If you thought accounting for leases under the new AASB 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 did not) when applying the requirements of AASB 112. However, they decided not to develop the needed guidance since the International Accounting Standards Board (IASB) and FASB were already working on a convergence project on income taxes and the exposure draft was expected later that year. That draft never eventuated.
With the introduction of AASB 16 Leases, this issue has increased in importance since the majority of leases will now be treated on Balance Sheet. ED 294 Deferred Tax related to Assets and Liabilities arising from a Single Transaction proposes to amend AASB 112 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 AASB 112).
Below is a link to an article (including a worked example) from Gary Kabureck, a board member of The International Accounting Standards Board.
https://www.ifrs.org/-/media/project/deferred-tax-related-to-assets-and-liabilities-arising-from-a-single-transaction/in-brief-ed-deferred-tax-related-to-assets-and-liabilities-ias-12.pdf
Comments to the AASB are required by 18 October 2019.
For help with transitioning to AASB 16
click here.