profits) from the exploitation of the UK’s oil and gas. PRT is a cash-based tax that is levied on a field-by-
field basis: in general, the costs of developing and running a field can only be set against the profits generated
by that field. Any losses, e.g. arising from unused expenditure relief, can be carried back or forward within
the field indefinitely. There is also a range of reliefs, including:
• oil allowance – a PRT-free slice of production;
• supplement – a proxy for interest and other financing costs;
• Tariff Receipts Allowance (TRA) – participators owning assets, for example pipelines, relating to one
field will sometimes allow participators from other fields to share the use of the asset in return for the
payment of tariffs, and TRA relieves some of the tariffs received from PRT;
• exemption from PRT for gas sold to British Gas under a pre-July 1975 contract; and
• cross-field relief for research expenditure.
PRT is currently charged at 50% on profits after these allowances. For a limited period, safeguard relief then
applies to ensure that PRT does not reduce the annual return in the early years of production of a field to
below 15% of the historic capital expenditure on the field.
PRT was abolished on 16 March 1993 for all fields given development consent on or after that date. This was
part of a package of PRT reforms which also included the reduction of the rate of PRT from 75 per cent to
50 per cent and the abolition of PRT relief for Exploration and Appraisal (E&A) expenditure.
The UK PRT is similar to an income tax in that the tax is a percentage of revenue minus
certain costs. However, there are also a number of other features that are not commonly
found in income taxes or in some other resource rent taxes:
• the oil allowance is a physical quantity of oil that is PRT exempt in each field,
subject to a cumulative maximum over the life of the field; and
• the tax is levied on individual oil fields rather than the entity owning the oil field
as a whole.
There are many different types of petroleum revenue taxes (or resource rent taxes)
around the world, some of which are clearly not income taxes, while others have some
of the characteristics of an income tax. In determining whether a particular production
tax meets the definition of an income tax under IAS 12, an entity will need to assess
whether or not the tax is based on (or closely enough linked to) net profit for the period.
If it does not meet the definition of an income tax, an entity should develop an
accounting policy under the hierarchy in IAS 8.
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Practice is mixed, which means that while some entities may treat a particular
petroleum revenue tax (or resource rent tax) as an income tax under IAS 12 and hence
provide for current and deferred taxes (see Extract 39.45 below), others may consider
the same tax to be outside the scope of IAS 12.
Extract 39.45: Woodside Petroleum Ltd (2017)
NOTES TO THE FINANCIAL STATEMENTS A. EARNINGS FOR THE YEAR [extract]
for the year ended 31 December 2017
A.5 Taxes [extract]
Key estimates and judgements [extract]
(a) Income tax classification [extract]
PRRT is considered, for accounting purposes, to be an income tax.
As illustrated in Extract 39.46 below, BHP assesses resource rent taxes and royalties
individually to determine whether they meet the definition of an income tax or not.
Extract 39.46: BHP Billiton plc (2017)
5 Income tax expense [extract]
Recognition and measurement [extract]
Royalty-related taxation [extract]
Royalties and resource rent taxes are treated as taxation arrangements (impacting income tax expense/(benefit)) when
they are imposed under government authority and the amount payable is calculated by reference to revenue derived
(net of any allowable deductions) after adjustment for temporary differences. Obligations arising from royalty
arrangements that do not satisfy these criteria are recognised as current provisions and included in expenses.
19.2 Grossing up of notional quantities withheld
Many production sharing contracts provide that the income tax to which the contractor
is subject is deemed to have been paid to the government as part of the payment of
profit oil to the government or its representative (e.g. the designated national oil
company) (see 5.3 above). This raises the question as to whether an entity should be
presenting current and deferred taxation arising from such ‘notional’ income tax, which
is only deemed to have been paid, on a net or a gross basis.
Example 39.20: Grossing up of notional quantities withheld
Entity A is the operator of an oil field that produces 10 million barrels of oil per year. Under the production sharing
contract between entity A and the national government, entity A and the government are entitled to 4,000,000 and
6,000,000 barrels of oil, respectively. The production sharing contract includes the following clause:
‘The share of the profit petroleum to which the government is entitled in any calendar year in accordance
with the production sharing contract shall be deemed to include a portion representing the corporate
income tax imposed upon and due by entity A, and which will be paid directly by the government on
behalf of entity A to the appropriate tax authorities.’
