Page 128 - Pakistan Oilfields Limited - Annual Report 2021

NOTES TO AND FORMING

PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2021

4.5 Taxation

Provision for current taxation is based on taxable income at applicable tax rates, adjusted for royalty
payments to the Government.
Deferred tax is accounted for on all temporary differences using the liability method. Deferred
tax liability has been calculated at the estimated effective rate of 30% after taking into account
availability of future depletion allowance and set off available in respect of royalty payments to the
Government.

4.6 Provisions

Provisions are recognized when the Company has a legal or constructive obligation as a result
of past events and when it is probable that an outflow of resources will be required to settle the
obligation and a reliable estimate of the amount can be made.

4.7 Provision for decommissioning costs

Provision for decommissioning costs is recognized in full for development wells and production
facilities. The amount recognized is the present value of the estimated cost to abandon a well
and remove production facilities. A corresponding intangible asset of an amount equivalent to
the provision is also created and is amortized on unit of production basis over the total proved
developed reserves of the field or @ 5% where the life of a field is more than 20 years.

Most of these abandonment and removal events are many years in the future and the precise
requirements that will have to be met when the abandonment and removal event actually occurs
are uncertain. Abandonment and asset removal technologies and costs are constantly changing, as
are political, environmental, safety and public expectations. Consequently, the timing and amount
of future cash flows are subject to significant uncertainty.

The timing and amount of future expenditures are reviewed annually, together with the interest rate
to be used in discounting the cash flows. Any difference between the liability recognized and actual
costs incurred are charged/credited to statement of profit or loss in the year of decommissioning.

The effect of changes resulting from revisions to the estimate of the liability are incorporated on a
prospective basis.

The decommissioning cost has been discounted at a real discount rate of 1.30% (2020: 1.65%) per
annum.

4.8 Employee compensated absences

The Company provides for compensated absences for all eligible employees in accordance with the
rules of the Company.

4.9 Staff retirement benefits

The Company operates the following staff retirement benefits plans:

(i) A pension plan for its management staff and a gratuity plan for its management
and non-management staff. The pension and gratuity plans are invested through
approved trust funds. Both are defined benefit final salary plans. The pension
and gratuity plans are complementary plans for management staff. Pension

126 PAKISTAN OILFIELDS LIMITED