Amendment to IAS 12 for deferred tax related to assets and liabilities arising from a single transaction

International Accounting Standards Board (IASB) in May 2021 issued an amendment to IAS 12 Income Taxes titled Deferred Tax related to Assets and Liabilities arising from a Single Transaction.

Before the amendment, IAS 12 provided for exemptions from initial recognition of deferred tax assets and liabilities in the following circumstances (P15 and P24, IAS 12):

When the deferred tax liability arises from:

1. Initial recognition of goodwill; or
2. The initial recognition of an asset or liability in a transaction which:
   • Is not a business combination; and
   • At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

When the deferred tax asset arises from:

1. The initial recognition of an asset or liability in a transaction which:
   • Is not a business combination; and
   • At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

There was a confusion over the application of the above exemptions to a transaction that results in an equal amount of deferred tax asset and deferred tax liability at the time of initial recognition and satisfies the above criteria as well. An example is capitalization of a lease transaction. At a discussion of IFRS Interpretations Committee Meeting in March 2018, the position of the staff was as follows (though it does not represent IASB’s formal position):

Applying IFRS 16 and IAS 17, a lessee recognizes a lease asset and lease liability in its statement of financial position. Therefore, in our view an entity considers the lease asset and lease liability independently of each other for the purposes of recognizing deferred tax. The unit of account in IAS 12 is the separate asset and liability, and thus we think the initial recognition exemption would apply separately to the lease asset and lease liability that an entity recognizes in its statement of financial position at lease commencement. Because the entity recognizes a lease asset and lease liability at lease commencement, the transaction affects neither accounting profit nor taxable profit (tax loss). Consequently, in our view if an entity determines that temporary differences arise on initial recognition of the lease asset and lease liability, the initial recognition exemption applies and the entity would not recognize deferred tax.

According to the amendment in May 2021, however, the initial recognition exemption will not apply to a transaction that gives rise to both taxable and deductible temporary differences on initial recognition; which means that if capitalization of a lease, for example, gives rise to taxable and deductible temporary differences, an entity will have to recognize both deferred tax liability and deferred tax asset.

The amendments are effective for annual reporting periods beginning on or after 1 January 2023. Application of the amendments before the effective date is permitted.