Assuming the following facts, how should entity A account for the income tax that it is deemed to have paid in 2018:
• the normal corporate income tax rate in the country in which entity A operates is 40%;
• entity A made a net profit of USD 30 million in 2018; and
• the average oil price during the year was USD 50/barrel.
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Gross presentation
Entity A’s profit after 40% corporate income tax was USD 30 million. Therefore, its profit before tax would
have been USD 50 million (i.e. USD 30 million ÷ (100% – 40%)). In other words, the government is deemed
to have paid corporate income tax of USD 20 million on behalf of entity A. Therefore, the government is
deemed to have taken 400,000 barrels (i.e. USD 20 million ÷ USD 50/barrel) out of entity A’s share of the
production. Hence, entity A’s share of production before corporate income tax was 4,400,000 barrels (i.e.
4,000,000 barrels + 400,000 barrels).
Net presentation
Under the net presentation approach, entity A ignores the corporate income tax that was deemed to have been
paid by the government because it is not a transaction that entity A was party to or because the deemed
transaction did not actually take place.
The disadvantage of presenting such tax on a gross basis is that the combined
production attributed to the entity and that attributable to the government exceeds the
total quantity of oil that is actually produced (i.e. in the above example the government
and entity A would report a combined production of 10.4 million barrels whereas actual
production was only 10 million barrels). Similarly, if the reserves were to be expressed
on the same basis as revenues, the reserves reported by the entity would include oil
reserves that it would not actually be entitled to.
On the other hand, if the host country has a well-established income tax regime that
falls under the authority of t
he ministry of finance and the production sharing contract
requires an income tax return to be filed, then the entity would have a legal liability
to pay the tax until the date on which the national oil company or the ministry
responsible for extractive activities (e.g. the ministry of mines, industry and energy)
pays the tax on its behalf. In such cases it may be appropriate to present revenue and
income tax on a gross basis.
20
EVENTS AFTER THE REPORTING PERIOD
20.1 Reserves proven after the reporting period
IAS 10 – Events after the Reporting Period – distinguishes between two types of events:
• adjusting events after the reporting period being those that provide evidence of
conditions that existed at the end of the reporting period; and
• non adjusting events after the reporting period being those that are indicative of
conditions that arose after the reporting period. [IAS 10.3].
This raises the question as to how an entity should deal with information regarding
mineral reserves that it obtains after the end of its reporting period, but before its
financial statements are authorised for issue i.e. finalised. For example, suppose that
an entity concludes after the year-end that its remaining mineral reserves at that date
were not 10 million barrels (or tonnes) but only 8 million barrels (or tonnes). As
discussed at 16.1.3.A above, a company needs to assess whether such a change in
mineral reserves should be treated as an adjusting event in accordance with IAS 10
(i.e. the new estimate provides evidence of conditions that existed previously) or as a
change in estimate in accordance with IAS 8 (i.e. the new estimate resulted from new
information or new developments).
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20.2 Business combinations – application of the acquisition method
If the initial accounting for a business combination can be determined only provisionally
by the end of the period in which the combination is effected – because either the fair
values to be assigned to the acquiree’s identifiable assets, liabilities or contingent
liabilities or the fair value of the combination can be determined only provisionally –
the acquirer should account for the combination using those provisional values. Where,
as a result of completing the initial accounting within 12 months from the acquisition
date, adjustments to the provisional values have been found to be necessary, IFRS 3
requires them to be recognised from the acquisition date. [IFRS 3.45]. Specifically IFRS 3
states that the provisional values are to be retrospectively adjusted to reflect new
information obtained about facts and circumstances that existed as at the acquisition
date and, if known, would have affected the measurement of the amounts recognised as
at that date. This raises the question of how an entity should account for new
information that it receives regarding an acquiree’s reserves before it has finalised its
acquisition accounting.
Example 39.21: Acquisition of an entity that owns mineral reserves
Entity A acquires Entity B for €27 million at 31 October 2017. At the time it assigned the following fair
values to the acquired net assets:
€ million
Mineral reserves (assuming reserves of 10 million barrels)
10
Other net assets acquired
5
Goodwill 12
Consideration transferred
27
At 30 June 2018, after conducting a drilling programme which commenced in March 2018, Entity A obtains
information about the reserves (as at 30 June 2018), which when added to the production for the period (i.e.
from 31 October 2017 to 30 June 2018) reveals that the mineral reserves at the date of acquisition were not
10 million barrels, as previously thought, but were only 8 million barrels.
