CW Energy LLP

IAS 12 Changes in Accounting for Deferred Tax on Decommissioning Assets and Liabilities

On 7 May IASB published limited scope amendments to the application of the Initial recognition Exemption (IRE) to transactions which give rise to taxable and deductible temporary differences of the same amount. This is primarily aimed at deferred tax arising on decommissioning obligations and leases but is also relevant for other transactions.

In the past, there had been some uncertainty about whether the initial recognition exemption applied to transactions such as leases and decommissioning obligations, i.e. transactions for which companies recognise both an asset and a liability of the same amount. The amendments provide that the exemption will not apply. As a result, companies are required to recognise in full a deferred tax liability on all taxable temporary differences and a deferred tax asset on all deductible temporary differences to the extent that it is probable that taxable profit will be available against which these deductible temporary differences will be utilised.

The changes would also effectively outlaw the integrally linked approach that has also been widely adopted by oil and gas companies in respect of decommissioning. This provides for the netting off of the deferred tax asset and liability on decommissioning, with a DTA recognised on the net position based on its recoverability.

We have set out details of the final proposal in our news brief on 23 September 2020 (which can be found here – and the amendments to IAS 12 issued last week follow those proposals.

The normal rules will apply to determine the extent to which a DTA can be recognised on a decommissioning provision and so this new approach could result in a P&L charge if an entity restricts the recognition of a DTA on decommissioning obligations but recognises a DTL on the corresponding decommissioning asset in full.

Effective Date

The effective date for the application of the proposed changes is for periods beginning on or after 1 January 2023 with earlier application permitted. For leases and decommissioning, retrospective application is required. There is a requirement to apply the changes from the beginning of the earliest comparative period (in accordance with IAS 8 principles).

Under IAS 8 an entity is required to calculate and recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings. Any subsequent movements would go through the P&L in the normal way.

For any other transactions, the new rule will apply prospectively.


We would recommend that companies review their current approach to determine whether the implementation of these changes to IAS 12 could have an impact on their position.

Where the standard will result in a change in the accounting for decommissioning once adopted companies will now have to disclose the estimated effect in accordance with IAS 8.

If a reader would like to discuss an impact on their tax position please contact Paul Rogerson, Andrew Lister or their normal CWE contact.