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IAS 12 — Deferred tax related to assets and liabilities arising from a single transaction

Date recorded:

Background

In July 2019, the Board published Exposure Draft ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). The ED mainly proposed the narrowing of scope of the recognition exemption and the "capping" proposal. The Board proposed that the recognition exemption would not apply when an entity recognises a deferred tax asset and liability of the same amount arising in any transactions. This is intended to align the accounting for deferred tax related to leases with the general principle in IAS 12 which results in an entity recognising the tax effects of a lease as it recovers the lease asset and settles Tthe lease liability. For the capping proposal, the Board proposed that an entity would recognise a deferred tax liability only to the extent that it recognises a corresponding deferred tax asset applying the recoverability requirement. For the portion of deferred tax liability not recognised, the recognition exemption continues to apply.

A number of comment letters was received on the ED. The staff provided the Committee with a summary of the feedback, together with the analysis and preliminary recommendations on addressing the concerns raised in the feedback.

Staff analysis

Almost all respondents to the ED agreed with the Board's decision to address the accounting for deferred tax related to leases and decommissioning obligations. However, many either disagreed with or expressed concerns with various aspects of the proposals, especially the capping proposal.

The respondents who opposed the capping proposal considered it complex and burdensome to apply because an entity would be required to assess the recoverability of each individual deferred tax asset on initial recognition for each applicable transaction. Also, it would be inconsistent with the principles in the IAS 12 requirements for recognising a deferred tax liability for all taxable temporary differences. The staff agreed that complexities and inconsistencies would arise when an entity is unable to recognise the deferred tax assets in full. In that case, the entity would need to apply the recognition exemption to the deferred tax liability not recognised and track temporary differences to which the exemption is applied separately from other temporary differences arising from the same assets and liabilities. The partial application of the recognition exemption to the deferred tax liability does not align with other circumstances in which the exemption applies because such circumstances are particular to the entity, depending on the recoverability of the deferred tax asset, but not to the tax characteristics of the transaction. Moreover, it might be unclear how an entity should allocate the taxable temporary difference against particular deductible temporary differences in assessing the recoverability of deferred tax assets and how to account for the reassessment of unrecognised deferred tax assets after initial recognition. In view of these, the staff recommends removing the capping proposal.

In relation to the attribution of tax deductions related to the lease asset or lease liability as required by IAS 12, the Board decided not to propose any further requirements or application guidance on how an entity makes this determination because the proposed amendments would result in entities recognising deferred tax assets and liabilities in relation to a lease, regardless of the tax deduction attributions. The staff acknowledge that there is a difference in recognition and disclosures depending on the tax deduction attribution, however, they considered the benefits of providing further requirements on this would not outweigh the potential costs and support the Board's decision not to provide further requirements as requested by some respondents.

Some respondents commented that the scope of the amendment is too broad and might thus capture transactions not considered by the Board. A few respondents suggested that limiting the scope to deferred tax arising from leases only. The staff disagreed with this because the purpose of the amendments is to capture any transaction that, on initial recognition, gives rise to equal and offsetting temporary differences but is not just limited to leases. Some considered that the specification that the capping proposal applies to transactions that lead to the initial recognition of "an asset and liability" may make it unclear whether some transactions, which involve multiple assets and liabilities, fall within its scope. The staff considered that if the capping proposal is removed, it will be clear that those transactions are in scope if they give rise to "equal amounts of taxable and deductible temporary differences", even if multiple assets and liabilities are involved. Overall, the staff supported the Board's current scoping of the amendments.

Regarding the transition requirements, some considered it is unclear how the amendments interact with some of the transition requirements in IFRS 16. For instance, the amendments refer to "equal amounts of taxable and deductible temporary differences" while on the date of initial application of IFRS 16, the carrying amount of the lease asset and liability could be different (if IFRS 16:C8(i) was applied). Accordingly, the staff recommended recognising all temporary differences related to leases and decommissioning obligations, without assessing whether those transactions result in equal and offsetting temporary differences restrospectively, at the beginning of the earliest comparative period presented, with the cumulative effect recognised as an adjustment to the retained earnings. Others were of the view that it is challenging to calculate deferred tax for the earliest comparative period presented. However, the staff supported the view of restating the comparative figure given the restatement provides useful information to users of financial statements. Furthermore, identifying transactions which might be in the scope of the amendments retrospectively could be costly and complex, thus the staff proposed allowing entities to apply the amendments prospectively to transactions other than leases.

The staff ask the Committee members' view on the analysis and preliminary recommendations set out in the paper.

Discussion

Most of the Committee members commented they agreed with the recommendations made by the staff to the board and considered they could address most of the concerns raised by the respondents. These Committee members particularly agreed with the removal of the capping proposal because of its complexity and in view of the fact that the general recoverability principle in IAS 12 has already addressed it. One Committee member supported the removal but raised the concern that an entity may do tax planning in order to recognise more deferred tax assets.  They also considered that adding illustrative examples for leases with advanced lease payment and initial costs would be helpful.

However, for the attribution of the tax deductions to the lease asset or lease liability, certain of the Committee members considered that it needs to be addressed because it does vary jurisdiction to jurisdiction. Therefore, they suggested the Board provide guidance to make the principle clearer or giving an example to illustrate the difference in recognition and disclosures depending on the tax deduction attribution.

Regarding the recommendation related to transition approach of the amendments, only one Committee member expressed his view. He broadly agreed with the option of prospective application to transactions other than leases but he thought it was unclear if it needs to be applied consistently to all transactions. He also advised the staff to clarify what is meant by a "transaction" and how it would be applied to a transaction is in progress at transition date.  He finally suggested the retrospective and prospective application to be applied by class of transactions.

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