Deloitte comment letter on the IASB's proposed amendments to IAS 12

Published on: 14 Nov, 2019

We have responded to the IASB exposure draft Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which was published by the IASB in July 2019 to clarify how companies account for deferred tax on leases and decommissioning obligations.

We support the efforts of the IASB to address an issue that has been the source of diversity in practice and that is likely to increase as a result of the application of IFRS 16 Leases. Currently, most entities faced with the issue either apply IAS 12 separately to the asset and liability (i.e., no deferred taxes are recognised on initial recognition or subsequently because of the application of the initial recognition exemption (IRE) to the temporary difference on the asset and the liability) or they apply the requirements of IAS 12 to the transaction as a whole (i.e., no deferred taxes are recognised initially because the transaction results in a nil net asset but deferred taxes are recognised subsequently as the carrying amount of the asset and liability diverge). We believe that either of these approaches is acceptable under IAS 12 and that diversity could have been addressed by the Board proposing the method it considered most relevant through an Interpretation of IAS 12.

The accounting treatment resulting from the proposals in the ED is more complex than the methods currently applied by entities. To ensure that the amendments achieve the objective of reducing diversity in practice, further clarification beyond those proposed in the ED will be required. The Board may wish to reconsider whether, in the context of a narrow scope project, it may be preferable to address diversity in practice through an Interpretation (as discussed in BC13 to BC15) and consider whether changes should be made to the IRE as part of a more comprehensive review of the IRE. If the Board pursues modifying the scope of the IRE, we note that important elements of the proposed approach are currently discussed in the Basis for Conclusions. We believe that it is important that these elements be brought into IAS 12 itself. An illustrative example of the proposed approach would also be helpful. Our specific concerns regarding the need for further clarification are presented in the Appendix to this letter.

As further explained in our detailed response, we believe that a key difficulty that needs to be address is the identification of transactions that are indeed subject to the IRE.

We note that the Board proposes transition relief to permit entities on adoption of the proposed amendments to assess the recoverability requirement only at the beginning of the earliest comparative period presented. We suggest that the transition relief be expanded such that entities are permitted to recognise and measure deferred tax amounts based on the temporary differences determined at the beginning of the earliest comparative period presented with the difference recognised in opening retained earnings (or component of equity). This appears appropriate considering that deferred tax assets and liabilities are reassessed and remeasured at each reporting period. We believe that the same transition relief should be offered to first-time adopters for the same reason.

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