TIAS 12 Income Taxes
When an entity recognises assets or liabilities for the first time, under IAS 12, the entity is exempted from recognising any deferred taxes.
There has been a degree of ambiguity regarding the applicability of this exemption to circumstances in which an asset and a liability are simultaneously recognised in the course of a single transaction.
For instance, it is unclear whether lessees can apply the exemption to right-of-use assets and lease liabilities as of the lease commencement date. Similarly, it is unclear whether or not entities can use the exemption to apply to decommissioning responsibilities and the accompanying payments that are recognised as part of the cost of the related asset.
What is the issue?
There is variability in practice due to the uncertainty; for example, in similar circumstances, some entities have recognised deferred taxes, but others have not recognised any deferred tax.
Amendments to IAS 12 on Deferred Tax related to Assets and Liabilities arising from a Single Transaction
The International Accounting Standards Board reviewed the IFRS Interpretations Committee's suggestion at its meeting on October 24, 2018. The proposed amendment was regarding recognising deferred tax when an entity accounts for transactions, such as leases or decommissioning obligations, by recognising both an asset and a liability for those transactions.
The Board issued deferred tax related to assets and liabilities resulting from a single transaction in May 2021. Because of the amendments, the scope of the recognition exemption described in paragraphs 15 and 24 of IAS 12 (recognition exemption) was narrowed. As a result, the recognition exemption is no longer applicable to transactions that, when initially recognised, give rise to equal taxable and deductible temporary differences.
Because of this, lessees would not be able to use the exemption in IAS 12 for the right-of-use assets and the lease liabilities. Similarly, entities who recognise decommissioning liabilities won't be able to utilise the exemption provided by IAS 12 either.
What are the key amendments?
The Malaysian Accounting Standards Board (MASB) issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to MFRS 112 Income Taxes) on June 30, 2021.
The Amendments are word-for-word Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12 Income Taxes) issued by the International Accounting Standards Board (IASB).
The Amendment clarifies that the exemption does not apply and that companies must recognise deferred tax on such transactions. Such clarification is expected to reduce diversity in reporting deferred tax on leases and decommissioning obligations.
Effective Date
The Amendments to MFRS 112 shall apply for annual reporting periods beginning on or after 1 January 2023. Earlier application is permitted.
What are the transition provisions?
An entity applying Deferred Tax related to Assets and Liabilities arising from a Single Transaction shall also, at the beginning of the earliest comparative period, present:
recognise a deferred tax asset - to the extent that taxable profit will probably be available against which the deductible temporary difference can be utilised - d a deferred tax liability for all deductible and taxable temporary differences associated with:
right-of-use assets and lease liabilities; and
decommissioning, restoration and similar liabilities and the corresponding amounts recognised as part of the cost of the related asset; and
recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other equity components, as appropriate) at that date.
Illustrative example
The applicable tax rate is 24%.
Para 7 of the MFRS 112:
The Tax Base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
Para 8 of the MFRS 112:
The Tax Base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.
Temporary Differences are differences between the Carrying Amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either:
taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
deductible temporary differences, which are temporary differences that will result in deductible amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
Applying the principle to the above example:
As no tax deductions may be taken against the ROU asset, there is no taxable base for the ROU asset.
Because the entity is eligible to receive tax deductions equivalent to the carrying amount of the lease liability, the tax base of the lease liability is "0."