Pillar Two model rules. The reference throughout the standard is to the OECD’s “Pillar Two model rules”, which propose a coordinated system of minimum corporate income tax at an effective rate of 15 per cent for multinational enterprises with consolidated revenue above EUR 750 million. The rules include an income inclusion rule, an undertaxed profits rule, and the option for countries to implement a qualified domestic minimum top-up tax (QDMTT). The standard uses the term “Pillar Two legislation” to refer to tax law enacted or substantively enacted that implements these model rules, including QDMTT. This is a broad concept that catches any domestic legislation that follows the OECD framework, regardless of specific local variations.

Deferred tax assets and liabilities. Under AASB 112, deferred tax assets and liabilities are normally recognised for temporary differences between the carrying amount of an asset or liability in the financial statements and its tax base, as well as for tax loss and credit carryforwards. The mandatory exception in paragraph 4A overrides those general principles for Pillar Two income taxes. No deferred tax amounts are recognised or disclosed, regardless of whether temporary differences exist. This is a significant departure from the normal accounting model.

Current tax expense (income). Paragraph 88B requires separate disclosure of current tax expense or income related to Pillar Two taxes when the legislation is in effect. This refers to the actual tax payable or receivable under the enacted Pillar Two rules for the period, not deferred tax. The standard therefore splits the tax reporting: current tax is disclosed; deferred tax is prohibited entirely.

Known or reasonably estimable information. Paragraphs 88C and 88D introduce a disclosure objective for periods before legislation is effective. The entity must disclose information that helps users understand exposure, but the standard explicitly says this “does not have to reflect all the specific requirements of the Pillar Two legislation and can be provided in the form of an indicative range”. This creates a pragmatic disclosure regime that acknowledges the uncertainty at early stages. The illustrative examples list qualitative items (how the entity is affected, main jurisdictions of exposure) and quantitative items (proportion of profits that might be subject, average effective tax rate, or how the average ETR would have changed had the legislation been in effect). If information is not known or reasonably estimable, the entity must state that and disclose its progress in assessing exposure.

Retrospective application. The standard requires retrospective application of the exception and the disclosure that it has been applied, in accordance with AASB 108. This means any deferred tax amounts previously recognised for Pillar Two exposures must be derecognised, and prior period comparative information must be restated as if the exception had always been in force.

The standard affects all entities that apply AASB 112 under the scope set out in AASB 1057 Application of Australian Accounting Standards. This includes reporting entities under the Corporations Act 2001 (listed and unlisted public companies, large proprietary companies, disclosing entities) and other entities that elect to prepare general purpose financial statements in accordance with Australian Accounting Standards (for example, some private companies, not-for-profit entities, and public sector entities). However, the substantive impact concentrates on multinational enterprises that fall within the scope of the OECD’s Pillar Two rules (generally those with consolidated annual revenue above EUR 750 million). For these entities, the Pillar Two top-up tax is a material new tax liability in many jurisdictions. The mandatory exception from deferred tax accounting means their balance sheets will not show deferred tax assets or liabilities related to this tax, which could change key ratios (for example, deferred tax balances, effective tax rate reconciliations, and net asset positions). Entities that are not themselves multinationals may still be affected if they are part of a multinational group (for example, as a subsidiary) or if they operate in jurisdictions that have enacted QDMTT that captures domestic entities. The disclosure requirements under paragraphs 88C and 88D will require preparers to gather qualitative and quantitative data on jurisdictional profit distribution, effective tax rates, and the status of legislative enactment in each country where they operate. This imposes a compliance burden, particularly for groups with complex supply chains and many tax jurisdictions. Auditors will need to verify that the exception has been applied correctly and that the disclosures are adequate, which may require new audit procedures and specialist tax knowledge. Financial statement users (investors, analysts, creditors) are the intended beneficiaries of the disclosures, but they now face financial statements that omit deferred tax information on Pillar Two taxes, potentially reducing comparability with prior periods where some entities may have recognised those balances before the standard’s retrospective application. The standard also affects entities with early adoption: they may have already applied the amendments from periods beginning before 1 January 2023, though the mandatory effective date is generous.

Duty to apply the mandatory exception. An entity must not recognise nor disclose any information about deferred tax assets and liabilities related to Pillar Two income taxes (paragraph 4A). This duty is absolute; it does not provide an opt in or a policy choice. The entity has no right to voluntarily recognise such deferred taxes, even if it believes doing so would provide useful information. The prohibition extends to disclosure, meaning notes cannot contain deferred tax amounts, not even to explain the impact of the exception.

Duty to disclose application of the exception. Paragraph 88A requires the entity to disclose that it has applied the exception. This is a compulsory disclosure that must appear in the notes.

