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Financial reporting in the oil and gas industry 1
Foreword
The move to International Financial Reporting This edition of ‘Financial reporting in the oil & gas
Foreword
Standards (IFRS) is advancing the transparency industry’ describes the financial reporting
and comparability of financial statements around implications of IFRS across a number of areas
the world. Many countries now require selected for their particular relevance to oil & gas
companies to prepare their financial statements companies. It provides insights into how
in accordance with IFRS. National standards in companies are responding to the various
other countries are being converged with IFRS. challenges and includes examples of accounting
The global trend towards IFRS has gained policies and other disclosures from published
significant further momentum with the US financial statements. It examines key
Securities and Exchange Commission’s (SEC) developments in the evolution of IFRS in the
commitment to the standards, beginning with its industry. The International Accounting Standards
decision to drop the requirement for foreign- Board (IASB), for example, has formed an
listed companies in the US to reconcile to US Extractive Activities working group. However,
GAAP. formal guidance on many issues facing
companies is unlikely to be available for some
The development of IFRS offers considerable
years. Another key development, of course, is
long-term advantages for global companies but,
convergence with US GAAP and the implications
along the way, it brings considerable challenges.
of the latest signals from the SEC for the oil &
The oil & gas industry is one of the world’s most
gas industry.
global industries, characterised by the need for
big upfront investment, often with great This publication does not describe all IFRSs
uncertainty about outcomes over a long-term applicable to oil & gas entities. The ever-changing
time horizon. Its geopolitical, environmental, landscape means that management should
energy and natural resource supply and trading conduct further research and seek specific
challenges, combined with often complex advice before acting on any of the more complex
stakeholder and business relationships, has matters raised. PricewaterhouseCoopers has a
meant that the transition to IFRS has required deep level of insight into and commitment to
some complex judgements about how to helping companies in the sector report
implement the new standards. effectively. For more information or assistance,
please do not hesitate to contact your local office
or one of our specialist oil & gas partners.
Richard Paterson
Global Energy, Utilities and Mining Leader
Contents
Introduction 5
Contents
IAS 27, Consolidated and separate financial statements (revised) 36
4.4 Impairment 54
Contact us 62
Financial reporting in the oil and gas industry 5
Introduction
What is the focus of this publication? The oil and gas industry has not only
Introduction
experienced the transition to IFRS, it has also
This publication considers the major accounting seen:
practices adopted by the oil and gas industry • significant growth in corporate acquisition
under International Financial Reporting Standards activity;
(IFRS).
• increased globalisation;
The need for this publication has arisen due to:
• continued increase in its exposure to
• the absence of an extractive industries sophisticated financial instruments and
standard under IFRS; transactions; and
• the adoption of IFRS by oil and gas entities • an increased focus on environmental and
across a number of jurisdictions, with restoration liabilities.
overwhelming acceptance that applying IFRS
in this industry will be a continual challenge; This publication has a number of chapters
and designed to cover the main issues raised.
Company-wide Issues:
• Production sharing agreements and concessions
• Joint ventures
• Business combinations
• Functional currency
Financial reporting in the oil and gas industry 9
1.1 Exploration & development individual fields, are capitalised. Cost centres
Initial recognition of E&E under the IFRS 6 only when facts and circumstances suggest that
exemption an impairment exists. Indicators of impairment
include, but are not limited to:
The exemption in IFRS 6 allows an entity to
continue to apply the same accounting policy to • Rights to explore in an area have expired or
exploration and evaluation expenditures as it did will expire in the near future without renewal.
before the application of IFRS 6. The costs
• No further exploration or evaluation is planned
capitalised under this policy might not meet the
or budgeted.
IFRS Framework definition of an asset, as the
probability of future economic benefits has not • The decision to discontinue exploration and
yet been demonstrated. IFRS 6 therefore deems evaluation in an area because of the absence
these costs to be assets. E&E expenditures of commercial reserves.
might therefore be capitalised earlier than would
• Sufficient data exists to indicate that the book
otherwise be the case under the Framework.
value will not be fully recovered from future
development and production.
Initial recognition of E&E under the Framework
The affected E&E assets should be tested for
Expenditures incurred in exploration activities
impairment once indicators have been identified.
should be expensed unless they meet the
IFRS also introduces a notion of larger cash
definition of an asset. An entity recognises an
generating units (CGUs) for E&E assets. Entities
asset when it is probable that economic benefits
are allowed to group E&E assets with producing
will flow to the entity as a result of the
assets, as long as the accounting policy is clear
expenditure. The economic benefits might be
as to the grouping and such policy is applied
available through commercial exploitation of
consistently. The only limit is that each CGU
hydrocarbon reserves or sales of exploration or
or group of CGUs cannot be larger than the
further development rights. It is difficult for an
segment. The grouping of E&E assets with
entity to demonstrate at that stage that the
producing assets might therefore enable an
recovery of exploration expenditure is probable.
impairment to be avoided.
As a result, exploration expenditure has to be
expensed. Virtually all entities transitioning to Once the decision on commercial viability has
IFRS have chosen to use the IFRS 6 shelter been established, E&E assets are reclassified out
rather than develop a policy under the of the E&E category. They are tested for
Framework. impairment under the IFRS 6 policy adopted by
the entity prior to reclassification. However, once
Reclassification out of E&E under IFRS 6 assets have been reclassified out of E&E the
normal impairment testing guidelines of IAS 36
IFRS 6 requires that E&E assets are reclassified
Impairment apply. Successful E&E will be
when evaluation procedures have been
reclassified to development. Unsuccessful E&E
completed. E&E assets for which commercially-
must be written down to fair value less costs to
viable reserves have been identified are
sell, because the shelter afforded by grouping
reclassified to development assets. E&E assets
these assets with producing assets in a larger
are tested for impairment immediately prior to
CGU shelter is no longer available.
reclassification out of E&E. The impairment
testing requirements are described below. Assets reclassified out of E&E are subject to the
normal IFRS requirements of impairment testing
Impairment of E&E assets at the CGU level and depreciation on a
component basis. Impairment testing and
IFRS 6 introduces an alternative impairment-
depreciation on a pool basis is not acceptable.
testing regime for E&E that differs from the
general requirements for impairment testing.
An entity assesses E&E assets for impairment
Financial reporting in the oil and gas industry 11
contract would double count the effects of the Entities should consider presenting reserve
contract. Impairment of financial instruments quantities and changes on a reasonably
that are within the scope of IAS 39 Financial aggregate basis. Where certain reserves are
Instruments: Recognition and Measurement is subject to particular risks, those risks should
addressed by IAS 39 and not IAS 36. be identified and communicated. Reserve
disclosures accompanying the financial
The cash flow effects of hedging instruments
statements should be consistent with those
such as caps and collars for commodity
reserves used for financial statement purposes.
purchases and sales are also excluded from the
For example, proven and probable reserves or
VIU cash flows. These contracts are also
proved developed and undeveloped reserves
accounted for in accordance with IAS 39.
might be used for depreciation, depletion and
amortisation calculations.
