liabilities related to leases or decommissioning obligations. The Committee then discussed whether an entity (a) recognises deferred taxes for these temporary differences or (b) applies the initial recognition exemption in paragraphs 15 and 24 of IAS 12 Income Taxes, which prohibits an entity from recognising deferred tax assets and liabilities on initial recognition of an asset or liability in a transaction, which is not a business combination.

The Committee decided to recommend to the IASB a narrow-scope amendment to IAS 12, which would narrow the scope of the initial recognition exemption so that it would not apply to the extent that, on initial recognition of a transaction, an entity would recognise equal amounts of deferred tax assets and liabilities. At its meeting in October 2018, the Board agreed with the Committee’s recommendation and decided to propose amending IAS 12 to address this matter.

Accordingly, the purpose of this paper is to discuss transition of the proposed amendments and to confirm the Board is satisfied it has complied with the due process requirements.  

Transition of the proposed amendments (Agenda Paper 12B)

The following recommendations were made to the Board:

  • Require entities to apply the proposed amendments retrospectively applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, entities would be permitted to assess whether the requirements in IAS 12 to recognise deferred tax assets are met only at the date of transition (transition relief)
  • Provide the transition relief for first-time adopters, i.e. first-time adopters would be permitted to assess whether the requirements in IAS 12 to recognise deferred tax assets are met only at the date of transition to IFRS Standards
  • Permit earlier application of the proposed amendments
  • Not change the proposed amendments with respect to the other matters discussed

The Committee reviewed if IAS 8 requirements would be sufficient in guiding initial application of the change, or if instead specific transition requirements should be proposed. The Committee concluded that in practice entities would only need to consider temporary differences that exist at the start of the comparative period, as the deferred tax balance at any given date reflects the existing temporary differences at that date. These temporary differences can be calculated based on a carrying amount and so retrospective application should not prove unduly complicated.

When assessing the requirements to recognise deferred tax assets and liabilities retrospectively, entities would need to assess if a tax temporary difference existed at the date of initial recognition of a transaction. For leases, this would be the date of lease commencement and for decommissioning liabilities, this would be the date on which the entity recognised the liability in line with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In these instances, the assessment date could be a considerable time ago, which could make the assessment impracticable without the use of hindsight. The Committee suggests that the Board could issue transition relief, so entities need only make the recoverability assessment from the date of transition. It was recommended that this relief be optional and not required. The Committee suggests that this relief should also be available for first-time adopters.

In the October 2018 Board meeting a number of questions were raised. These questions along with the Committee’s analysis are outlined below: The Committee concluded that no amendments to the proposal are necessary.

  • Whether the expected cost of implementing the proposed amendments would outweigh the expected benefits.
    Analysis: The amendments should eliminate diversity in practise and improve subsequent accounting for tax effects. Gathering the data necessary to implement the proposed requirements could be time-consuming if the entity holds a large number of leases, however in these instances the effects of tax differences are not expected to require unduly complicated calculations. This was the case in instances where tax deductions relate to the leased asset, and where tax deductions relate to the lease liability. The Committee concluded that the benefit of amendments outweigh the cost.
  • Whether the Board should address the interaction between the initial recognition exemption and the requirement in IAS 12 to assess unrecognised deferred tax assets for recognition.
    Analysis: The Committee’s view is that the Board should not address the interaction as this would broaden the scope of the proposed amendments and given this mismatch would likely only effect decommissioning obligations it could lead to adding significant complexity to amendments with only incremental benefit.
  • Whether and how the effective date of the proposed amendments would interact with that of IFRS 16 Leases.
    Analysis: Because IFRS 16 is in effect as from 1 January 2019, entities will not apply the proposed amendments at the same time as they apply IFRS 16. The staff would expect the effective date of the proposed amendments to be no earlier than annual reporting periods beginning on or after 1 January 2021.

Staff recommendation

The staff recommends that the Board require entities to apply the amendments retrospectively applying IAS 8 with a transition relief available to all entities that they only need to assess at the date of transition if the requirements to recognise deferred tax apply, as opposed to the date of transaction.

The staff also recommend to allow first-time adopters to assess whether the requirements in IAS 12 to recognise deferred tax assets are met only at the date of transition to IFRS Standards.

These amendments should be made available for early application.

Due process requirements (Agenda Paper 12C)

The Board will be asked the following questions on the due process taken in making these amendments:

  1. Comment period—does the Board agree with the staff recommendation to have a comment period of at least 120 days for the Exposure Draft?
  2. Dissent—does any Board member intend to dissent from the proposed amendments to IAS 12?
  3. Permission to ballot—is the Board satisfied that it has complied with the applicable due process requirements and that it has undertaken sufficient consultation and analysis to begin the balloting process for the Exposure Draft?


A Board member suggested that the Basis for Conclusions to the amendment should include the analysis performed specifically on the recognition criteria for the deferred tax asset and the basis for the Board’s decision not to expand the amendment to include an assessment of whether these recognised assets could be realised. This will allow those who disagree with the proposed amendment to provide a robust response during the comment period.

A Board member enquired if sufficient evidence has been obtained to support the position of an optional relief on initial application of the amendment on the basis that some entities would incur significant cost in retrospectively applying the amendment. The staff responded that through their research they identified a number of reporting entities, which would incur significant expense if this amendment were to be retrospective on initial application.

One Board member queried the inclusion of the term “unduly difficult”, when an entity chooses to take the transition relief. This wording would represent a new term, in comparison to the term “undue cost of effort”, which has been used in a number of amendments and Standards. The Board member questioned if the staff intended a different meaning and, if there is no difference, suggested changing the wording so it is consistent with other suggested amendments.


The Board unanimously agreed with the suggestions of the staff within Agenda Paper 12B.

The Board then unanimously agreed that the due process requirements outlined in Agenda Paper 12C are met.

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