Two new standards, MFRS 15 – Revenue Recognition and MFRS 16 – Leases, effective from 1 January 2018 and 1 January 2019 respectively, are projected to have significant impact not just on accounting and financial reporting, but also tax reporting.
By Abdul Razak Rahman
MFRS 15 – Revenue Recognition
The objective of MFRS 15 – Revenue Recognition is to have a single revenue standard and model of accounting for revenue applicable across all industries and capital market. In addition to improving comparability across industries, the rationale behind introducing MFRS 15 includes: removing inconsistencies in the previous accounting model, creating a robust framework, enhancing the disclosure requirement and simplifying the reporting guidance.
At the recent MIA Malaysian Tax Conference 2018, Nurul Ezhawati Abdul Latif of Universiti Teknologi MARA highlighted the following key areas that might be impacted by the change in revenue recognition brought about by the new standard:
- Changes in accounting method of revenue recognition for tax purposes will impact the tax liability.
- New or different temporary differences may impact the deferred taxes.
- There is a need to harmonise the tax reporting system with the new revenue recognition modules for financial accounting purposes.
- Reconciliation of revenue against indirect taxes invoices and filings
- The effect on intercompany transfer pricing policies and amounts, particularly when transfer prices are set or tested using a revenue or profit-based formula.
- Amendments of existing contract terms to align with the MFRS 15 requirement.
“With the adoption of the new standard, the accounting revenue as determined under MFRS 15 is accepted as revenue for tax purpose since the tax principle generally provides for income to be subject to tax when it is accrued. The difference in the amount recognised under MFRS 15 is a mere timing difference and the entire amount from the contract would eventually be subject to tax,” explained Chee Pei Pei, Executive Director, Deloitte Tax Services Malaysia. She further added that the exceptions to this principle are where specific tax treatment has been established through case law or provided under the law (Section 24 of gross income for tax purposes), or specific tax treatments for construction business, property development and leasing transactions, under Section 36 of the Income Tax Act.
MFRS 16 – Leases
MFRS 16 – Leases effectively eliminates the classification of leases as either operating leases or finance leases for a lessee. Nurul Ezhawati explained that the rationales are to present a complete and an understandable picture of an entity’s leasing activities, faithful representation of lessee’s assets and liabilities, and enhance disclosure requirements. The additional areas affected by the changes in classification of leases are:
- Deductibility of expenses i.e. interest and principal portion relating to assets under leasing
- Determination of qualifying assets for capital allowances claim (tax) and depreciation (accounting)
“For lessee accounting, MFRS 16 introduces a single measurement model where all leases with a term of greater than 12 months are recognised on the balance sheet. The right of use asset on the balance sheet represents the lessee’s rights to use the underlying leased asset and the lease liability represents the lessee’s obligation to make lease payments,” added Pei Pei.
Despite these changes in lessee accounting arising from the introduction of the new standard, MFRS 16 does not change the treatment of leases for income tax purposes for the lessee. The general deduction rules under Section 33(1) still apply whereby lease rental (interest and principal portion) is a deductible operating expense if wholly and exclusively incurred in the production of gross income. However, depreciation and interest on lease liability are not deductible under Section 33(1). As for the lessor, there are no changes for income tax purposes.
“The introduction of the new rulings under MFRS 15 and MFRS 16 means that there will be more tax adjustments in arriving at taxable profits and it is the responsibility of the taxpayers to ensure that the reconciliations are properly documented. Information relating to the adjustments such as financing component and income recognition relating to transitional adjustments should be clearly disclosed in the tax computation,” advised Norhaslinda Bukhari, Director, Tax Policy Department of IRB Malaysia.