1.2.5 Disclosure of resources
The categories of reserves used and their
A key indicator for evaluating the performance of
definitions should be clearly described. Reporting
oil and gas entities are their existing reserves and
a ‘value’ for reserves and a common means of
the future production and cash flows expected
measuring that value have long been debated,
from them. Some national accounting standards
and there is no consensus among national
and securities regulators require supplemental
standard-setters permitting or requiring value
disclosure of reserve information, most notably
disclosure. There is, at present, no globally
the Statement on Financial Accounting Standards
agreed method to ‘value’ disclosures. However,
(FAS) 69 and Securities and Exchange
there are globally accepted engineering
Commission (SEC) regulations. There are also
definitions of reserves that take into account
recommendations on accounting practices
economic factors. These definitions may be a
issued by industry bodies – Statements of
useful benchmark for disclosing future cash flow
Recommended Practice (SORPs) – which cover
information about reserves for investors and
Accounting for Oil and Gas Exploration,
other users of financial statements to evaluate.
Development, Production and Decommissioning
Activities. However, there are no reserve The disclosure of key assumptions concerning
disclosure requirements under IFRS. the future, and other key sources of estimation
uncertainty at the balance sheet date, is required
IAS 1 Presentation of Financial Statements
by IAS 1. Given that the reserves and resources
requires that an entity’s financial statements
have a pervasive impact, this normally results in
should provide additional information that is not
entities providing disclosure about hydrocarbon
presented on the face of the financial statements
resource and reserve estimates, for example:
but which is necessary for a fair presentation.
IAS 1 allows an entity to consider the • hydrocarbon resource and reserve estimates:
pronouncements of other standard-setting • methodology used; and
bodies and accepted industry practices in the • key assumptions;
absence of specific IFRS guidance when
• the sensitivity of carrying amounts of assets
developing accounting policies. Many entities
and liabilities to the hydrocarbon resource and
provide supplemental information with the
reserve estimates used;
financial statements because of the unique
nature of the oil and gas industry and the clear • the range of reasonably possible outcomes
desire of investors and other users of the within the next financial year in respect of the
financial statements to receive information about carrying amounts of the assets and liabilities
reserves. The information is usually supplemental affected; and
to the financial statements, and is not covered by
• an explanation of changes made to past
the independent auditor’s opinion.
hydrocarbon resource and reserve estimates,
Information about quantities of oil and gas including changes to underlying key
reserves and changes therein is essential for assumptions.
users to understand and compare oil and gas
Other information – for example, potential future
companies’ financial position and performance.
costs to be incurred to acquire, develop and
Financial reporting in the oil and gas industry 17
produce reserves – may help users of financial The cost of the provision is recognised as part of
The accretion of the discount on a (b) the entity has a practice of settling similar
decommissioning liability is recognised as part of contracts net, whether:
finance expense in the income statement. • with the counterparty;
• by entering into offsetting contracts; or
1.2.7 Financial instruments and embedded • by selling the contract before its exercise or
derivatives lapse;
The accounting for financial instruments can (c) the entity has a practice, for similar items, of
have a major impact on an oil & gas entity’s taking delivery of the underlying and selling it
financial statements. Many use a range of within a short period after delivery for the
derivatives to manage the commodity, currency purpose of generating a profit from short-
and interest-rate risks to which they are term fluctuations in price or dealer’s margin;
operationally exposed. Other, less obvious, or
sources of financial instruments issues arise (d) the commodity that is the subject of the
through both the scope of IAS 39 and the rules contract is readily convertible to cash.
around accounting for embedded derivatives.
Many entities that are solely engaged in Application of ‘own-use’
producing, refining and selling commodities, may
be party to commercial contracts that are either Own-use applies to those contracts that were
wholly within the scope of IAS 39 or contain entered into and continue to be held for the
embedded derivatives from pricing formulas or purpose of the receipt or delivery of a non-
currency. financial item. The practice of settling similar
contracts net prevents an entire category of
Scope of IAS 39 contracts from qualifying for the own-use
treatment (ie, all similar contracts must then be
Contracts to buy or sell a non-financial item, recognised as derivatives at fair value).
such as a commodity, that can be settled net in
cash or another financial instrument, or by A contract that falls into category (b) or (c) above
exchanging financial instruments, are within the cannot qualify for own-use treatment. These
scope of IAS 39. They are treated as derivatives contracts must be accounted for as derivatives
and are marked to market through the income at fair value. Contracts subject to the criteria
statement. Contracts that are for an entity’s described in (a) or (d) above are evaluated to see
‘own-use’ are exempt from the requirements of if they qualify for own-use treatment.
IAS 39 but these ‘own-use’ contracts may include Many contracts for commodities such as oil and
embedded derivatives that may be required to be gas meet criterion (d) above (ie, readily
separately accounted for. An ‘own-use’ contract convertible to cash) when there is an active
is one that was entered into and continues to be market for the commodity. An active market
held for the purpose of the receipt or delivery of exists when prices are publicly available on a
the non-financial item in accordance with the regular basis and those prices represent regularly
entity’s expected purchase, sale or usage occurring arm’s length transactions between
requirements. In other words, it will result in willing buyers and willing sellers. Consequently,
physical delivery of the commodity. The ‘net sale and purchase contracts for commodities in
settlement’ notion in IAS 39 is quite broad. locations where an active market exists must be
A contract to buy or sell a non-financial item can accounted for at fair value unless own-use
be net settled in any of the following ways: treatment can be evidenced. An entity’s policies,
(a) the terms of the contract permit either procedures and internal controls are therefore
party to settle it net in cash or another critical in determining the appropriate treatment
financial instrument; of its commodity contracts.
Own-use is not an election. A contract that meets
the own-use criteria cannot be selectively fair
valued unless it otherwise falls into the scope of
IAS 39. If an own-use contract contains one or
Financial reporting in the oil and gas industry 19
more embedded derivatives, an entity may (b) is consistent with accepted economic
contracts include a volume component, and oil that may have to be separated and accounted
and gas entities are likely to recognise the for under IAS 39 as a derivative. Examples are
deferred gain/loss and release it to profit or loss gas prices that are linked to the price of oil or
on a systematic basis as the volumes are other products, or a pricing formula that includes
delivered, or as observable market prices an inflation component.
become available for the remaining delivery
An embedded derivative is a derivative
period. The recognition of the day-one
instrument that is combined with a non-derivative
gain/losses may change as the result of the IASB
host contract (the ‘host’ contract) to form a single
project on Fair Value Measurements.
hybrid instrument. An embedded derivative
causes some or all of the cash flows of the host
Volume flexibility (optionality)
contract to be modified, based on a specified
Long-term commodity contracts frequently offer variable. An embedded derivative can arise
the counterparty flexibility in relation to the through market practices or common contracting
quantity of the commodity to be delivered under arrangements.
the contract. A supplier that gives a purchaser
An embedded derivative is separated from the
volume flexibility may have created a written
host contract and accounted for as a derivative
option. This will often prevent the supplier from
if:
claiming the own-use exemption. A written
option cannot be entered into for the purpose of (a) the economic characteristics and risks of the
the receipt or delivery of a non-financial item in embedded derivative are not closely related to
accordance with the entity’s expected purchase, the economic characteristics and risks of the
sale or usage requirements. A contract host contract;
containing a written option must be accounted
(b) a separate instrument with the same terms as
for in accordance with IAS 39 if it can be settled
the embedded derivative would meet the
net in cash, eg, when the item that is subject of
definition of a derivative; and
the contract is readily convertible into cash.
