The IRE represents the best option for dealing with “day one” taxable temporary differences. As a result there is a difference in tax accounting depending on the allocation of the tax base. principle in IAS 12. The initial recognition of an asset or liability in a … On 1 January 2019, the right-of use asset. Based on this approach, deferred tax was not recognised on permanent differences (income or expenses that appeared in either the financial statements or the tax return but not in both). AASB 112 7 STANDARD Definitions 5 The following terms are used in this Standard with the meanings specified: Accounting profit is profit or loss for a period before deducting tax expense. Therefore, the Committee recommended that the IASB develop clarifying amendments to IAS 12. José Antonio Abraján (jose.abrajan@mx.ey.com), Deferred taxes Senior Manager, EY Mexico, The principal Mexican correspondents of the Compliance Management channel on www.internationaltaxreview.com. Option 3 – Gross up the asset to the amount to have an equivalent to the earned pretax profits related to the asset. C11 The initial recognition exception in paragraphs 15 and 24 of IAS 12 does not apply when the entity recognises assets and liabilities relating to its interest in a joint operation. IAS 12 prohibits entities from recognising deferred tax assets and liabilities for deductible or taxable temporary differences arising from the initial recognition of an asset or a liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit. By using this site you agree to our use of cookies. Please read our Terms and Conditions and Privacy Policy before using the site. IAS 12 focuses on the future tax consequences of recovering an asset only to the extent of its carrying amount at the date of the financial statements. The taxable temporary differences will be in the scope of IRE if they arise from: Ø At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). What is the objective of IAS 12? Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable). Brazil, margaret.varela-christie@euromoneyplc.com. Prime examples of this are Leases under IFRS 16 and Decommissioning Obligations. Instant access to all of our content. exemption. Diversity in application of IAS 12’s initial recognition exemption At present, when a company recognises a lease asset and lease liability, for example, it either: applies the initial recognition exemption (IRE) separately to the lease asset and lease liability and recognises the tax impacts in profit or loss when they are incurred – i.e. The IASB first discussed this issue in October 2018. 58 of IAS 12 in subsequent periods. Consider the following example and compare it to previous example where all temporary differences resulted from subsequent accounting. Application of initial recognition exemption? Q&A IAS 12: 15(b)-4 — Initial Recognition Exception — Transfers of Assets Between Group Entities. Once entered, they are only The AcSB’s due process includes: recognition of a deferred tax liability and a corresponding increase in the carrying value of the related assets on the initial recognition of an asset in a transaction that is not a business combination and for which the tax basis is less than its cost. These words serve as exceptions. Initial recognition of goodwill. Mexico, This content is from: 2019. Mexico. An exposure draft of proposed amendments was published on 17 July 2019 with comments requested by 14 November 2019. The aim of the proposed amendments is to clarify how entities account for deferred tax on leases (accounted for under IFRS 16 Leases ) and decommissioning obligations. IAS 12 prohibits an entity from recognizing deferred tax arising from the initial recognition of an asset or a liability in particular situations (recognition exemption). The IASB has recently issued an exposure draft, ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Proposed amendments to IAS 12). expense in profit or loss according to para. 1. and the lease liability under IFRS 16 … Deferred tax is not recognised if it arises on initial recognition of assets/liabilities in a transaction which is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit (IAS 12.15/24). Recognition of current tax liabilities and current tax assets 12 - 14 Recognition of deferred tax liabilities and deferred tax assets. Show contents . The objective of IAS 12 is to prescribe the accounting treatment for income taxes.. The Board discussed papers on (1) Sale and Leaseback with Variable Payments: Amendment to IFRS 16, (2) Lack of Exchangeability (IAS 21), (3) Commodity Loans, and (4) Deferred Tax Related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). Under the proposed amendments, the initial recognition exemption in IAS 12 would not apply to a transaction that at the time of the transaction gives rise to equal and offsetting amounts of … If you're happy with cookies click proceed. Download *Additional Material is restricted to those with NZ-assigned IP addresses only. IAS 12 Initial recognition exception Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › IAS 12 Initial recognition exception This topic has 1 reply, 2 voices, and was last updated 4 years ago by P2-D2. