Background

The IFRS Interpretations Committee received a submission about IAS 12 Income Taxes and the recognition of deferred tax in relation to leases (when a lessee recognises an asset and a liability at the lease commencement) and decommissioning obligations (when an entity recognises a liability and includes the decommissioning costs in the cost of the item of of property, plant and equipment). The submitted fact pattern assumed that lease payments and decommissioning costs were deductible for tax purposes when paid and identified different approaches in practice.

The Committee discussed the submission at its meetings in March 2018 and June 2018 and came to the conclusion that the matter was relevant and widespread, as there are various kinds of contracts and fact patterns affected. Moreover, the question as to whether tax deductions are attributable to a contract, a (single) asset/liability, or rather to cash flows, and as to which consequences this may have for determining temporary differences, is fundamental within IAS 12. Therefore, the Committee recommended that the IASB develop clarifying amendments to IAS 12.

The IASB discussed the issue in October 2018 (general discussion of the issue and agreement with the IFRS Interpretations Committee's recommendation) and January 2019 (transition, retrospective application, and early application) and has now published an exposure draft of proposed clarifying amendments.

Suggested changes

The main change proposed in ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Proposed amendments to IAS 12) is a proposed exemption from the initial recognition exemption provided in IAS 12.15(b) and IAS 12.24. Accordingly, the initial recognition exemption would not apply to transactions in which both deductible and taxable temporary differences arise on initial recognition that result in the recognition of deferred tax assets and liabilities of the same amount. This is also explained in the newly inserted paragraph IAS 12.22A.

Comments on the proposed changes are requested by 14 November 2019.

Effective date and transition

The exposure draft does not contain a proposed effective date as the IASB intends to decide on this after exposure. The proposed amendments would be applied retrospectively in accordance with IAS 8 and early adoption would be permitted.

For practical and cost reasons, some simplification is provided for the assessment of the probability that a taxable profit will be available against which the deductible temporary difference can be utilised. A similar simplification is proposed for first-time adopters.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Short In brief overview of the proposed amendments (link to IASB website)
• IFRS in Focus Newsletter explaining the proposed amendments
• Our IAS Plus Project page on IAS 12 — Deferred tax related to assets and liabilities arising from a single transaction