Industry facing new financial reporting challenges
Posted: 27 August 2009
Already facing a range of challenges surrounding the Federal Petroleum Resource Rent Tax (PRRT) and possible radical reform from the Henry tax review, the oil and gas industry is now facing two further tax financial reporting challenges, according to Deloitte Audit Partner Jason Thorne.
Speaking at the APPEA Oil and Gas Tax Conference in Perth today, Mr Thorne raised further concerns.
"In addition to PRRT, the new International Accounting Standards Board (IASB) exposure draft (Exposure Draft ED/2009/2 Income Tax) and the requirement to account for and disclose uncertain tax positions would likely create an onerous accounting burden for oil and gas entities reporting under IFRS," he said.
These issues follow a sharp increase in disputes surrounding the ATO’s administration of the PRRT, leading to calls to review the PRRT legislation and the industry group APPEA’s call earlier this week to establish biennial examinations of the ATO’s administration. The possibility of the Henry tax review of Australian taxation, proposing widespread changes to the taxation of the resources industry, is also adding significant concern to companies planning multi-billion dollar projects with long lead times.
Financial reports under scrutiny
"Oil and Gas company financial statements are likely to be under intense scrutiny over the next few reporting seasons," said Thorne . "Compliance will require a substantial level of resources and lead time to plan and deliver."
"The experience of similar accounting requirements in the United States revealed that most oil and gas companies required six to nine months to prepare for the changes. We are certainly recommending that CFOs in Australia should start giving some consideration to the challenges in this coming financial year."
The IASB standard is tabled for adoption in the second half of 2010 and if enacted may become applicable during 2011.
Exposure draft
"As a result of the proposed changes, oil and gas companies will need to better understand the tax consequences of their assets and liabilities and be able to apply the new requirements, particularly the capital gains tax (CGT) and PRRT impacts," said Thorne.
"There will be fewer deferred tax liabilities on many intangible and similar assets and potentially additional deferred tax assets that cannot be recognised. This, coupled with additional liabilities relating to uncertain tax positions could significantly increase effective tax rates. For some, compliance with the new standard will also require a review of financial systems, skills and training of key financial staff members," said Mr Thorne.
Challenges for Financial Reporting
Overall, Mr Thorne believes that the three main challenges for financial reporting will be:
- accounting for uncertain tax positions
- a change in methodology for the calculation of deferred taxes
- understanding how interaction between the CGT and PRRT regimes will occur within the new requirements.
"Uncertain tax positions will be a high-risk area for oil and gas companies in the near term, so the commercial implications will need to be carefully considered," said Thorne.
Uncertain tax positions
Also presenting at the conference, Deloitte Tax Partner Darren Lee said that a key consideration for the industry in the coming financial year is about the new requirement to make provision for uncertain tax positions.
He believes that CFOs should be asking themselves, "What uncertain tax positions do I have, and what is their potential impact on my financial reporting at transition?"
"Given the complexity of tax legislation, it would be highly unlikely that any oil and gas company would have 100% certainty on their tax positions," said Thorne
"If a company takes a position in tax that may be challenged by the ATO, the company must make a provision and show its weighted probability of success in its accounts," said Mr Lee. This could apply, for example, to tax losses, investment allowance, PRRT, tax consolidation outcomes, depreciation, R&D and transfer pricing.
"Oil and gas companies should always assume that the ATO will review uncertain tax positions of a reporting entity and even possibly use the weightings as potential ‘red flags’ in risk reviews. Obviously this will raise significant disclosure issues that should be carefully considered," said Thorne.
Posted by Richard Price, Editor, EnergyME.com
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