(c) the hybrid (combined) instrument is not
Contracts may include volume flexibility but not
measured at fair value with changes in fair
contain a written option if the purchaser did not
value recognised in the profit or loss (ie, a
pay a premium for the optionality. Receipt of a
derivative that is embedded in a financial
premium to compensate the supplier for the risk
asset or financial liability at fair value through
that the purchaser may not take the optional
profit or loss is not separated).
quantities specified in the contract is one of
the distinguishing features of a written option. Embedded derivatives that are not closely related
The premium might be explicit in the contract or must be separated from the host contract and
implicit in the pricing. It is necessary to consider accounted for at fair value, with changes in fair
whether a net premium is received either at value recognised in the income statement. It may
inception or over the contract’s life in order to not be possible to measure the embedded
determine the accounting treatment. If no derivative. Therefore, the entire combined
premium can be identified, other terms of the contract must be measured at fair value, with
contract may need to be examined to determine changes in fair value recognised in the income
whether it contains a written option; in particular, statement.
whether the buyer is able to secure economic
An embedded derivative that is required to be
value from the option’s presence.
separated may be designated as a hedging
instrument, in which case the hedge accounting
Embedded derivatives
rules are applied.
Long-term commodity purchase and sale
A contract that contains one or more
contracts frequently contain a pricing clause (ie,
embedded derivatives can be designated as a
indexation) based on a commodity other than
contract at fair value through profit or loss at
the commodity deliverable under the contract.
inception, unless:
Such contracts contain embedded derivatives
Financial reporting in the oil and gas industry 21
(a) the embedded derivative(s) does not expected future cash flows associated with the
Overlift and underlift are in effect a sale of oil at sometimes there are variations in the quality of
the point of lifting by the underlifter to the the product, sometimes different products are
overlifter. The criteria for revenue recognition in exchanged. Balancing payments are made to
IAS 18 Revenue paragraph 14 are considered to reflect differences in the values of the products
have been met. Overlift is therefore treated as a exchanged where appropriate.
purchase of oil by the overlifter from the
The nature of the exchange will determine if it is
underlifter.
a like-for-like exchange or an exchange of
The sale of oil by the underlifter to the overlifter dissimilar goods. A like-for-like exchange doesn’t
should be recognised at the market price of oil at give rise to revenue recognition or gains, but an
the date of lifting. Similarly the overlifter should exchange of dissimilar goods is accounted for
reflect the purchase of oil at the same value. gross, giving rise to revenue recognition and
gains or losses.
The extent of underlift by a partner is reflected as
an asset in the balance sheet and the extent of The exchange of crude oil, even where the
overlift is reflected as a liability. An underlift asset qualities of the crude differ, is usually treated as
is the right to receive additional oil from future an exchange of similar products and accounted
production without the obligation to fund the for at book value. Any balancing payment made
production of that additional oil. An overlift or received to reflect minor differences in quality
liability is the obligation to deliver oil out of the or location should be adjusted against the
entity’s equity share of future production. carrying value of the inventory. There may,
however, be unusual circumstances where the
The initial measurement of the overlift liability and
facts of the exchange suggest that there are
underlift asset is at the market price of oil at the
significant differences between the crude oil
date of lifting, consistent with the measurement
exchanged. The transaction should be accounted
of the sale and purchase. Subsequent
for as a sale of one product and the purchase of
measurement depends on the terms of the JV
the other at fair values in these circumstances.
agreement. JV agreements that allow the net
A significant cash element in the transaction is an
settlement of overlift and underlift balances in
indicator that the transaction may be a sale and
cash will fall within the scope of IAS 39 unless
purchase of dissimilar products.
the own-use exemption applies.
Overlift and underlift balances that fall within 1.2.9 Royalty and income taxes
the scope of IAS 39 must be remeasured to the
Petroleum taxes generally fall into two categories
current market price of oil at the balance sheet
– those that are calculated on profits earned
date. The change arising from this
(income taxes) and those calculated on
remeasurement is included in the income
production or sales (royalty or excise taxes). The
statement as other income/expense rather than
categorisation is crucial: royalty and excise taxes
revenue or cost of sales.
do not form part of revenue, while income taxes
Overlift and underlift balances that do not fall usually require deferred tax accounting but form
within the scope of IAS 39 should be measured part of revenue.
at the lower of carrying amount and current
market value. Any remeasurement should be Petroleum taxes – royalty and excise
included in other income/expense rather than
Petroleum taxes that are calculated by applying a
revenue or cost of sales.
tax rate to a measure of revenue or volume do
not fall within the scope of IAS 12 Income Taxes
Exchanges
and are not income taxes. They do not form part
Energy companies exchange crude or refined oil of revenue or give rise to deferred tax liabilities.
products with other energy companies to achieve Revenue-based and volume-based taxes are
operational objectives. This is often done to save recognised when the production occurs or
on transportation costs by exchanging a quantity revenue arises. These taxes are most often
of product A in location X for a quantity of described as royalty or excise taxes. They are
product A in location Y. Variations on this arise – measured in accordance with the relevant tax
Financial reporting in the oil and gas industry 23
legislation and a liability is recorded for amounts regional basis. An IFRS balance sheet and a tax
of cash for income taxes, royalty and excise and does not gross up revenue for the tax paid
taxes and amounts due under licences, on its behalf by the government entity. If the
production sharing contracts and the like. upstream company retains an obligation for the
income tax, it would follow the accounting
The accounting for the tax charge and the
described above under Tax paid in cash or in kind.
settlement through oil should reflect the
substance of the arrangement. Determining the
1.2.10 Emission trading schemes
accounting is straightforward if it is an income
tax (see definition above) and is calculated in The ratification of the Kyoto Protocol by the EU
monetary terms. The volume of oil used to settle required total emissions of greenhouse gases
the liability is then determined by reference to the within the EU member states to fall to 92% of
market price of oil. The entity has in effect ‘sold’ their 1990 levels in the period between 2008 and
the oil and used the proceeds to settle its tax 2012. The introduction of the EU Emissions
liability. These amounts are appropriately Trading Scheme (EU ETS) on 1 January 2005
included in gross revenue and tax expense. represents a significant EU policy response to the
challenge. Under the scheme, EU member states
Arrangements where the liability is calculated by
have set limits on carbon dioxide emissions from
reference to the volume of oil produced without
energy intensive companies. The scheme works
reference to market prices can make it more
on a ‘cap’ and ‘trade’ basis and each member
difficult to identify the appropriate accounting.
state of the EU is required to set an emissions
These are most often a royalty or volume-based
cap covering all installations covered by the
tax. The accounting should reflect the substance
scheme.
of the agreement with the government. Some
arrangements will be a royalty fee, some will The EU cap and trade scheme is expected to
be a traditional profit tax, some will be an serve as a model for other governments seeking
appropriation of profits and some will be a to reduce emissions.
combination of these and more. The agreement
There are also several non-Kyoto carbon markets
or legislation under which oil is delivered to a
in existence. These include the New South Wales
government must be reviewed to determine the
Greenhouse Gas Abatement Scheme, the
substance and hence the appropriate accounting.
