Accounting Standard AASB 2021-5 Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities arising from a Single Transaction

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Explanatory Statement

Accounting Standard AASB 2021-5
Amendments to Australian Accounting Standards –
Deferred Tax related to Assets and Liabilities arising from a Single Transaction

 

June 2021

EXPLANATORY STATEMENT

Standards Amended by AASB 2021-5

This Standard makes amendments to AASB 1 First-time Adoption of Australian Accounting Standards (July 2015) and AASB 112 Income Taxes (August 2015).

These amendments arise from the issuance of International Financial Reporting Standard Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) by the International Accounting Standards Board (IASB) in May 2021.

Marked-up Text

This Standard incorporates marked-up text to clearly identify some of the amendments to AASB 1 and AASB 112. All amendments are incorporated using clean text into the compilations of those Standards when they are prepared, based on the legal commencement date of the amendments.

Power to Make Amendments

Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws), the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.  Accordingly, the AASB has the power to amend the Accounting Standards that are made by the AASB as legislative instruments under the Corporations Act 2001.

Main Features of AASB 2021-5

Main Requirements

This Standard amends AASB 112 to clarify the accounting for deferred tax on transactions that, at the time of the transaction, give rise to equal taxable and deductible temporary differences. In specified circumstances, entities are exempt from recognising deferred tax when they recognise assets or liabilities for the first time. The amendments clarify that the exemption does not apply to transactions for which entities recognise both an asset and a liability and that give rise to equal taxable and deductible temporary differences. This may be the case for transactions such as leases and decommissioning, restoration and similar obligations. Entities are required to recognise deferred tax on such transactions.

The Standard amends AASB 1 to require deferred tax related to leases and decommissioning, restoration and similar obligations to be recognised by first-time adopters at the date of transition to Australian Accounting Standards, despite the exemption set out in AASB 112.

Application Date

AASB 2021-5 applies to annual reporting periods beginning on or after 1 January 2023. The amendments may be applied to earlier reporting periods.

References to Other AASB Standards

References in this Standard to the titles of other AASB Standards that are legislative instruments are to be construed as references to those other Standards as originally made and as amended from time to time and incorporate provisions of those Standards as in force from time to time.

Consultation Prior to Issuing this Standard

The AASB issued ED 294 Deferred Tax related to Assets and Liabilities arising from a Single Transaction in July 2019, with comments due by 18 October 2019. ED 294 incorporated IASB Exposure Draft ED/2019/5 Deferred Tax related to Assets and Liabilities arising from a Single Transaction. No comment letters were received by the AASB relating to ED 294. The AASB did not make a submission to the IASB on ED/2019/5.

The IASB analysed the feedback it received on the proposed amendments and decided to finalise the amendments after making some minor changes, including removing the proposed requirement for an entity to limit the recognition of a deferred tax liability to the extent that it recognises a deferred tax asset, while also simplifying the transition requirements. The IASB concluded that these amendments would significantly reduce the complexity of applying the proposed amendments, while still achieving their objective. The IASB set an effective date for the amendments of annual periods beginning on or after 1 January 2023, with earlier application permitted. The AASB considered and adopted the amendments made by the IASB to IFRS Standards in finalising AASB 2021-5 and the amendments to the Australian Accounting Standards.

A Regulation Impact Statement (RIS) has not been prepared in connection with the issue of AASB 2021-5 as the amendments made do not have a substantial direct or indirect impact on business or competition.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011

Accounting Standard AASB 2021-5
Amendments to Australian Accounting Standards –
Deferred Tax related to Assets and Liabilities arising from a Single Transaction

Overview of the Accounting Standard

This Standard amends AASB 112 Income Taxes to clarify the accounting for deferred tax on transactions that, at the time of the transaction, give rise to equal taxable and deductible temporary differences. In specified circumstances, entities are exempt from recognising deferred tax when they recognise assets or liabilities for the first time. The amendments clarify that the exemption does not apply to transactions for which entities recognise both an asset and a liability and that give rise to equal taxable and deductible temporary differences. This may be the case for transactions such as leases and decommissioning, restoration and similar obligations. Entities are required to recognise deferred tax on such transactions.

The Standard amends AASB 1 First-time Adoption of Australian Accounting Standards to require deferred tax related to leases and decommissioning, restoration and similar obligations to be recognised by first-time adopters at the date of transition to Australian Accounting Standards, despite the exemption set out in AASB 112.

Human Rights Implications

This Standard is issued by the AASB in furtherance of the objective of facilitating the Australian economy.  It does not diminish or limit any of the applicable human rights or freedoms, and thus does not raise any human rights issues.

