Companies may adjust or tailor the non-GAAP financial measures and performance metrics they typically present because of COVID-19-related factors. It is important that transparent disclosure of how the metrics are calculated and why management finds these metrics meaningful be included in filings to help investors understand the effects of COVID-19 on a particular company. That “dry hole expense” I mentioned above is another name for unsuccessful exploration, and some companies actually add it back on their cash flow statements (long story, but essentially they are using a mix of both standards). Under the Full Cost method (FC), most exploration and development costs are capitalized by an aggregated “cost pool” regardless of the outcome.
Exploration and Development Costs
Professional certifications such as Certified Oil and Gas Accountant (COGA) provide industry-specific knowledge and credentials. Another layer of complexity is added by the various types of contracts prevalent in the industry, such as take-or-pay agreements and production imbalances. Take-or-pay contracts require the buyer to pay for a minimum quantity of product, regardless of whether they take delivery. This necessitates careful consideration of the timing and amount of revenue to be recognized, especially if the buyer does not take the full contracted volume. Production imbalances, where partners in a joint venture may take more or less than their share of production, also require meticulous accounting to ensure that revenue is accurately reported. Accounting methods and principles should be applied consistently from one period to another.
Hierarchy of Accounting Principles
Under the successful efforts methodology, you expense them, and under the full cost methodology you capitalize them and add that CapEx to the PP&E on your balance sheet. This doesn’t really affect the income statement, but you do need to add back deferred taxes on the cash flow statement. You see such high percentages because of the sky-high depreciation, depletion & amortization (DD&A) numbers for oil & gas companies and because many companies record them differently for book and tax purposes. When you project a natural resource company’s statements, you begin by projecting its production by segment based on its reserves and its historical patterns. Professor Charlotte Wright updates her indispensable accounting book for the oil and gas industry in this revised and expanded https://www.instagram.com/bookstime_inc sixth edition.
Key Responsibilities of Oil and Gas Accountants
- Conversely, if the sale occurs at a processing facility, revenue is recognized once the product has been processed and delivered to the buyer.
- Oil and gas accounting software is not just a convenience; it’s a strategic imperative for the future of the industry.
- Under the successful efforts methodology, you expense them, and under the full cost methodology you capitalize them and add that CapEx to the PP&E on your balance sheet.
- The alternative approach, known as the FC method, allows companies to capitalize on all operating expenses related to locating new oil and gas reserves regardless of the outcome.
- The Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS) provide guidelines to ensure consistency and transparency in revenue reporting.
- Accountants analyze operating expenses, capital expenditures, and production costs to identify opportunities for cost optimization and improved efficiency.
We use a shared, web-based oil and gas accounting application with a shared file service. Our clients work in the same system and run reports or review the data out of the same database. We work together to customize our processes to define the hand offs and controls for treasury, AP workflow, revenue distribution and joint interest billing, etc. However, without the subsequent discovery of new reserves, the resulting decline in periodic production rates will later begin to negatively impact revenues and the calculation of DD&A for both a SE and FC company. Accountants must stay abreast of tax laws and ensure compliance to minimize tax liabilities while maximizing tax benefits for their clients.
RESOURCES
One of the key aspects of joint venture accounting is the use of joint interest billing (JIB) statements. These statements provide a detailed breakdown of costs incurred and revenues generated, which are then allocated to each partner based on their ownership percentage. Accurate JIB statements are essential for maintaining transparency and trust among joint venture partners. Companies often employ specialized software like Quorum Joint Venture Accounting or P2 BOLO to manage these complex transactions, ensuring that all parties receive timely and accurate financial information. One of the primary considerations in revenue recognition is the point at which control of the product is transferred to the customer.
Balance Sheet
To get a sense of what the financial statements look like for a real company, click here to check out XTO Energy’s statements from just before they were acquired by Exxon Mobil. Energy companies’ income statements do not have the usual Cost of Goods Sold / Gross Profit and Operating Expense distinction that you see for normal companies. You measure the company’s reserves (how much they have on their balance sheet, accounting in oil and gas industry ready to extract, produce, and sell) and production (how much they produce and sell each day, month, quarter, year, etc.) in these units. PwC US Energy practice provides audit and assurance, tax, advisory, and consulting services to help energy businesses address key issues.
Corp Fin observed companies making some of these disclosures in their earnings releases but encourages companies to evaluate whether any of the information should also be included in management discussion and analysis (MD&A). Before you begin projecting an energy company’s financial statements, you need to know something about the units used. When identical operational results are assumed, an oil and gas company following the SE method can be expected to report lower near-term periodic net income than its FC counterpart. Each of these has its own unique set of departments that handle the various entries and procedures to ensure costs and revenue are accounted for properly.
Energy: Delivering value up and down stream
- Given the volatility of oil and gas prices, companies in this industry often engage in hedging activities to manage their exposure to price fluctuations.
- The result is then compared to the net book value of the assets being tested, to see if a write down is needed.
- Depreciation and amortization, on the other hand, apply to tangible and intangible assets, respectively.
- However, without the subsequent discovery of new reserves, the resulting decline in periodic production rates will later begin to negatively impact revenues and the calculation of DD&A for both a SE and FC company.
- CFO is basically net income with non-cash charges like DD&A added back, so, despite a relatively lower charge for DD&A, CFO for an SE company will reflect the net income impact from expenses relating to unsuccessful exploration efforts.
- Companies may adjust or tailor the non-GAAP financial measures and performance metrics they typically present because of COVID-19-related factors.
- Valuation of reserves involves not just the quantity but also the quality of the hydrocarbons.
In each year, you assume that you produce either the production volume of that year or the remaining reserves – whichever number is lower. Depending on the https://www.bookstime.com/ company’s previous history, you might assume a decline rate of 5-10% per year – potentially more or less depending on how mature it is. You might assume a modest increase over that number, especially if the company is spending a lot on finding new resources. For purposes of this tutorial, we’re going to focus on Upstream, or E&P (Exploration & Production) companies because those are the most “different” from normal companies – and they’re the most common topic in interviews.
The past several years have seen significant changes in the accounting and disclosure rules for the industry. While the book has thorough updates throughout, there are new industry issues specifically addressed from the accounting perspective. This is because adding back the non-cash charge for DD&A effectively negates the relatively larger impact to net income under the FC accounting method. If your company is on the lookout for high-quality oil and gas accountants, talk to EAG Inc..