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. The material on this site is for financial institutions, professional investors and their professional advisers. The recognition of deferred tax assets is subject to specific requirements in IAS 12. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. All In some jurisdictions, the revaluation or other restatement of an asset to fair value affects taxable profit (tax loss) for the current period. Recognise a deferred tax expense of $300 by adjusting the carrying value of the book value of the asset. example, it either: − applies the initial recognition exemption (IRE) … These amendments clarify that the recognition exemption will not apply to temporary differences that may arise on initial recognition of an asset and a liability relating to a lease or decommissioning obligation. One of these circumstances is the recognition of a transaction that affects neither Tax law is complex and subject to interpretation ― entities need to evaluate tax uncertainties in applying IAS 12. The submitted fact pattern assumed that lease payments and decommissioning costs were deductible for tax purposes when paid and identified different approaches in practice. Currently, in some cases, the exemption is applied, and in other cases it is not. © 2019 Euromoney Institutional Investor PLC. Initial Recognition. In March 2018 the Committee discussed a submission about the recognition of deferred tax when a lessee recognises an asset and liability at the commencement date of a lease applying IFRS 16 Leases and whether the initial recognition exemption in paragraphs 15 and 24 of IAS 12 would apply to those temporary differences. The IRE is not applicable for taxable temporary differences related to investing in subsidiaries, branches or associates, as well as having interest in a joint venture. The IRE appliance seems to be aimed more at permanent differences under the income statement approach. The IRE does not apply to transactions affecting taxable profit or accounting profit (or both). Recognise a deferred tax expense of $300 in income statement might be meaningless since there is any loss simply by purchase of a non-deductible asset. Deferred taxes related to foreign interest – what you should consider under IAS 12, Depreciation of Mexican peso vs US dollar - income tax considerations, Brazil: Tax is critical factor impacting Brazilian M&A, Tax considerations when targeting distressed companies for acquisition. If temporary differences arise on initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit, an entity would—in the absence of the exemption—recognise deferred to the application of the initial recognition exemption in IAS 12 . EY’s other tax compliance partners in Mexico City are: Hector Armando Gama Baca (hector.gama@mx.ey.com), Fernando Tiburcio Lara (fernando.tiburcio@mx.ey.com), Juan Manuel Puebla Domínguez (juan-manuel.puebla@mx.ey.com), Raúl Tagle Cázares (raul.tagle@mx.ey.com), Raúl Federico Aguilar Millán (federico.aguilar@mx.ey.com), Ricardo Delgado Acuña (ricardo.delgado@mx.ey.com). IASB Publishes Proposed Amendments to IAS 12. For help please see our FAQ. material subject to strictly enforced copyright laws. In a transaction where the IRE does apply to the goodwill as following: IRE does not apply to transactions affecting taxable profit or accounting profit (or both) because those kind of transactions are not permanent items. IAS 12 has an initial recognition exemption in respect of such a deferred tax liability. It is important to note that this exemption relates to impacts resulting from initial recognition only. The recognition exemption prohibits a company from recognising deferred tax when it initially recognises an asset or liability in particular circumstances. The standard IAS 12. guides us in the area of income taxes and really, it is not an interesting easy-to-read novel.. Membership Options | One Week Trial, This content is from: The IASB discussed the issue in October 2018 (general discussion of the issue and agreement with the IFRS Interpretations Committee's recommendation) and January 2019 (transition, retrospective application, and early application) and published an exposure draft of proposed clarifying amendments on 17 July 2019. If the amount paid exceeds the amount due for The origin of the IRE is the today superseded “income statement” approaches to accounting for deferred tax. Diversity in application of IAS 12’s initial recognition . Recognise a deferred tax expense of $428 by adjusting the carrying value of the book value of the asset. The initial recognition of an asset or liability in a transaction which: Business combinations: The initial recognition of goodwill because the deferred tax asset or liability form part of the goodwill arising or the bargain purchase gain recognised. does not reflect the future tax impacts of leases (Approach 1); or Taxable temporary differenceTax value – book value. Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. DART pending content manager is OFF You are here Home . On the other hand, and according to para. Income Taxes. However, IAS 12 prohibits a company from doing so if the recognition exemption applies. Each word should be on a separate line. Please read, Disclosure initiative — Accounting policies, IAS 12 — Deferred tax related to assets and liabilities arising from a single transaction, IAS 19/IFRIC 14 — Remeasurement at a plan amendment, curtailment or settlement / Availability of a refund of a surplus from a defined benefit plan, IFRS 16 — Lease liability in a sale and leaseback, IAS 12 — Deferred tax – tax base of assets and liabilities, Updated IASB work plan — Analysis (November 2020 meeting), Updated IASB work plan — Analysis (October 2020 meeting), Updated IASB work plan — Analysis (September 2020), Updated IASB work plan — Analysis (July 2020 meeting), Updated IASB work plan — Analysis (April 2020 regular meeting), Updated IASB work plan — Analysis (April 2020 supplementary meeting), Deloitte comment letter on the IASB's proposed amendments to IAS 12, IFRS in Focus — IASB proposes amendments to IAS 12 'Income Taxes'. The objective of this amendment is to narrow the initial recognition exemption in paragraphs 15 and 24 of IAS 12, so that it would not apply to transactions that give rise to both taxable and deductible temporary differences, to the extent the amounts recognized for the temporary differences are the same. This site uses cookies to provide you with a more responsive and personalised service. Read ED/2019/5 Deferred Tax relating to Assets and Liabilities arising from a single transaction; 12. deferred tax [ias 12] exemptions p15(b) ILLUSTRATION: SOLUTION 31/12/X6 Fair value [NRC] 430 000 Tax base Nil . IAS 12 states the IRE in order to have a valid tax accounting treatment to justify the non-recognition of a deferred tax liability related to the initial (“day one”) recognition of certain taxable temporary differences. Deferred tax assets are recognised only to the extent that recovery is probable. Sponsored, This content is from: Fact pattern: Lessee T rents a building from Lessor L for five years commencing on 1 January . Option 2 – Gross up the asset by adding the income tax, Gross up amount of the asset with the related deferred income tax. It is for information only. This content is from: Entity A acquires an asset for $10 million t… The main issue here is how to account for the current and future consequences of. The exemption in IAS 12 therefore exists for deferred tax liabilities even though there are no theoretical arguments against recognising and despite the standard requiring recognition of deferred tax assets. The IFRS Interpretations Committee received a submission about IAS 12 Income Taxes and the recognition of deferred tax in relation to leases (when a lessee recognises an asset and a liability at the lease commencement) and decommissioning obligations (when an entity recognises a liability and includes the decommissioning costs in the cost of the item of of property, plant and equipment). On 17 July 2019, the IASB issued Exposure Draft ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction - Proposed amendments to IAS 12 ('the ED'). Previous lack of guidance in IAS 12 resulted in diversity in practice. In this session, the Board discussed whether they agree with the effective date of the amendments, confirm that due process requirements have been met and to ask if any Board members intend to dissent from the amendments. Q&A IAS 12: 15(b)-4 — Initial Recognition Exception — Transfers of Assets Between Group Entities. 22(c) of IAS 12, the initial recognition exemption applies to both, the date of initial recognition, and subsequent periods. In this session, the Board discussed additional analysis and preliminary recommendations on how to address the matters raised in the feedback on the Exposure Draft to the IFRS Interpretations Committee. The IRE is represents the least bad of the previous four options, for dealing with “day one” temporary differences. The staff have conducted further research in exploring the standard-setting options and have identified two standard-setting options. IAS 12 proposals – Recognising deferred tax on leases. Worked example. In March 2018 the Committee discussed a submission about the recognition of deferred tax when a lessee recognises an asset and liability at the commencement date of a lease applying IFRS 16 Leases and whether the initial recognition exemption in paragraphs 15 and 24 of IAS 12 