Regional Greenhouse Gas Initiative and Western
Different agreements with the same government
Climate Initiative in the United States and the
must each be reviewed as the substance of the
Chicago Climate Exchange in North America.
arrangement, and hence the accounting may
differ from one to another.
Accounting for ETS
Tax ‘paid on behalf’ (POB) The emission rights permit an entity to emit
pollutants up to a specified level. The emission
POB arrangements are varied, but generally arise
rights are either given or sold by the government
when a government entity will pay the income
to the emitter for a defined compliance period.
tax due by a foreign upstream entity to the
government on behalf of the foreign upstream Schemes in which the emission rights are
entity. This occurs where the upstream entity is tradable allow an entity to:
the operator of fields under a PSA and the
• emit fewer pollutants than it has allowances for
government entity is usually the national oil
and sell the excess allowances;
company that holds the government’s interest in
the PSA. The crucial issue in accounting for tax • emit pollutants to the level that it holds
POB arrangements are if they are akin to a tax allowances for; or
holiday or if the upstream entity retains an
• emit pollutants above the level that it holds
obligation for the income tax.
allowances for and either purchase additional
POB arrangements that represent a tax holiday allowances or pay a fine.
such that the upstream company has no legal tax
obligation are accounted for as a tax holiday.
The upstream company presents no tax expense
Financial reporting in the oil and gas industry 25
IFRIC 3 Emission Rights was published in A provision is recognised for the obligation to
significant a new field is expected to be, the PSA rather than the risks of the exploration and
more likely that the relevant government will the reserves, it can continue to capitalise E&E
write specific legislation or regulations for it. and development costs, but fixed assets are not
Each must be evaluated and accounted for in capitalised as such. The entity instead may have
accordance with the substance of the a receivable from the government where it is
arrangement. The entity’s previous experience allowed to retain oil extracted to the extent of
of dealing with the relevant government will also costs incurred plus a profit margin. The accounting
be important, as it is not uncommon for applied in these circumstances is therefore in
governments to force changes in PSAs or accordance with IAS 39 rather than IAS 16.
concessions based on changes in market
All assets recognised are then accounted for
conditions or environmental factors. An agreement
under the usual policies of the entity for
may contain a right of renewal with no significant
subsequent measurement, depreciation,
incremental cost. The government may have a
amortisation, impairment testing and de-
policy or practice with regard to renewal. These
recognition. Assets should be fully depreciated or
should be assessed when estimating the
amortised on a units of production basis by the
expected life of the agreement.
date that control passes back to the government
or the concession ends. A PSA is almost always
Exploration, development and production
a separate CGU for impairment testing purposes
assets in PSAs
once in production.
The legal form of the PSA or concession should
not impact on the recognition of exploration and Revenue and costs of PSAs and concessions
evaluation (E&E) assets or production assets.
The entity should record only its share of oil
Costs that meet the criteria of IFRS 6, IAS 38 or
under a PSA as revenue. Oil extracted on behalf
IAS 16 should be recognised in accordance with
of a government is not revenue or a production
the usual criteria where the entity is exposed to
cost. The entity acts as the government’s agent
the majority of the economic risks and has
to extract and deliver the oil or sell the oil and
access to the probable future economic benefits
remit the proceeds. Many PSAs specify that
of the assets. The period of the PSA or
income taxes owed by the entity are paid in
concession should be longer than the expected
delivered oil rather than cash. ‘Tax oil’ is recorded
useful life of the majority of the constructed
as revenue and as a reduction of the current tax
assets. The probable hydrocarbon resources and
liability to reflect the substance of the
current prices should provide evidence that E&E,
arrangement where the entity delivers oil to the
development and fixed asset investment will be
value of its current tax liability. Any volume-based
recovered during the concession period. Assets
tax is accounted for as royalty or excise tax
are appropriately recorded on the balance sheet
within operating results.
of the entity beyond the E&E phase, if both
conditions are present. Assets subject to depreciation, depletion or
amortisation should be expensed in a manner
A PSA that is shorter than the expected useful
that reflects the consumption of their economic
life of the related production assets or is a cost
benefits. The units of production basis is usually
plus arrangement can represent an arrangement
the appropriate method.
whereby the government compensates the entity
for exploration activities and the development
1.3.2 Joint ventures
and construction of fixed assets. The entity
should assess the arrangement to determine to Joint ventures and other similar arrangements
what extent it is bearing the risks associated with are frequently used by oil & gas companies as a
the exploration, the reserves, etc, and to what way to share the high risks associated with the
extent it is instead bearing the risks of industry or as a way of bringing in specialist
contractual performance under the contract. skills to a particular project on an equity basis.
Under arrangements where the entity is largely The legal basis for a joint venture or the
bearing the risks of its performance under the description of it may take various forms;
establishing a joint venture might be achieved
Financial reporting in the oil and gas industry 27
through a formal joint venture contract, or controlled entity is usually, but not necessarily,
entities. A key practical issue will sometimes be arise when a super majority, for example an 80%
ensuring that the results of the joint venture are majority, is required but where the threshold can
incorporated by the venturer on the same basis be achieved with a variety of combinations of
as the venturer’s own results – ie, using the same shareholders and no venturers are able to
GAAP (IFRS) and the same accounting policy individually veto the decisions of others.
choices. The growing use of IFRS is helping Accounting for these arrangements will depend
reduce the adjustments required but doesn’t on the way they are structured and the rights that
eliminate them. each venturer has.
Companies should be aware, however, that the When the arrangement is organised in an entity,
IASB is proposing to eliminate the choice of each investor will account for its investment
proportionate consolidation in certain either using equity accounting in accordance with
circumstances. Further details are included in IAS 28 Investments in Associates (if it has
section 2. significant influence) or at fair value as a financial
asset in accordance with IAS 39. When the
Contributions to joint ventures investors have an undivided interest in the
tangible or intangible assets, they will typically
It is common for venturers to contribute assets to
have a right to use a share of the operative
a joint venture when it is created. This may be in
capacity of that asset. An example is when a
the form of cash or a non-monetary asset.
number of investors have invested in an oil
Contributions of assets are a part disposal by the
pipeline and an investor with, say, a 20% interest
contributing party, in return receiving a share of
has the right to use 20% of the capacity of the
the assets contributed by the other venturers.
pipeline. Industry practice is for an investor to
Accordingly the contributor should recognise a
recognise its undivided interest at cost less
gain/loss on the part disposal measured as the
accumulated depreciation and any impairment
difference between its share of the fair value of
charges.
the assets contributed by the other venturers and
the other venturers’ share of the book value of An undivided interest in an asset is normally
the asset it contributed. accompanied by a requirement to incur a
proportionate share of the asset’s operating and
The venturer recognises its share of an asset
maintenance costs. These costs should be
contributed by other venturers at its share of
recognised as expenses in the income statement
the fair value of the asset contributed. This is
when incurred and classified in the same way as
classified in the balance sheet according to
equivalent costs for wholly-owned assets.
the nature of the asset in the case of jointly
controlled assets or when proportionate
Accounting within the joint venture
consolidation is applied to a jointly controlled
entity. The equivalent measurement basis is The preceding paragraphs describe the
achieved when equity accounting is applied; accounting by the investor in a joint venture.
however, the interest in the asset forms part of The joint venture itself will normally prepare its
the equity accounted investment balance. own financial statements for reporting to the joint
venture partners, for tax compliance or for other
The same principles apply when one of the other
reasons. It is increasingly common for these
venturers contributes a business to a joint
financial statements to be prepared in
venture; however, in this case one of the assets
accordance with IFRS. Joint ventures are
recognised will be goodwill, calculated in the
typically created by the venturers contributing
same way as in a business combination.
assets and businesses to the joint venture in
exchange for their equity interest in the JV.
