The guidelines for accounting for tax within financial statements which are contained within AASB 112 Income Taxes (“AASB 112”) have again been updated by the Australian Accounting Standards Board (“AASB”) by issuing AASB 2021-5.
As you may recall, AASB 112 Income Taxes requires entities to account for income tax consequences when economic transactions take place rather than when income tax payments or recoveries are made. This means that entities need to understand and track the differences between the tax rules and the accounting standards. These differences are essentially split into:
- Permanent difference – a tax deduction is never able to be claimed; or
- Temporary difference – a tax deduction is permitted but in a different period to accounting.
Whilst the changes in AASB2021-5 are not wholesale, they potentially impact a large number of entities as the change is to narrow the scope of an initial recognition exception.
To date there have been differing views as to the application of the exception contained within AASB 112 where a single transaction gave rise to a deferred tax asset and deferred tax liability. The change clarifies that the exception is not to apply to a variety of common transactions, the most obvious being leases.
Therefore, as a result of the change, companies will need to recognise a deferred tax asset and deferred tax liability for temporary differences, particularly those which arise from transactions such as leases and decommissioning, restoration, or similar obligations.
The amendments are effective for annual reporting periods beginning on or after 1 January 2023 but can be adopted for earlier reporting periods. The amendments apply to transactions that occur on or after the beginning of the earliest comparative period and require entities to also recognise deferred tax for all temporary differences related to leases, decommissioning, restoration and similar liabilities at the beginning of the earliest comparative period presented.
Accordingly, existing positions will need to be brought into line with the current guidance with the cumulative effect of initial application being recognised as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate. The impact of the clarification is shown in the table below (assuming a 30% tax rate):
|Initial||Year 1||Year 2||Year 3||Restated|
|Right of Use Asset||1,000||900||800||700||700|
|Deferred Tax Liability||Nil||Nil||Nil||Nil||210|
|Deferred Tax Asset||Nil||Nil||Nil||Nil||300|
The net impact of the recognition (ie the difference between the Deferred Tax Asset and Liability) of the deferred balances ($90 in the above example) is recorded as an adjustment to retained earnings. The ongoing movements of the deferred tax balances will then flow through into the profit and loss account as with any other adjustment.
Your ESV Engagement Partner can help with a review of your current position and help guide you through whether a transition is required and if so, the timing around this.