Conclusion

This Standard is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 

Overview

Accounting Standard AASB 2021-5, Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities arising from a Single Transaction, was enacted in June 2021. It was introduced to address the complexities associated with the accounting for deferred tax on transactions that give rise to equal taxable and deductible temporary differences at the time of the transaction. The Australian Accounting Standards Board (AASB) made these amendments to align Australian Accounting Standards with the corresponding International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The policy objective is to ensure consistency and clarity in accounting standards, particularly in relation to deferred tax on specific transactions such as leases and decommissioning obligations, thereby facilitating a smoother transition for entities adopting Australian Accounting Standards for the first time. The AASB has the authority to amend the Accounting Standards under the Corporations Act 2001. AASB 2021-5 applies to annual reporting periods beginning on or after 1 January 2023, with the option for earlier application. The amendments aim to simplify the application of deferred tax accounting in specified circumstances, ensuring that entities correctly recognise deferred tax where appropriate. The AASB considered feedback from the IASB, resulting in minor changes to the proposed amendments, and adopted the final version in AASB 2021-5. This standard does not have substantial direct or indirect impacts on business or competition, and it is compatible with the human rights and freedoms recognised or declared in international instruments.

Scope and Application

The Accounting Standard AASB 2021-5, which amends Australian Accounting Standards regarding deferred tax related to assets and liabilities arising from a single transaction, applies to entities required to comply with Australian Accounting Standards. These include for-profit and not-for-profit entities, public benefit entities, and entities preparing financial reports under the Corporations Act 2001, the Superannuation Industry (Supervision) Act 1993, or the Not-for-profit Sector (Accounting) Standards Amendment Act 2014. The amendments are applicable to annual reporting periods beginning on or after 1 January 2023, though earlier application is permitted. The Standard amends AASB 112 Income Taxes to clarify the accounting treatment for deferred tax on transactions that result in equal taxable and deductible temporary differences, and it requires entities to recognise deferred tax for certain transactions such as leases and decommissioning obligations. The AASB has the authority to make these amendments under the Corporations Act 2001 and the Acts Interpretation Act 1901. The Standard ensures compatibility with human rights, as it does not diminish any applicable rights or freedoms.

Key Provisions

AASB 2021-5 makes amendments to two existing Australian Accounting Standards, AASB 1 First-time Adoption of Australian Accounting Standards (Section 1) and AASB 112 Income Taxes (Section 2). These amendments are in response to changes made by the International Accounting Standards Board to its equivalent standards, particularly focusing on the deferred tax related to assets and liabilities arising from a single transaction. The AASB has the authority to amend these standards under subsection 33(3) of the Acts Interpretation Act 1901, which allows for the repeal, rescind, revoke, amendment, or variation of legislative instruments such as rules, regulations, or by-laws, including accounting standards made by the AASB under the Corporations Act 2001. The primary requirement of AASB 2021-5 is to clarify the accounting treatment for deferred tax on transactions that create equal taxable and deductible temporary differences at the time of the transaction (Section 3). Entities are exempt from recognising deferred tax when they initially recognise assets or liabilities under certain conditions, but this exemption does not apply to transactions where both an asset and a liability are recognised and these give rise to equal temporary differences. For transactions such as leases and decommissioning, restoration, and similar obligations, entities must recognise deferred tax. Additionally, the Standard mandates that first-time adopters of Australian Accounting Standards must recognise deferred tax related to leases and decommissioning, restoration, and similar obligations at the date of transition to Australian Accounting Standards, despite the exemption provided in AASB 112 (Section 4). Entities governed by AASB 2021-5 must ensure they follow the clarified accounting treatment for deferred tax on specified transactions. This includes recognising deferred tax for transactions that create both an asset and a liability with equal temporary differences, and ensuring that first-time adopters recognise deferred tax for leases and similar obligations at the transition date to Australian Accounting Standards. Entities should review their accounting practices and systems to ensure compliance with these amendments, which apply to annual reporting periods beginning on or after 1 January 2023 (Section 5). Failure to comply with the requirements of AASB 2021-5 could result in financial statements that do not accurately reflect the entity's financial position and performance. While the explanatory statement does not explicitly mention specific penalties for non-compliance, breaches of accounting standards can lead to legal consequences under the Corporations Act 2001, including fines and potential criminal charges for directors. The maximum penalties for breaches of the Corporations Act can include significant fines for both individuals and corporations, as well as imprisonment for directors who are found to be in breach of their statutory duties (Section 6).

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