Deferred tax | assets and liabilities arising from a single transaction

The International Accounting Standards Board (IASB) has issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). The amendments require an entity to recognize deferred tax on certain transactions (e.g., leases and decommissioning liabilities) that give rise to equal amounts of taxable and deductible temporary differences on initial recognition.

In May 2021, the IASB issued narrow scope changes to IAS 12 Income Taxes (the amendments) to specify how entities should account for deferred tax on transactions such as leases and decommissioning obligations.

In specific circumstances, entities are exempt from recognizing deferred tax when they recognize assets or liabilities for the first time. This is referred to as the initial recognition exemption. There had been some diversity in practice as to whether the initial recognition exemption applied to transactions such as leases and decommissioning obligations. These are transactions where entities initially recognize both an asset and a liability.

The amendments clarify that the initial recognition exemption set out in IAS 12 does not apply and that entities are required to recognize deferred tax on these transactions. The aim of the amendments is to reduce diversity in the reporting of deferred tax on leases and decommissioning obligations.

The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted.

Our thoughts

We are supportive of the IASB addressing this issue as it has become more prevalent since IFRS 16 Leases became effective for annual reporting periods beginning on or after January 1, 2019. We believe the amendments will reduce the diversity in practice that is currently being seen on accounting for income taxes related to leases and decommissioning obligations.