Investments with less than joint control
Assets received by a joint venture in exchange
Some co-operative arrangements may appear to for issuing shares to a venturer is a transaction
be joint ventures but fail on the basis that within the scope of IFRS 2 Share-based
unanimous agreement between venturers is not Payment. Such assets are therefore recognised
required for key strategic decisions. This may at fair value. However, the accounting for the
Financial reporting in the oil and gas industry 29
value of net assets gives rise to positive or Exchange differences can arise for two reasons:
negative goodwill. This residual approach to the when a transaction is undertaken in a currency
calculation of goodwill required by IFRS 3 is likely other than the entity’s functional currency; or
to result in the goodwill in upstream business when the presentation currency differs from the
combinations. Any goodwill is likely to represent functional currency.
the value paid for assets that do not qualify for
separate recognition on the balance sheet (such Determining the functional currency
as an assembled workforce), synergies paid for
Identifying the functional currency for an oil and
by the acquirer and, occasionally, overpayments.
gas entity can be complex because there are
However, IFRS 3 requires certain assets and often significant cash flows in both the US dollar
liabilities acquired in a business combination to and local currency.
be recognised on a basis other than fair value.
Determining the functional currency,
Examples include pension liabilities and deferred
management should take into account primarily
tax. Deferred tax is calculated after the fair values
the currency that dominates the determination of
of the other identifiable assets and liabilities have
the sales prices and that most influences
been determined by comparing the fair value
operating costs.
recognised for accounting purposes with the tax
base of each asset and liability. Consequently, The currency in which selling prices are
the mechanics of the deferred tax calculation and denominated and settled is often the currency
the goodwill calculation might result in goodwill that mainly dominates the determination of sales
being recognised solely as a result of the prices, but this is not necessarily the case.
recognition of the deferred tax. That is, goodwill Many sales within the oil and gas industry are
might be recognised when there is no expectation conducted either in, or with reference to, the US
of goodwill because there are no unrecognised dollar. However, the US dollar may not always
assets, no synergies and no overpayments. be the main influence on these transactions.
This anomaly will persist until the IASB revises For many of the commodities sold by oil and gas
the deferred tax standard, expected in 2009. entities, it is difficult to identify a single country
whose competitive forces and regulations mainly
1.3.4 Functional currency determine the selling prices.
Oil and gas entities commonly undertake If the primary indicators do not provide an
transactions in more than one currency, as obvious answer to what the functional currency
commodity prices are often denominated in US is, the currency in which an entity’s finances are
dollars and costs are typically denominated in denominated should be considered ie, the
the local currency. Determination of the functional currency in which funds from financing activities
currency can require significant analysis and are generated and the currency in which receipts
judgement. from operating activities are retained.
An entity’s functional currency is the currency of A typical oil and gas entity in the production
the primary economic environment in which it stage receives its revenue predominantly in US
operates. This is the currency in which the entity dollars with most of its costs denominated in the
measures its results and financial position. local currency and only some in US dollars.
An entity’s presentation currency is the currency Management may conclude that the US dollar is
in which it presents its accounts. Reporting the functional currency, as the majority of the
entities may select any presentation currency cash flows are denominated and settled in the
(subject to the restrictions imposed by local US dollar.
regulations or shareholder agreements).
Oil and gas entities at different stages of
However, the functional currency must reflect the
operation may reach a different view about their
substance of the entity’s underlying transactions,
functional currency. Functional currency is not a
events and conditions; it is unaffected by the
free choice, and an entity’s functional currency
choice of presentation currency.
does not change unless there are changes in its
operations and transaction flows.
Financial reporting in the oil and gas industry 31
2.1 Extractive activities research The changes to the standard were made as part
of the IASB’s and FASB’s short-term
project convergence project. The elimination of the
The extractive activities project at the IASB is a option to expense borrowing costs does not
comprehensive research project and the first step achieve full convergence with US GAAP, as some
towards a standard focused on upstream technical differences remain (for example,
extractive activities. Any new standard is definitions of borrowing costs and qualifying
expected to supersede IFRS 6 Exploration for assets).
and Evaluation of Mineral Resources.
The effective date of IAS 23R is 1 January 2009,
The project was approved in 2004 and is with earlier adoption permitted. The amendments
considering the unique issues associated with are to be applied prospectively; comparatives will
accounting for upstream activities. This involves not need to be restated. The Board has provided
researching: additional relief by allowing management to
designate a particular date on which it can start
• financial reporting issues associated with oil &
applying the amendments. For example,
gas reserves and resources (including the
management can decide to designate 1 October
exploration for reserves and resources) – in
2008 as a starting date, because the company
particular whether and how to define,
starts a project for which management would like
recognise, measure and disclose reserves and
to capitalise interest when it applies IAS 23R in
resources; and
2009.
• considering other issues related to extractive
activity accounting as identified in the IASC’s 2.3 Emissions Trading Schemes
Extractive Industries Issues Paper.
The IASB added the emissions trading topic to
A Discussion Paper is due in late 2008. Despite its agenda after the withdrawal of IFRIC 3
the scope of the project including ‘other issues’ Emission Rights in 2005. The project was
and referring to the previous Issues Paper, it is temporarily deferred (due to deferral of the
expected to focus almost exclusively on the project relating to government grants) and again
reserves and resources recognition questions. activated in December 2007 with the increasing
The Issues Paper spanned a wide range of international interest in emission trading schemes
issues relevant to the industry including and the diversity in practice that has arisen. The
decommissioning and restoration, revenue Board decided to limit the scope of the project to
recognition, joint ventures and impairment. The the issues that arise in accounting for emissions
IASB’s discussions to date have raised the trading schemes, rather than addressing broadly
possibility of recognising and measuring reserves the accounting for all government grants (which
on the balance sheet at fair value. This will likely would have involved re-activating the IAS 20
be given consideration as one of the possible project).
accounting models during the Board’s
The purpose of the project is to comprehensively
deliberations and its public consultations.
address the accounting for emissions trading
schemes. It will cover the following issues:
2.2 Borrowing costs • whether the emissions allowances are an asset
The IASB issued amendments to IAS 23 (considering different ways of acquiring the
Borrowing Costs in March 2007. IAS 23R asset) and what its nature is;
removes the policy choice of either capitalising or • recognition and measurement of allowances;
expensing borrowing costs and requires • whether liability exists, what its nature is and
management to capitalise borrowing costs how it should be measured.