Can Entity A revise its initial acquisition accounting to reflect the fact that the mineral reserves are only
8 million barrels, rather than 10 million?
The answer to this question is not straightforward and it is a matter of significant
judgement which needs to be made based on the facts and circumstances of each
individual situation.
IFRS 3 requires assets acquired and liabilities assumed to be measured at fair value as at
the acquisition date. It then defines fair value as: the amount for which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s
length transaction. The challenge with the new information obtained about the mineral
reserves in Example 39.21 above is determining whether it provided new information
about facts and circumstances that existed as at the acquisition date or whether it
resulted from events that occurred after the acquisition date. As discussed in 16.1.3.A
above, it is difficult to determine exactly what causes a reserve estimate to change, i.e.
whether the facts and circumstances existed at acquisition date or whether it was due
to new events.
In Example 39.21 above, the new reserves information arose as a result of a drilling
programme that commenced five months after the acquisition date and it is not entirely
clear why the reserves estimate changed. One may therefore conclude that as entity A
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should be valuing the mineral reserves acquired on the basis of information that a
knowledgeable, willing party would and could reasonably have been expected to use in
an arm’s length transaction at 31 October 2017, that this new information should not
have an impact on the provisional accounting. This is on the basis that this new
information was not available at acquisition date and could not reasonably have been
expected to be considered as part of the acquisition.
Similarly, if entity A had concluded at 30 June 2018 that its internal long-term oil
price assumption was $80/barrel instead of $60/barrel that would not have any
effect on the acquisition accounting. Entity A should be valuing the mineral reserves
on the basis of information that a knowledgeable, willing party would have used in
an arm’s length transaction at 31 October 2017; this may, of course, have been
neither $80 nor $60.
The conclusion may differ however, if the drilling programme had been completed
and the information was available at acquisition date, but due to the pressures of
completing the transaction, entity A had not been able to assess fully or take into
account all of this information e.g. it had not had time to properly analyse all of the
information available in the data room. In this instance, it would be appropriate to
adjust the provisional accounting.
20.3 Completion of E&E activity after the reporting period
As discussed at 3.5.1 above, IFRS 6 requires E&E assets to be tested for impairment
when exploration for and evaluation of mineral resources in the specific area have not
led to the discovery of commercially viable quantities of mineral resources and the
entity has decided to discontinue its activities in the specific area. [IFRS 6.20]. An entity
that concludes, after its reporting period, that an exploration and evaluation project is
unsuccessful, should account for this conclusion as:
• a non-adjusting event if the conclusi
on is indicative of conditions that arose
after the reporting period, for example new information or new developments
that did not offer greater clarity concerning the conditions that existed at the
end of the reporting period (one possible example may be drilling that only
commenced after reporting date). The new information or new developments
are considered to be changes in accounting estimates under IAS 8. Also, based
on the information that existed at the reporting period, the fair value less costs
of disposal of the underlying E&E asset might well have been in excess of its
carrying amount; [IAS 8.5]
• an adjusting event if the decision not to sanction the project for development was
based on information that existed at the reporting date. Failure to use, or misuse
of, reliable information that was available when financial statements for those
periods were authorised for issue and could reasonably be expected to have been
obtained and taken into account in the preparation and presentation of those
financial statements, would constitute an error under IAS 8. [IAS 8.5].
Evaluating whether information obtained subsequent to the reporting period but before
the financial statements are authorised for issue is an adjusting or non-adjusting events
may require significant judgement. The conditions should be carefully evaluated based
on the facts and circumstances of each individual situation.
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21 GLOSSARY
The glossary below defines some of the terms and abbreviations commonly used in the
extractive industries.149
Abandon
To discontinue attempts to produce oil or gas from a well
or lease, plug the reservoir in accordance with regulatory
requirements and recover equipment.
Area-of-interest method
An accounting concept by which costs incurred for
individual geological or geographical areas that have
characteristics conducive to containing a mineral reserve
are deferred as assets pending determination of whether
commercial reserves are found. If the area of interest is
found to contain commercial reserves, the accumulated
costs are capitalised. If the area is found to contain no
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 671