Duty to disclose current tax expense (income) related to Pillar Two. Paragraph 88B applies in periods when Pillar Two legislation is in effect. The entity must separately disclose its current tax expense or income arising from Pillar Two income taxes. This is separate from other current tax disclosures under AASB 112.

Duty to disclose exposure before legislation effective. Paragraphs 88C and 88D impose a disclosure requirement in periods when Pillar Two legislation is enacted or substantively enacted but not yet in effect. The entity must disclose “known or reasonably estimable information” that helps users understand exposure. The duty is not absolute if information is not known or reasonably estimable; in that case, the entity must state that fact and disclose its progress in assessing exposure. This gives a limited right to avoid detailed quantification if it is not feasible, but the entity cannot simply remain silent.

Rights regarding form of disclosure. The entity has the right to provide information in the form of an indicative range rather than precise numbers, and the disclosure need not reflect all specific requirements of Pillar Two legislation.

Right to early adoption. The standard permits earlier application, meaning an entity can choose to apply it for annual periods before 1 January 2023 if it wishes, though the effective date is already backward looking (annual periods beginning on or after 1 January 2023).

Right to interim relief. Paragraph 98M(b) provides that an entity is not required to apply paragraphs 88B to 88D for any interim period ending on or before 31 December 2023. This is a practical reprieve for entities that may not have had time to gather the necessary data.

Duty to apply retrospectively. For paragraphs 4A and 88A, the entity must apply them immediately upon issue of the standard (22 June 2023) and retrospectively. This requires restating prior period comparatives and derecognising any previously recognised deferred tax amounts for Pillar Two income taxes.

AASB 2023-2 is a legislative instrument made under section 334 of the Corporations Act 2001. As such, it has the force of law for entities required to prepare financial reports in accordance with the Act. Section 296 of the Corporations Act requires financial reports to comply with accounting standards. Failure to comply means the financial report does not give a true and fair view and is defective. Directors and preparers face a range of enforcement consequences. The Australian Securities and Investments Commission (ASIC) can issue infringement notices, seek civil penalties, or pursue criminal prosecution for false or misleading statements in financial reports. For a listed entity, continuous disclosure obligations may also be triggered if Pillar Two exposures are material and not properly disclosed. The mandatory exception in paragraph 4A is absolute; recognising a deferred tax asset or liability for Pillar Two income taxes would be a direct breach of the standard. The disclosure requirements under paragraphs 88A to 88D are also enforceable. If an entity fails to state that it applied the exception, or fails to make required exposure disclosures, the financial report is non compliant. The standard itself does not prescribe monetary penalties; those arise under the Corporations Act and other legislation. Audit firms are required to report material non compliance to ASIC. The retrospective application requirement means prior period comparatives must also be restated; failure to restate would be a further breach. Because the standard is relatively new (commenced 29 June 2023), there have been no published enforcement actions specifically citing AASB 2023-2 as at the time of writing. However, ASIC has historically taken a keen interest in compliance with tax related accounting standards, particularly where deferred tax disclosures are concerned. The potential for penalty is real, and the cost of rectifying non compliant financial statements after lodgement is high. The mandatory exception also removes the ability for an entity to argue that voluntary recognition provided a better view; non compliance is strictly defined.

AASB 2023-2 amends AASB 112 Income Taxes and becomes part of that standard. The interaction with other accounting standards is direct. The mandatory exception overrides the general recognition and measurement requirements of AASB 112 for deferred tax assets and liabilities. It also overrides the disclosure requirements of AASB 112 to the extent they would otherwise require information about deferred taxes for Pillar Two income taxes. However, other disclosure requirements of AASB 112 (for example, on current tax, unrecognised deferred tax assets, and tax rate reconciliation) remain in full force for non Pillar Two amounts. The standard interacts with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors because it requires retrospective application of paragraphs 4A and 88A in accordance with AASB 108. That means an entity must adjust prior period comparative amounts and may need to provide additional disclosures under AASB 108 about the change in accounting policy. The interaction with the Corporations Act 2001 is through section 334 (making of the standard) and section 296 (requirement to comply). The standard also interacts with tax legislation, but only indirectly. It does not change the calculation or payment of Pillar Two taxes; those are determined by domestic and international tax laws. The accounting standard merely dictates how those taxes are reflected in financial statements. An entity must interpret “enacted or substantively enacted” in the context of each jurisdiction’s legislative process, which requires legal judgement beyond accounting expertise. The disclosure under paragraphs 88C and 88D is intended to be read alongside other disclosures about tax risks and uncertainties required by AASB 137 Provisions, Contingent Liabilities and Contingent Assets and AASB 101 Presentation of Financial Statements. However, the specific Pillar Two disclosure regime may partly overlap with, or be instead of, a provision or contingent liability disclosure, depending on the facts. The standard is also harmonised with IFRS as adopted in the European Union and other jurisdictions, which means Australian entities using IFRS as issued by the IASB will face the same requirements. For entities that apply Australian Accounting Standards but also report under US GAAP or other frameworks, the differences will need to be reconciled. The standard does not affect tax consolidation accounting under AASB 112 or the treatment of income taxes other than Pillar Two.

