Financial reporting in the oil and gas industry - PwC

energy

Financial reporting

in the oil and gas

industry

International Financial

Reporting Standards

2nd edition

Foreword

One of the major challenges of any

reporting framework is how best

to implement it in the context of a

speci?c company or industry. IFRS is a

principles based framework and short

on industry guidance. PwC looks at

how IFRS is applied in practice by oil

and gas companies. This publication

identi?es the issues that are unique to

the oil and gas companies industry and

includes a number of real life examples

to demonstrate how companies are

responding to the various accounting

challenges along the value chain.

Of course, it is not just IFRS that

are constantly evolving but also the

operational issues faced by oil and gas

companies with the heavy demand for

capital and risks faced by the industry

driving more cooperative working

relationships. We look at some of main

developments in this context with a

selection of reporting topics that are

of most practical relevance to oil and

gas companies�� activities. The new

standards on joint arrangements,

consolidated ?nancial statements

and disclosure of interests in other

entities will be of particular interest

to companies in the oil and gas sector.

The debate about speci?c guidance for

exploration, evaluation, development

and production of oil and gas continues.

Foreword

International Financial Reporting

Standards (IFRS) provide the basis

for ?nancial reporting to the capital

markets in an increasing number of

countries around the world. Over 100

countries either use or are adopting

IFRS. Those companies already on IFRS

have their own challenges as the pace of

standard-setting from the International

Accounting Standards Board (IASB)

has been intense in recent years with a

constant ?ow of changes for companies

to keep up with.

This publication does not describe all

IFRSs applicable to oil and gas entities

but focuses on those areas that are of

most interest to companies in the sector.

The ever-changing landscape means

that management should conduct

further research and seek speci?c

advice before acting on any of the more

complex matters raised. PwC has a deep

level of insight into and commitment to

helping companies in the sector report

effectively. For more information or

assistance, please do not hesitate to

contact your local of?ce or one of our

specialist oil and gas partners.

Alan Page

Global Energy, Utilities and Mining Leader

September 2011

Financial reporting in the oil and gas industry

3

Contents

4

Introduction

11

1

Oil & gas value chain and signi?cant accounting issues

13

2

Upstream activities

15

2.1

Overview

16

2.2

Reserves and resources

16

2.2.1

What are reserves and resources?

16

2.2.2

Estimation

17

2.3

Exploration and evaluation

17

2.3.1

Successful efforts and full cost methods

17

2.3.2

Accounting for E&E under IFRS 6

18

2.3.3

Initial recognition of E&E under the IFRS 6 exemption

19

2.3.4

Initial recognition under the Framework

19

2.3.5

Subsequent measurement of E&E assets

21

2.3.6

Reclassi?cation out of E&E under IFRS 6

21

2.3.7

Impairment of E&E assets

21

2.3.8

Side tracks

21

2.3.9

Suspended wells

22

2.3.10 Post balance sheet events

22

2.4

Development expenditures

23

2.5

Borrowing costs

24

2.6

Revenue recognition in upstream

24

2.6.1

Overlift and underlift

24

2.6.2

Pre-production sales

28

2.6.3

Forward-selling contracts to ?nance development

28

2.6.4

Provisional pricing arrangements

28

2.6.5

Presentation of revenue

28

2.7

Asset swaps

30

2.8

Depletion, Depreciation & Amortisation (��DD&A��)

30

Financial reporting in the oil and gas industry

UoP basis

30

2.8.2

Change in the basis of reserves

30

2.8.3

Components

31

2.9

Disclosure of reserves and resources

32

2.9.1

Overview

32

2.9.2

Disclosure of E&E and production expenditure

33

2.9.3

SEC rules on disclosure of resources and modernisation of requirements

33

3

Midstream and downstream activities

35

3.1

Overview

36

3.2

Inventory valuation

36

3.2.1

Producers�� inventories

36

3.2.2

Broker-dealer inventories

36

3.2.3

Line ?ll and cushion gas

36

3.2.4

Net Realisable Value (��NRV��) of oil inventories

37

3.2.5

Spare part inventories

38

3.3

Revenue recognition in midstream and downstream

38

3.3.1

Product exchanges

38

3.3.2

Cost and Freight vs Free On Board

39

3.3.3

Oil?eld services

39

3.4

Emissions trading schemes

39

3.4.1

Accounting for ETS

40

3.4.2

Certi?ed Emissions Reductions (��CER��s)

41

3.5

Depreciation of downstream assets

41

3.5.1

Cost of turnaround/overhaul

42

4

Sector-wide accounting issues

43

4.1

Business combinations

44

4.1.1

Overview

44

4.1.2

De?nition of a business

44

Financial reporting in the oil and gas industry

Contents

2.8.1

5

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