attributable to qualifying assets. Qualifying assets
The project is in the research phase, with the
are assets that take a substantial time to get
Board gathering information on the characteristics
ready for their intended use or sale. An example
of various emissions trading schemes. This will
is self-constructed assets such as power plant,
be the basis for preparation of a comprehensive
buildings, machinery.
package that outlines the alternative models that
Financial reporting in the oil and gas industry 35
could be used to account for emissions trading Switching from proportionate consolidation to
The introduction of the dual approach will require accordance with the ED proposals. The
all companies to review each of their joint venture accounting described in the examples may
agreements. They will need to determine whether require some entities to modify their accounting
each joint arrangement exhibits the properties practices in these areas.
and characteristics of joint assets/joint
operations (typically a direct use of Timetable
assets/obligation for liabilities) and/or the
The IASB expects to publish a new IFRS for joint
characteristics of a Joint Venture (an interest in
arrangements in quarter 4 of 2008. The
the outcome of the JV, eg, a share of profit
implementation date has not been decided yet
generated by the Joint Venture). An interest in the
but might be as early as 2010. Those companies
outcome/net result will more commonly arise
that conduct a significant amount of their
when the joint arrangement is incorporated;
business through joint ventures may want to
however, unincorporated joint arrangements are
follow the development of this standard carefully.
capable, in some circumstances, of returning a
net result/profit to the partners, and so should
also be analysed.
2.5 IFRS 3, Business combinations
(revised) and IAS 27,
Other considerations Consolidated and separate
The results presented in financial statements will financial statements (revised)
reflect the cumulative impact of all relevant The IASB issued two revised standards in
factors. For example, if a company has an January 2008: IFRS 3R Business Combinations
interest in the net result of an E&P joint venture it and IAS 27R Consolidated and Separate
will account for its interest in the joint venture Financial Statements. The revised standards are
using equity accounting. However, if it also effective for annual periods beginning on or after
purchases (its share of) oil from the joint venture 1 July 2009. The standards result in more fair
and sells it to a third party, it will record revenue value changes being recorded through the
for those third-party sales in addition to equity income statement and cement the ‘economic
accounting for its interest in the joint venture, entity’ view of the reporting entity.
after appropriate eliminations.
The key differences between IFRS 3R and IAS
A company that finds itself moving from 27R and the previous standards are as follows:
proportionate consolidation to equity accounting
may also want to consider the impact of its • Business combinations achieved by contract
internal management reporting. IFRS 8 Operating alone and business combinations involving
Segments requires disclosure of segmental only mutual entities are accounted for under
information on the same basis as is provided to the revised IFRS 3.
the company’s chief operating decision-maker • Minor changes in the definition of a business
(CODM). The accounting basis used for providing with more significant changes in the
information to the CODM is used to present the application guidance.
segment information in accordance with IFRS 8.
Accordingly, if the CODM is presented with • Transaction costs incurred in connection with
information prepared using proportionate the business combination are expensed when
consolidation, then this is the basis that should incurred and are no longer included in the cost
be presented in the segment information and of the acquiree.
reconciled to the primary financial statements. • An acquirer recognises contingent
The ED includes a number of illustrative consideration at fair value at the acquisition
examples, including a farm-in arrangement and a date. Subsequent changes in the fair value of
unitisation. These examples describe the such contingent consideration will often affect
expected accounting for these arrangements in the income statement.
Financial reporting in the oil and gas industry 37
• The acquirer recognises either the entire • All purchases of equity interests from and
There are a number of differences between IFRS and US GAAP. This section provides a summary
description of those IFRS/US GAAP differences that are particularly relevant to oil & gas entities.
These differences relate to: exploration and evaluation, reserves & resources, depreciation, inventory
valuation, impairment, disclosure of resources, decommissioning obligations, financial instruments,
revenue recognition, joint ventures and business combinations.
Impairment of E&E IFRS 6 provides specific relief for No similar relief for E&E assets.
assets E&E assets. Cash-generating units This is unlikely to result in a GAAP
(CGUs) may be combined up to the difference when the company uses
level of a segment for E&E assets. successful efforts under US GAAP.
Impairment testing is required A company applying full cost will
immediately before assets are probably be able to shelter
reclassified from E&E to unsuccessful exploration costs in
development. larger pools until these are depleted
through production.
IFRS 6 also provides guidance in
relation to identifying trigger events No reversal of impairment charges
for an impairment review. is permitted.
Impairment charges against E&E Evaluation of exploration activity that
assets are reversed if recoverable is completed after the balance sheet
amount subsequently increases. date and that concludes that the
exploration has been unsuccessful,
Evaluation of exploration activity that
is classified as a type I (adjusting)
is completed after the balance sheet
post-balance sheet event (FIN 36).
date and that concludes that the
exploration has been unsuccessful, is
classified as a non-adjusting (type II)
post-balance sheet event.
Financial reporting in the oil and gas industry 41
Impact of changes Inventories measured at the lower of Inventories measured at the lower of
in market prices cost and net realisable value. Net cost and market value. When market
after balance sheet realisable value does not reflect value is lower than cost at the
date changes in the market price of the balance sheet date, a recovery of
inventory after the balance sheet date market value after the balance sheet
if this reflects events and conditions date but before the issuance of the
that arose after the balance sheet financial statements is recognised as
date. a type I (adjusting) post balance sheet
event.
42 PricewaterhouseCoopers
Impairment test Assets or groups of assets (cash Long-lived assets are tested for
triggers generating units) are tested for impairment only if indicators are
impairment when indicators of present and an undiscounted cash
impairment are present. flow test suggests that the carrying
amount of an asset will not be
recovered from its use and eventual
disposal. Unproved properties are
assessed periodically for impairment
based on results of drilling activity,
firm plans, etc.
Level at which Assets tested for impairment at the Similar to IFRS except that the
impairment tested cash generating unit (CGU) level. grouping of assets is based on
CGU is the smallest identifiable group largely independent cash flows (in
of assets that generates cash inflows and out) rather than just cash
that are largely independent of the inflows.
cash inflows from other assets or
Production assets accounted for
groups of assets.
under the full cost method are tested
Production assets typically tested for for impairment on a pool-wide basis.
impairment at the field level. A pool-
wide impairment test is not
permitted.
Reversal of Impairment losses, other than those Impairment losses are never
impairment charge relating to goodwill, are reversed reversed.
when there has been a change in the
economic conditions or in the
expected use of the asset.
Measurement of Liability measured at the best Range of cash flows prepared and
liability estimate of the expenditure required risk weighted to calculate expected
to settle the obligation. values.
Risks associated with the liability are Risks associated with the liability are
reflected in the cash flows or in the only reflected in the cash flows,
discount rate. except for credit risk, which is
reflected in the discount rate.
The discount rate is updated at each
balance sheet date. The discount rate for an existing
liability is not updated. Accordingly,
downward revisions to undiscounted
cash flows are discounted using the
credit adjusted risk-free rate when
the liability was originally recognised.
Upward revisions, however, are
discounted using the current credit
adjusted risk-free rate at the time of
the revision.
Decommissioning liability need not
be recognised for assets with
indeterminate life.
Recognition of The adjustment to PPE when the The asset recognised in respect of a
decommissioning decommissioning liability is decommissioning obligation is a
asset recognised forms part of the asset separate asset from the asset to be
to be decommissioned. decommissioned.