would apply to those temporary differences. IASB Publishes Proposed Amendments to IAS 12. Amendments are proposed to IAS 12 to address circumstances where an asset with a matching liability arising from the same transaction are recognised. For example: the goodwill and assets or liabilities whose source is not a business combination, or at the time to acquire the asset or assume the liability the transaction does not affect neither accounting profit nor taxable profit. Taxable temporary differences 15 - 23 Deductible temporary differences 24 - 33 ... IAS 12 Income Taxes was issued by the International Accounting Standards Committee (IASC) in October 1996. Deferred taxes – the initial recognition exception (IRE) related to taxable temporary differences – what you should consider under IAS 12 The general rule is to recognise deferred tax liabilities for all taxable temporary differences, except to the extent that they are within the scope of the IRE mentioned in IAS-12. So let’s see what’s inside. or, at the time of the transaction, affects neither accounting profit nor taxable profit. Moreover, the question as to whether tax deductions are attributable to a contract, a (single) asset/liability, or rather to cash flows, and as to which consequences this may have for determining temporary differences, is fundamental within IAS 12. Gustavo Gómez (gustavo.gomez@mx.ey.com), Tax partner, EY Mexico. Purpose of the initial recognition exemption 7 IAS 12, paragraphs 22(c) “(…) if the transaction is not a business combination, and affects neither accounting profit nor taxable profit, an entity would, in the absence of the exemption provided by paragraphs 15 and 24, recognise the resulting deferred tax liability or asset and adjust the July 2019. 12 Jun 2018. IAS-12 states that adjusting the carrying value of the book value with the related will make the financial statements “less transparent”. This example shows the appliance of the IRE: Depreciation is not deductible for tax purposes. In this session, the Board discussed the Committee's recommendation to propose a narrow-scope amendment to IAS 12 so that the initial recognition exemption would not apply to transactions that give rise to both taxable and deductible temporary differences to the extent the amounts recognised for the temporary differences are the same. To take away this difference the IFRIC staff proposes a narrow scope amendment to IAS 12 which entails that the initial recognition exemption should not be The Committee discussed the submission at its meetings in March 2018 and June 2018 and came to the conclusion that the matter was relevant and widespread, as there are various kinds of contracts and fact patterns affected. upon initial recognition, subject to the initial recognition exemption or in subsequent periods. On disposal any capital gain will be taxable or any capital loss will be not deductible. 4 | IAS 12 Income Taxes RECOGNITION AND MEASUREMENT Current tax – Recognition and measurement IAS 12 requires the recognition of current tax in an entity’s financial statements. Paragraph 22(c) of IAS 12 explains the purpose of the recognition exemption. hyphenated at the specified hyphenation points. Future taxable amounts arising from recovery of the asset will be capped at the asset's carrying amount. The Committee received a request to interpret how IAS 12 should be applied when a lessee recognises an asset and liability at commencement of a lease (applying either IFRS 16 'Leases' or IAS 17 'Leases'). Option 4 – Do not recognise any deferred tax liability at all. Initial recognition exemption > Impacts deferred taxes: A deferred tax asset or liability is not recognized if: it arises from the initial recognition of an asset or liability in a transaction that is not a business combination; and; at the time of the transaction it affects neither accounting profit nor taxable profit. The general rule is to recognise deferred tax liabilities for all taxable temporary differences, except to the extent that they are within the scope of the IRE mentioned in IAS-12. This section covers: • the recoverability of deferred tax assets where taxable temporary differences are available IAS 12 also requires the recognition of deferred tax liabilities for taxable temporary differences in NZ IAS 12 – This version is effective for reporting periods beginning on or after 1 Jan 2019 (early adoption permitted) Date of issue: Nov 2012 Date compiled to: 28 Feb 2018 . The Board discussed deferred tax relating to assets and liabilities arising from a single transaction (proposed amendments to IAS 12). Recognition of deferred tax liabilitiesThe general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary differences. IAS-12 states that adjusting the carrying value of the book value with the related will make the financial statements “less transparent”. 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