If you thought accounting for leases under the new IFRS 16 was complicated have you even considered the tax effect accounting implications?
In 2005 a question was asked to the IFRS Interpretations Committee ‘what is the treatment of deferred tax relating to assets and liabilities arising from finance leases?’. The committee noted that there is diversity in practice (i.e. some entities recognise deferred tax on leases and others didn’t) in applying the requirements of IAS 12 to assets and liabilities arising from finance leases however, they decided not to develop any guidance because there was a short-term convergence project by the International Accounting Standards Board (IASB) and FASB on income taxes where an exposure draft is expected later in 2005. That draft never eventuated. With the introduction of IFRS 16 Leases this issue has increased in importance since the majority of leases will now be treated on Balance Sheet. ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction proposes to amend IAS 12 such that an entity will be required to recognise deferred tax on initial recognition of particular transactions such as leases and decommissioning obligations.
What does it mean for you?
If you already recognise deferred tax on leases and decommissioning obligations then nothing. If you don’t, then you will be required to recognise deferred tax on leases and decommissioning obligations in the future (if this ED is approved and becomes part of IAS 12).
Click here to read an article (including a worked example) from Gary Kabureck, a board member of The International Accounting Standards Board.
Comments to the IASB by 14 November 2019
For help with transitioning to IFRS 16 please click here.