This distinction is relevant because
of the limits placed on subsequent
adjustments to the asset as a
result of remeasurement of the
decommissioning liability. In
particular, the limit that the
decommissioning asset cannot be
reduced below zero for US GAAP
compared with the limit that the
asset to be decommissioned cannot
be reduced below zero for IFRS.
44 PricewaterhouseCoopers
Separation of Derivatives embedded in hybrid Similar to IFRS except that there are
embedded contracts are separated when: some detailed differences of what is
derivatives meant by ‘closely related’.
• the economic characteristics and
risks of the embedded derivatives Under US GAAP, if a hybrid
are not closely related to the instrument contains an embedded
economic characteristics and risks derivative that is not clearly and
of the host contract; closely related to the host contract
at inception, but is not required to
• a separate instrument with the
be bifurcated, the embedded
same terms as the embedded
derivative is continuously
derivative would meet the
reassessed for bifurcation.
definition of a derivative; and
The normal purchases and normal
• the hybrid instrument is not
sales exemption cannot be claimed
measured at fair value through
for a contract that contains a
profit or loss.
separable embedded derivative –
Under IFRS, reassessment of whether even if the host contract would
an embedded derivative needs to be otherwise qualify for the exemption.
separated is permitted only when
there is a change in the terms of the
contract that significantly modifies
the cash flows that would otherwise
be required under the contract.
A host contract from which an
embedded derivative has been
separated, qualifies for the own-use
exemption if the own-use criteria are
met.
Types of joint IFRS distinguishes between three Refers only to jointly controlled
venture types of joint venture: entities, where the arrangement is
carried on through a separate
• jointly controlled entities – the
corporate entity.
arrangement is carried on through
a separate entity (company or
partnership);
• jointly controlled operations – each
venturer uses its own assets for a
specific project; and
• jointly controlled assets – a project
carried on with assets that are
jointly owned.
Jointly controlled Either the proportionate consolidation Prior to determining the accounting
entities method or the equity method is model, an entity first assesses
allowed. Proportionate consolidation whether the joint venture is a Variable
requires the venturer’s share of the Interest Entity (VIE). If the joint venture
assets, liabilities, income and is a VIE, the primary beneficiary
expenses to be either combined on a should consolidate. If the joint venture
line-by-line basis with similar items in is not a VIE, venturers assess the
the venturer’s financial statements, or accounting using the voting interest
reported as separate line items in the model. If control does not exist then
venturer’s financial statements. typically the arrangement will meet
the criteria to apply the equity method
to measure the investment in the
jointly controlled entity. Proportionate
consolidation is generally not
permitted except for unincorporated
entities operating in certain industries,
such as the oil & gas industry.
Purchase method Assets, liabilities and contingent There are specific differences from
– fair values on liabilities of acquired entity are IFRS.
acquisition recognised at fair value where fair
Contingent liabilities of the acquiree
value can be measured reliably.
are recognised if, by the end of the
Goodwill is recognised as the
allocation period:
residual between the consideration
paid and the percentage of the fair • their fair value can be determined,
value of the net assets acquired. or
In-process research and • they are probable and can be
development is generally capitalised. reasonably estimated.
Liabilities for restructuring activities Specific rules exist for acquired
are recognised only when the in-process research and
acquiree has an existing liability at development (generally expensed).
acquisition date. Liabilities for future
Some restructuring liabilities relating
losses or other costs expected to be
solely to the acquired entity may be
incurred as a result of the business
recognised if specific criteria about
combination cannot be recognised.
restructuring plans are met.
Purchase method Stated at minority’s share of the fair Stated at minority’s share of pre-
– minority interests value of acquired identifiable assets, acquisition carrying value of net
at acquisition liabilities and contingent liabilities. assets.
Purchase method Capitalised but not amortised. Similar to IFRS, although the level of
– intangible assets Goodwill and indefinite-lived impairment testing and the
with indefinite intangible assets are tested for impairment test itself are different.
useful lives and impairment at least annually at either
goodwill the cash-generating unit (CGU) level
or groups of CGUs, as applicable.
Purchase method The identification and measurement Any remaining excess after
– negative goodwill of acquiree’s identifiable assets, reassessment is used to reduce
liabilities and contingent liabilities are proportionately the fair values
reassessed. Any excess remaining assigned to non-current assets (with
after reassessment is recognised in certain exceptions). Any excess is
the income statement immediately. recognised in the income statement
immediately as an extraordinary
gain.
Financial reporting in the oil and gas industry 49
The revisions made to FAS 141 in 2007 and to IFRS 3 in 2008 remove some of the differences
Acquisition method Assets and liabilities of the acquired entity are recognised at fair value.
– fair values on This includes acquired in-process research and development.
acquisition
Liabilities for restructuring activities are recognised only when the acquiree
has an existing liability at the acquisition date.
The following summary reflects differences between the requirements of IFRS 3 (Revised 2008) and
FAS 141 (Revised 2007).
Assets and Recognise contingent liabilities at fair Liabilities and assets subject to
liabilities arising value if fair value can be measured contractual contingencies are
from contingencies reliably. If not within the scope of IAS recognised at fair value. Recognise
39, measure subsequently at higher liabilities and assets subject to other
of amount initially recognised and contingencies only if more likely
best estimate of amount required to than not that they meet definition of
settle (under IAS 37). asset or liability at acquisition date.
After recognition, retain initial
Contingent assets are not recognised.
measurement until new information
is received, then measure at the
higher of amount initially recognised
and amount under FAS 5 for
liabilities subject to contingencies,
and lower of acquisition date fair
value and the best estimate of a
future settlement amount for assets
subject to contingencies.
Employee benefit Measure in accordance with IFRS 2 Measure in accordance with FAS
arrangements and and IAS 12, not at fair value. 123 and FAS 109, not at fair value.
deferred tax
Contingent If not within scope of IAS 39, account Measure subsequently at fair value,
consideration for subsequently under IAS 37. with changes recognised in earnings
Measure financial asset or liability if classified as asset or liability.
contingent consideration at fair value,
with changes recognised in earnings
or other comprehensive income.
Lessor operating Value of asset includes terms of Value lease separately from asset.
lease assets lease.
Financial reporting in the oil and gas industry 51
Annual Report and Accounts 2007, Royal Dutch Shell plc, p. 118
56 PricewaterhouseCoopers
exposures, certain gains and losses attributable characteristics are not closely related to those of
Gas contracts and related derivative instruments Annual Report and Accounts 2007, BP plc, p. 105
associated with the physical purchase and resale
of third-party gas are presented on a net
basis within other operating income.” 4.7 Revenue recognition issues
Revenue recognition – Exchanges
Annual Report and Accounts 2007, BG Group plc, p. 75
BP plc
“Revenues associated with the sale of oil, natural
Measurement of long-term contracts that gas, natural gas liquids, liquefied natural gas,
do not qualify for ‘own use’ petroleum and chemicals products and all other
items are recognized when the title passes to the
BG Group plc customer. Physical exchanges are reported net,
Valuation as are sales and purchases made with a
“The Group calculates the fair value of interest common counterparty, as part of an arrangement
rate and currency exchange rate derivative similar to a physical exchange. Similarly, where
instruments by using market valuations where the group acts as agent on behalf of a third party
available or, where not available, by discounting to procure or market energy commodities, any
all future cash flows by the market yield curve at associated fee income is recognized but no
the balance sheet date. purchase or sale is recorded.”
