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Key points

The IASB issued amendments to IAS 12, ‘Income Taxes', on 7 May 2021. The amendments are effective for annual reporting periods beginning on or after 1 January 2023.
The amendments require companies to recognise deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences.
Impacted transactions include certain decommissioning obligations, which are common in the energy and mining industries so the impact of the amendment could be significant for entities in this sector.
What is the issue?
As set out in UK In brief INT2021-10, the IASB amended IAS 12, 'Income taxes', to require companies to recognise deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences.
The amendments are effective for annual reporting periods beginning on or after 1 January 2023. Earlier application is permitted (subject to any local endorsement process).
What is the impact and for whom?
The amendments target the recognition of deferred tax in respect of:
  • right-of-use assets and lease liabilities; and
  • decommissioning, restoration and similar liabilities, and the corresponding amounts recognised as part of the cost of the related asset. Since decommissioning obligations are common in the energy and mining industries, the impact of the amendment could be significant for entities in this sector.
Recognition of deferred tax assets and liabilities
Where the recognition of a decommissioning obligation, along with an increase in the value of the associated asset, gives rise to equal taxable and deductible temporary differences, a deferred tax asset and liability should be recognised.
When assessing whether such a transaction gives rise to equal taxable and deductible temporary differences it is necessary to consider the applicable tax law.
In some tax jurisdictions, an entity might receive tax deductions for payments to settle decommissioning obligations when it makes such payments. In such situations, the entity determines whether those tax deductions are attributable to:
  • the increased cost of the asset and interest expense (insofar as it relates to the decommissioning obligation) – because the deductions relate to the expenses arising from the asset (that is, depreciation and interest expense); or
  • the decommissioning obligation and interest expense – because the deductions relate to the payment of the decommissioning costs.
Determination of whether tax deductions are attributable to the decommissioning asset or liability
An entity applies judgement in determining whether tax deductions are attributable to the asset or liability, having considered the applicable tax law.
For example, in the UK, tax deductions in relation to decommissioning obligations are typically given when the costs are paid, and the cost of the asset that arose from recognition of the decommission obligation is excluded from the calculation of capital allowances on the asset (if applicable). We would therefore normally conclude, for entities subject to UK tax, that the tax deductions relate to the decommissioning liability.
In the case where the tax deductions are considered attributable to the decommissioning liability, the asset’s tax base is nil because there are no associated tax deductions; so there is a temporary difference equal to the asset’s carrying amount on initial recognition. The liability’s tax base is also nil because of the future tax deduction when the liability is settled (that is, the tax base of the liability equals its carrying amount less future deductions); so there is a temporary difference equal to the liability’s carrying amount on initial recognition.
When the recognition of the decommissioning obligation gives rise to an equal amount of deductible and taxable temporary differences, the initial recognition exception does not apply, and so the entity should recognise a deferred tax asset (to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised) and a deferred tax liability.
Recognition of a deferred tax asset is dependent on the availability of taxable profit in accordance with the usual IAS 12 rules. It will also be dependent on specific tax rules applicable to impacted industries, for example UK oil and gas entities are commonly able to carry back deductions to 2002 providing sufficient tax has been incurred in the past but there is no similar carry back provision for renewables entities. Renewables entities such as wind farm operators where each wind farm is housed in a separate entity, might also need to consider whether a deferred tax asset can be recognised. Expenses incurred by offshore entities are not currently eligible for tax deductions if the entity ceases trading prior to incurring the decommission costs – tax planning opportunities might be available to mitigate this, but this can be a complex area and impacted entities should consult tax specialists.
PwC IFRS Manual of Accounting EX 14.82.1 illustrates the deferred tax consequences of a decommissioning obligation where the tax deductions are considered attributable to the decommissioning liability.
In some situations, tax deductions are available on some (but not all) of the decommissioning expenditure. Further guidance in these situations is given in FAQ 14.82.2.
In other situations an entity might conclude that the tax deductions relate to the asset rather than the liability. The accounting differences in this scenario are set out in FAQ 14.80.6, using a lease transaction as an example. This may be relevant for Group scenarios where the decommissioning obligations arise in jurisdictions with different tax legislation.
Presentation of deferred tax assets and liabilities
For presentation in the statement of financial position, the entity should apply the general principles set out in IAS 12 for offsetting deferred tax assets and deferred tax liabilities. For example, if the conditions necessary for offsetting deferred tax related to the decommissioning obligation are met, the entity should offset deferred tax balances for presentation purposes.
Offsetting may be available for deferred tax positions arising in UK entities but this may not be the case in all jurisdictions and therefore, for consolidation purposes, entities will need to consider the tax rules / facts and circumstances in the jurisdiction and entity in which the decommissioning obligation arises.
However, entities will still typically need to disclose the gross deferred tax assets and liabilities arising from these types of transactions in the notes to the financial statements, following the requirements in para 81(g) of IAS 12.
When does it apply?
These amendments should be applied for annual periods beginning on or after 1 January 2023. Earlier application is permitted (subject to any local endorsement process). The amendments should be applied on a modified retrospective basis.
What are the transition requirements?
The amendment requires companies, at the beginning of the earliest comparative period presented:
  • to recognise a deferred tax asset – to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised – and a deferred tax liability for all deductible and taxable temporary differences; and
  • to recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date.
This will reflect the opening position, without the need for full retrospective application.
Where do I get more details?
For more information, please contact Claire Howells (claire.l.howells@pwc.com) or Dave Walters (dave.walters@pwc.com).
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