Dual-based asset
As part of a business combination an entity purchases an opencast mine to which there is assigned a fair value of €10 million. The tax system of the jurisdiction where the mine is located provides that, if the site is sold (with or without the minerals in situ), €9 million will be allowed as a deduction in calculating the taxable profit on sale. The profit on sale of the land is taxed as a capital item. If the mine is exploited through excavation and sale of the minerals, no tax deduction is available.
The entity intends fully to exploit the mine and then to sell the site for retail development. Given the costs that any developer will need to incur in preparing the excavated site for development, the ultimate sales proceeds are likely to be nominal. Thus, for the purposes of IAS 16, the quarry is treated as having a depreciable amount of €10 million and a residual value of nil.
On the analysis above, there is a taxable temporary difference of €10 million associated with the depreciable amount of the asset (carrying amount of €10 million less tax base in use of nil), and a deductible temporary difference of €9 million associated with the residual value (carrying amount of nil less tax base on disposal of €9 million).
The entity will therefore provide for a deferred tax liability on the taxable temporary difference. Whether or not a deferred tax asset is recognised in respect of the deductible temporary difference will be determined in accordance with the criteria discussed in 7.4 above. In some tax regimes, capital profits and losses are treated more or less separately from revenue profits and losses to a greater or lesser degree, so that it may be difficult to recognise such an asset due to a lack of suitable taxable profits.