The fair value of commodity contracts and Annual Report and Accounts 2007, BP plc, p. 107
commodity related derivatives is based on
forward price curves, where available. Where
observable market valuations are unavailable, the 4.8 Royalty and income taxes
fair value on initial recognition is the transaction Petroleum taxes
price and is subsequently determined using
quotes from thirdparties or the Group’s forward Centrica plc
planning assumptions for the price of gas, other Petroleum revenue tax (PRT)
commodities and indices. “The definitions of an income tax in IAS 12,
Income Taxes, have led management to judge
One of the assumptions underlying the fair value that PRT should be treated consistently with
of long-term UK gas contracts is that the gas other income taxes. The charge for the year is
market in the UK is liquid for two years.” presented within taxation on profit from
continuing operations in the Income Statement.
Annual Report and Accounts 2007, BG Group plc, p. 105 Deferred amounts are included within deferred
tax assets and liabilities in the Balance Sheet.”
BP plc
“Derivatives embedded in other financial
instruments or other host contracts are treated
as separate derivatives when their risks and
58 PricewaterhouseCoopers
Where the carrying amount exceeds the Accounting for jointly controlled or owned
Investments with less than joint control Allocation of the cost of the combination to
assets and liabilities acquired
Hydro ASA
Investments in associates and joint ventures BP plc
“Associates Hydro accounts for associates using Business combinations and goodwill
the equity method. The definition of an associate “Business combinations are accounted for using
is based on Hydro’s ability to exercise significant the purchase method of accounting. The cost
influence, which is the power to participate in the of an acquisition is measured as the cash paid
financial and operating policies of the entity. and the fair value of other assets given, equity
Significant influence is assumed to exist if Hydro instruments issued and liabilities incurred or
owns between 20 to 50 percent of the voting assumed at the date of exchange, plus costs
rights. However, exercise of judgment may lead directly attributable to the acquisition. The
to the conclusion of significant influence at acquired identifiable assets, liabilities and
ownership levels less than 20 percent or a lack of contingent liabilities are measured at their fair
significant influence at ownership percentages values at the date of acquisition. Any excess of
greater than 20 percent. Hydro uses the equity the cost of acquisition over the net fair value of
method for a limited number of investees where the identifiable assets, liabilities and contingent
Hydro owns less than 20 percent of the voting liabilities acquired is recognized as goodwill.
rights, based on an evaluation of the governance Any deficiency of the cost of acquisition below
structure in each investee.” the fair values of the identifiable net assets
acquired (i.e. discount on acquisition) is credited
Annual Report and Accounts 2007, Hydro ASA, p. F8 to the income statement in the period of
acquisition. Where the group does not acquire
100% ownership of the acquired company, the
4.11 Business combinations interest of minority shareholders is stated at the
Goodwill minority’s proportion of the fair values of the
assets and liabilities recognized. Subsequently,
BG Group plc any losses applicable to the minority
“Business combinations and goodwill shareholders in excess of the minority interest on
In the event of a business combination, fair the group balance sheet are allocated against the
values are attributed to the net assets acquired. interests of the parent.
Goodwill, which represents the difference At the acquisition date, any goodwill acquired is
between the purchase consideration and the fair allocated to each of the cash-generating units
value of the net assets acquired, is capitalised expected to benefit from the combination’s
and subject to an impairment review at least synergies. For this purpose, cash-generating
annually, or more frequently if events or changes units are set at one level below a business
in circumstances indicate that the goodwill may segment.
be impaired. Goodwill is treated as an asset of
the relevant entity to which it relates, including Following initial recognition, goodwill is measured
foreign entities. Accordingly, it is re-translated at cost less any accumulated impairment losses.
into pounds Sterling at the closing rate of Goodwill is reviewed for impairment annually or
exchange at each balance sheet date.” more frequently if events or changes in
circumstances indicate that the carrying value
Annual Report and Accounts 2007, BG Group plc, p. 73 may be impaired.
Annual Report and Accounts 2007, Royal Dutch Shell plc, p. 145
The extracts from third-party publications that are contained in this document are for illustrative
purposes only; the information in these third-party extracts has not been verified by
PricewaterhouseCoopers and does not necessarily represent the views of PricewaterhouseCoopers;
the inclusion of a third-party extract in this document should not be taken to imply any endorsement
by PricewaterhouseCoopers of that third-party.
62 PricewaterhouseCoopers
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Financial reporting in the oil and gas industry 63
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Email: gunnar.slettebo@no.pwc.com
Finland
Juha Tuomala Portugal
Telephone: +358 9 2280 1451 Luis Ferreira
Email: juha.tuomala@fi.pwc.com Telephone: +351 213 599 296
Email: luis.s.ferreira@pt.pwc.com
France
Philippe Girault Russia & CIS
Telephone: +33 1 5657 8897 Dave Gray
Email: philippe.girault@fr.pwc.com Telephone: +7 495 967 6311
Email: dave.gray@ru.pwc.com
Germany
Manfred Wiegand Randol Justice
Telephone: +49 201 438 1517 Telephone: +7 495 967 6465
Email: manfred.wiegand@de.pwc.com Email: randol.justice@ru.pwc.com
Greece Spain
Socrates Leptis-Bourgi Francisco Martinez
Telephone: +30 210 687 4693 Telephone: +34 915 684 704
Email: socrates.leptos.-.bourgi@gr.pwc.com Email: francisco.martinez@es.pwc.com
Ireland Sweden
Carmel O’Connor Mats Edvinsson
Telephone: +353 1 792 6288 Telephone: +46 8 555 33706
Email: denis.g.oconnor@ie.pwc.com Email: mats.edvinsson@se.pwc.com
Italy Switzerland
John McQuiston Ralf Schlaepfer
Telephone: +390 6 57025 2439 Telephone: +41 58 792 1620
Email: john.mcquiston@it.pwc.com Email: ralf.schlaepfer@ch.pwc.com
United Kingdom
Ross Hunter
Telephone: +44 20 7804 4326
Email: ross.hunter@uk.pwc.com
64 PricewaterhouseCoopers
Middle East
Paul Suddaby
Telephone: +971 4 3043 451
Email: paul.suddaby@ae.pwc.com
The Americas
Canada
John Williamson
Telephone: +1 403 509 7507
Email: john.m.williamson@ca.pwc.com
Alistair Bryden
Telephone: +1 403 509 7354
Email: alistair.e.bryden@ca.pwc.com
Latin America
Jorge Bacher
Telephone: +54 11 4850 6801
Email: jorge.c.bacher@ar.pwc.com
United States
Rich Paterson
Telephone: +1 713 356 5579
Email: richard.paterson@us.pwc.com
Michael Stewart
Telephone: +44 20 7804 6829
Email: michael.j.stewart@uk.pwc.com
Further information
Olesya Hatop
Global Energy, Utilities & Mining Marketing
Telephone: +49 201 438 1431
Email: olesya.hatop@de.pwc.com
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