AASB 2023-2 is an amendment to AASB 112 Income Taxes (issued August 2015). It was made by the Australian Accounting Standards Board on 22 June 2023 and commenced as a legislative instrument on 29 June 2023. The standard inserts four new paragraphs (4A, 88A, 88B, 88C, 88D) and a related heading and examples into AASB 112, and adds a new effective date paragraph 98M. It does not repeal or modify any existing provisions of AASB 112 other than adding these paragraphs. The standard arises directly from the International Accounting Standards Board’s issuance of International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12) in May 2023. The AASB adopted the IASB’s amendments without modification. This is one of several recent amendments to AASB 112 responding to international tax developments; earlier amendments include AASB 2021 5 (deferred tax related to assets and liabilities arising from a single transaction) and AASB 2022 2 (deferred tax related to lease and decommissioning obligations). The standard is itself a “temporary” measure according to the preface, but no future amendment has been announced. The AASB has not issued any subsequent amending standard to AASB 2023-2 as of the source date. The standard applies retrospectively, meaning entities had to adjust their opening balances as if the exception had always been in force, even though the standard was issued in mid 2023. The application date (annual periods beginning on or after 1 January 2023 that end on or after 30 June 2023) is unusual because it was backdated to periods already commenced when the standard was made. The standard permitted earlier application, meaning some large multinationals may have voluntarily adopted it for earlier periods to align with parent company IFRS reporting. The effective date paragraph 98M distinguishes between the exception and the disclosure of the exception (applied immediately and retrospectively) and the other disclosures (applied from the annual periods specified). No other amendments have been made to AASB 112 by this standard, and the standard does not amend any other AASB standards.

The source text for AASB 2023-2 does not reference any litigation. The standard is an accounting standard, not a piece of tax legislation, and there have been no reported Australian court cases interpreting or challenging its provisions since its commencement on 29 June 2023. The amendments are technical in nature and were adopted directly from the IASB. At the international level, there has been no significant litigation regarding the equivalent IAS 12 amendments, largely because the IASB’s Basis for Conclusions (not reproduced in the source) notes the urgent need for the exception due to the complexity and potential diversity in accounting for Pillar Two deferred taxes. The absence of litigation in Australia is unsurprising given the standard’s short life and its mandatory, non controversial nature. The only potential source of dispute is the meaning of “substantively enacted” in relation to Pillar Two legislation. This term is used in AASB 112 generally and has been the subject of some interpretive guidance, but no specific case law on Pillar Two exists. The mandatory exception could theoretically be challenged if a reporting entity believed it should be permitted to recognise deferred tax assets (for example, because the exception removes relevant information from financial statements). However, any such challenge would have to overcome the fact that the standard is a legislative instrument made under the Corporations Act; the AASB has statutory authority to set accounting standards. A constitutional challenge would be unlikely to succeed. The disclosure requirements under paragraphs 88C and 88D have been drafted in a principles based manner, which may lead to disputes with auditors or regulators about what constitutes “known or reasonably estimable” and whether an indicative range is sufficient. However, no such disputes have been publicly reported. The retrospective application requirement could cause practical difficulties if an entity had previously issued financial statements that recognised deferred taxes for Pillar Two exposures and later must restate those figures, but that is an accounting adjustment, not litigation. In summary, the standard has generated no litigation history in Australia to date.

Retrospective restatement shock. Paragraph 98M(a) requires immediate retrospective application of the exception. Any entity that had previously recognised deferred tax assets or liabilities for Pillar Two exposures (for example, in a half year report ending 30 June 2023) must now derecognise those amounts and restate comparatives. This could throw off previously announced earnings, deferred tax balances, and effective tax rates. The restatement must be explained under AASB 108, which itself requires disclosure.

No deferred tax disclosure permitted. The prohibition in paragraph 4A goes beyond recognition. It says an entity shall “neither recognise nor disclose information about deferred tax assets and liabilities related to Pillar Two income taxes”. This means an entity cannot even provide a note explaining what the deferred tax position would have been. This is a complete blackout on deferred tax information for Pillar Two. Users lose insight into expected future tax cash flows from timing differences.

Substantively enacted standard. The disclosure trigger for paragraphs 88C and 88D depends on whether Pillar Two legislation is “enacted or substantively enacted” in each relevant jurisdiction. The concept of “substantively enacted” varies internationally. In Australia, it typically requires passage through both houses of Parliament and Royal Assent. In other countries, it may be triggered at different stages. This creates a judgement call that can significantly affect when disclosure is required. Misjudging this could lead to either premature disclosure (creating noise) or late disclosure (non compliance).

