Accounting for deferred tax on leases

The International Accounting Standards Board has published proposed changed to the IFRS standard for income tax, IAS 12. The amendments clarify how companies account for deferred tax on leases and decommissioning obligations.

IAS 12 specifies how a company accounts for income tax, including deferred tax, which represents amount of tax payable or recoverable in the future.

In specific circumstances companies are exempt from recognised deferred tax when they recognise assets or liabilities for the first time. There has been some uncertainty in the market about whether the exemption applies to leases and decommissioning obligations. Therefore, to promote consistent application of the standard, the board has proposed amendments.

IASB is proposing that the exemption in the standard would not apply to leases and decommissioning obligations – transactions for which companies recognise both an asset and a liability. The proposed amendments would result in companies recognising deferred tax on such transactions.

*A decommissioning obligation is, for example, the obligation to remove an oil rig and restore the site when the assets comes to the end of its useful life.