Accounting for Leases and Deferred Taxes

Leases and Deferred Taxes
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Accounting for Leases and Deferred Taxes
Future sources of income can be efficient to minimize or remove the valuation allowance, such as future expected taxable income (FASB, 2015), making it certain for the business to recognize its deferred tax asset. Taking advantage of the future taxable differences and a carryback of asset operating losses, if any, in the first few years may also prove quite effective for the new operation. Tax planning strategies will also come in handy in reducing the taxable income or eliminating the valuation allowance. One such strategy is the option to lease rather than buy equipment; it will reduce the taxable income (FASB, 2015) as the lease rentals will be treated as allowable business expenses. A comparison in accounting between GAAP and IFRS indicates that deferred tax assets are reported fully, with a reduction by the valuation allowance in GAAP. While in adhering to the IFRS the valuation allowance is disregarded and the tax assets are recognized when it is probable that the asset will be realized (FASB, 2015).
Leases can either be capitalized (treated as assets) or reported as operating leases. For a lease to be capitalized, it must not be cancellable (IAS plus, 2015), there is an option of transferring the asset’s ownership at the end of the lease period. The lease duration is seventy-five percent or more of the service life of the leased asset (IAS plus, 2015). On the other hand, the present value of the lowest lease rental, the administrative costs not included, (IAS plus, 2015) should be equal or above 90% of the fair price of the asset.

However GAAP and IFRS differ in accounting for leases, in that in GAAP, the classification of a lease is dependent on a specified criterion (IAS plus, 2015) while in IFRS the substance of the lease determines its classification. In accounting for the lease payments using the GAAP, the lessee uses the incremental borrowing rate to discount the payments, unless the implicit borrowing rate is known and it is less than the incremental borrowing rate. While in IFRS, discounting the payments is done using the implicit interest rate (IAS plus, 2015).
References
FASB simplifies presentation of deferred income taxes. (2015, November 20). Retrieved from https://www.journalofaccountancy.com/news/2015/nov/deferred-taxes-balance-sheet-201513434.html
IAS plus. (2015, August 14). Retrieved from https://www.iasplus.com/en-us/standards/ifrs-usgaap/leases