Interim period relief may confuse. Paragraph 98M(b) says disclosure under paragraphs 88B to 88D is not required for any interim period ending on or before 31 December 2023. However, the exception itself (paragraph 4A) and the disclosure of its application (paragraph 88A) applied immediately and retrospectively with no interim relief. An entity preparing a half year report to 31 December 2023 must still apply the exception and disclose that it has done so, but need not provide the exposure disclosures under 88C and 88D until the annual report. This creates a risk that users see a statement that the exception was applied but no information about exposure, potentially raising questions.

Indicative range may be too vague. The allowance to provide information as an “indicative range” (paragraph 88D) might tempt preparers to give very broad ranges that are not helpful, or to couch disclosures in vague qualitative terms. However, the objective is to “help users understand the entity’s exposure”. If a regulator or auditor believes the entity could have provided narrower ranges or more specific data without undue cost, they might require more. The standard does not define “reasonably estimable” and different entities may draw different lines, creating inconsistency.

Exception described as temporary but no sunset. The preface calls the exception “temporary”, but the standard itself sets no expiry date or review clause. This creates uncertainty about when deferred tax accounting will be reinstated. Entities must plan for potential future amendment, but have no timeline. The IASB has indicated it will review the exception after Pillar Two implementation, but that is not part of this standard.

Scope creep from QDMTT. Paragraph 4A applies to Pillar Two legislation including “qualified domestic minimum top-up taxes”. Some jurisdictions may introduce QDMTT that applies to domestic entities below the EUR 750 million threshold. Therefore, even purely domestic entities could be caught by the exception if they operate in a country that has enacted QDMTT. Preparers should not assume they are outside scope based on group size alone.

Compliance with AASB 2023-2 requires several concrete steps. First, an entity must immediately apply the mandatory exception in paragraph 4A. This means reviewing all deferred tax asset and liability balances as at the start of the earliest comparative period presented. If any of those balances relate to income taxes expected to arise from Pillar Two legislation (including QDMTT), those balances must be derecognised. The entity must restate its opening retained earnings and other affected line items as if the exception had always been in place. This restatement must be done in accordance with AASB 108, including disclosure of the nature and amount of the adjustment.

Second, the entity must disclose that it has applied the exception (paragraph 88A). This can be a simple statement, but must be explicit. It should appear in the notes to the financial statements under income taxes.

Third, for the current period and future periods when Pillar Two legislation is in effect, the entity must separately disclose its current tax expense (income) related to Pillar Two income taxes (paragraph 88B). This requires the entity to track actual tax payable or receivable under Pillar Two rules separately from other current tax amounts. Systems need to be set up to capture this data.

Fourth, for periods when Pillar Two legislation is enacted or substantively enacted but not yet in effect (for example, if a jurisdiction passes legislation effective from a future date), the entity must comply with paragraphs 88C and 88D. This involves a systematic assessment in each jurisdiction of operations. The entity should identify where legislation is at various stages and evaluate whether it can make a reasonable estimate of exposure. The entity should prepare qualitative disclosures (how it is affected, main jurisdictions) and quantitative disclosures (proportion of profits potentially subject, average effective tax rate, or a range). An indicative range is acceptable. If the entity lacks data, it must disclose that it cannot reasonably estimate and describe progress in assessing exposure. This process should be documented and reviewed regularly as new legislation is enacted.

Fifth, the entity must consider the interim relief period. For interim periods ending on or before 31 December 2023, paragraphs 88B to 88D need not be applied. However, the exception and the disclosure of its application must be applied in those interim reports. For subsequent interim periods, the full disclosure regime applies.

Sixth, the entity should update its accounting policy note to reflect the new standard. The policy should state that deferred taxes are not recognised for Pillar Two income taxes, and should reference paragraph 4A.

Seventh, the entity should engage tax specialists to monitor the global enactment of Pillar Two rules and to calculate indicative effective tax rates and profit allocations for disclosure purposes. This may require modelling that goes beyond existing tax provision processes.

Eighth, the entity should coordinate with auditors early to agree on the scope of “known or reasonably estimable” and the adequacy of the indicative ranges. Given the novelty of the standard, auditors may initially demand robust supporting evidence for any conclusion that information is not reasonably estimable.

Ninth, the entity must ensure that prior period comparatives are restated for the exception. This may affect previously reported financial performance and require reissuance of earlier financial statements if they were not prepared in compliance with the standard (though the standard was not in effect at those dates). The entity should consult with its auditor and possibly legal advisors about the implications for previously lodged financial reports.

Finally, the entity should remain alert to any future amendments that may remove the mandatory exception and reinstate deferred tax accounting for Pillar Two income taxes. When that happens, a further change in accounting policy will be required.