The rapid development of the energy sector, including renewable energy projects, has brought the question of decommissioning costs — incurred at the end of an installation’s operational life — into sharp focus. The obligation to dismantle wind turbines, photovoltaic panels, and other energy infrastructure components, and to restore the land to its original condition, is now a standard feature of administrative permits and lease agreements.
In practice, this obligation is commonly referred to as an ARO (Asset Retirement Obligation) — a future, unavoidable cost associated with retiring a fixed asset and fulfilling environmental or contractual obligations. Its recognition and the timing of its settlement differ significantly depending on whether the issue is examined from an accounting or a tax perspective.
Accounting perspective
From an accounting perspective, a decommissioning provision is treated as a present obligation arising from a past event — most commonly the construction and commissioning of an installation whose future dismantling will be mandatory. Under IFRS reporting, this obligation is recognized as a provision in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, provided the relevant criteria are met: a present obligation exists, an outflow of resources is probable, and a reliable estimate of the amount can be made.
At the same time, under IAS 16 Property, Plant and Equipment, estimated costs of dismantling and site restoration — where they arise from an obligation incurred in connection with the construction or use of the asset — are added to the asset’s initial carrying amount. In practice, this means that the provision, recognized in parallel on the gross asset side, is spread over time through depreciation. The provision itself is then updated and “accretes” in subsequent periods through the unwinding of the discount, which is recognized on the liability side as a finance cost. Where estimates change — for example due to changes in dismantling technology, environmental requirements, or discount rates — IFRIC 1 applies, governing how both the provision and the carrying amount of the asset are adjusted.
Under Polish accounting standards (PAS), this mechanism is not precisely regulated, though practitioners generally seek to apply an approach that most faithfully reflects the economic substance of the transaction. The situation is complicated by the fact that under KSR 11 Fixed Assets, the initial cost of a fixed asset does not, as a rule, include future decommissioning costs — an approach that is fundamentally different from that adopted under IAS 16.
The obligation to incur decommissioning expenditure is therefore recognized within provisions, in accordance with KSR 6 Provisions, Accruals and Contingent Liabilities. Polish regulations do not, however, clearly specify whether the provision should be recognized in full as an expense in the income statement at the time of its creation, or whether it should be released systematically over time.
The primary argument against a single-period charge to profit or loss at the point of recognition is the matching principle, which — in the view of most practitioners — would not be observed in such a case. This approach also has serious practical consequences: a one-off charge frequently results in negative equity at a relatively early stage of a company’s life, giving rise to legal and/or commercial difficulties (such as automatic breach of loan covenants, contract termination, or margin step-ups).
It is therefore appropriate to recognize the cost of future decommissioning in profit or loss systematically over the installation’s operational life, so as to preserve the matching of income and expenditure. Polish regulations do not, however, prescribe a technical means of resolving this dilemma, and the express prohibition on capitalizing decommissioning costs into the initial cost of fixed assets (arising from KSR 11) precludes direct reference to the IFRS approach.
One practical solution found in the market (though not yet a widely accepted practice) is to recognize the future decommissioning cost as a prepayment (deferred charge), in correspondence with the initial recognition of the provision, and to release this asset systematically over the life of the installation. This approach preserves the matching of income and costs and avoids an excessive one-off charge to profit or loss that could otherwise result in negative equity.
As regards the subsequent measurement of the decommissioning provision recognized on the balance sheet, as under the IAS/IFRS regime it is subject to an annual update through the unwinding of the discount, recognized in correspondence with a finance cost, so as to present it at its present value on the balance sheet.
The tax perspective, however, looks entirely different — and it is this aspect that can be a source of misunderstanding and divergence between the accounting and tax results.
Tax treatment of provisions — general principle
Under the Corporate Income Tax (CIT) Act, provisions for future costs — including decommissioning provisions — do not constitute tax-deductible costs at the time of their creation. This exclusion follows directly from Article 16(1)(27) of the CIT Act, under which provisions are not tax-deductible unless the legislature expressly provides otherwise. No such exception has been introduced for the decommissioning of energy installations.
There is equally no basis under CIT legislation for increasing the initial cost of a self-constructed fixed asset by the estimated future decommissioning costs. This is because, at the point when the investment is brought into use, no expenditure has yet been incurred in the tax sense. As a result:
- A provision created on the basis of an estimate of future remediation or demolition costs will not reduce the taxable base in the year of recognition;
- The tax-deductible cost will arise only when the expenditure is actually incurred — i.e. when payment is made for dismantling or remediation services, after the asset has been decommissioned.
In practice, this means that while the decommissioning cost may be spread over 20 to 30 years for accounting purposes, the corresponding tax deduction will not arise until the end of the project’s life cycle. This gives rise to significant temporary differences between the accounting and tax results and, in certain circumstances, can create real difficulties in effectively utilizing this cost deduction for tax purposes.
This issue becomes particularly acute when a project is definitively wound up and no new investment is being developed in its place. While the taxpayer retains the right to recognize a tax-deductible cost in respect of decommissioning expenditure actually incurred, in practice there may no longer be any taxable income against which to offset it. As a result, the economic burden of tax paid during the project’s operational years is not neutralized — and this also creates difficulties in determining the carrying amount of the related deferred tax asset.
A more favorable outcome arises where a new investment is developed on the site of the former one — for example through the replacement of turbines or other key components with more modern solutions (where the same project company carries out the new investment). In such a scenario, it may be possible to include the decommissioning costs in the initial cost of the new or modernized installation (provided they are directly connected with its development), and thereby deduct them through depreciation charges.
Approaches in other jurisdictions
In certain jurisdictions, including Germany, France, and Canada, mechanisms exist to mitigate the effect of this “cost split” — for example through:
- Loss carryback — the ability to carry a tax loss back to prior years in which income was generated (though typically subject to limitations, generally one to three years);
- Tax systems in which taxable profit is more closely aligned with the accounting result.
The Polish tax system lacks both a loss carryback mechanism and any general alignment of accounting with tax principles (though exceptions exist — for instance in the context of Estonian CIT).
As a result, a taxpayer may find itself in a position where it:
- Bears a current tax charge on its full operating profit (reduced only by the “non-tax” depreciation of the ARO component);
- Is unable to deduct either the estimated future decommissioning costs or their depreciation equivalent.
From an accounting standpoint, a provision for energy installation decommissioning costs can and should be released systematically over the entire useful life of the asset. From a tax perspective, however, the Polish CIT Act does not currently permit such treatment — meaning that decommissioning costs remain tax-neutral until they are actually incurred.
For the energy sector, this means that tax cash flow planning must take into account the fact that a multi-year accounting cost has no tax counterpart, and that its deduction may not occur until several decades have passed — if at all. An alternative is to treat these costs as part of a new investment, but this requires strict conditions to be met and thorough documentation of the connection with the new fixed asset.
Mikołaj Ratajczak
Partner
Maciej Krokosiński
Partner
