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September 2011
The financial statements of many oil and gas companies could look very different in the future
as a result of the changes to the accounting for joint arrangements (formerly joint ventures).This
could affect key performance measures and ratios for companies in the sector, which raises the
question of how such changes should be communicated to investors and other stakeholders.
Assessing the effect of the new requirements for your company may take significant time and
judgement.The number and variety of joint arrangements in the oil and gas sector means that
planning for transition in advance of the 1January 2013 effective date is of particular importance.
Key questions that you should consider asking yourself
Question
Considerations
I proportionately
consolidate jointly
controlled entities what
will the changes mean for
my financial statements?
The option to proportionately consolidate has been eliminated. Assuming there is no change
to the classification of arrangements, a change from proportionate consolidation to equity
accounting will affect virtually all financial statement line items, notably decreasing revenue,
gross assets and gross liabilities. If the joint venture has tax expense, then transition will also
decrease profit before tax. See page 3.
The change to the definitions of different types of arrangements may mean that some jointly
controlled entities will be accounted for on a line-by-line basis under the newstandard.
In summary, arrangements in which you have joint control and individual rights/obligations to the
underlying individual assets and liabilities will be accounted for on a line-by-line basis. When the
rights are to net assets, equity accounting will apply. However, the process for assessing these
rights follows a series of tests, and analysis of the detail of the legal and contractual arrangements
as well as the substance of the arrangements will be required. This will require judgement and
could well be time-consuming if you have a number of arrangements. See page 5.
In this case, individual balances in the financial statements will change. For example, the
operating profit of the arrangement will form part of your total operating profit. See page 3.
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
The differences between the joint arrangement classification and accounting models of the existing IAS31 and the new IFRS11
can be illustrated as follows:
Key
JCO/JCA: Jointly controlled operation/jointly controlled asset
JCE: Jointly controlled entity
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Joint control
The first step will be to consider recent changes to the
definition of control. Joint control exists when there is a
contractual agreement that decisions about the relevant
activities require the unanimous consent of the parties. The
need for a contract to confer joint control is not new. However,
the definition of control has changed as a result of IFRS10
Consolidated Financial Statements, which is applicable from
the same date as IFRS11.
Under IFRS 10 an investor has control when it is exposed, or
has rights, to variable returns from its involvement with that
investee and has the ability to affect those returns through
its power over the investee. The new control model requires
identification of how decisions affecting relevant activities
are made. These relevant activities typically exclude decisions
that apply only in exceptional circumstances, such as
onliquidation.
Details of arrangements need to be assessed to determine if
these new definitions change the list of joint arrangements for
accounting purposes.
There are often a number of different agreements that may
influence this assessment, including terms of reference,
joint operating agreements and even agreements with
operators. An operator of an oil field, for example, may
determine day-to-day decisions about the arrangement, but
that will not necessarily mean that the operator has control.
In fact, in many cases the operator is clearly subject to key
strategic decisions made by the partners. As a result, being
the operator alone will not determine control in many cases;
however, the specific nature of the agreements in place
should be assessed.
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Structure
The structure of the arrangement is the first factor to be
considered in assessing the type of arrangement, but it is not
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Example
Example 5 of IFRS 11 provides an illustration of a separate vehicle, entity H, undertaking oil and gas exploration, development
and production activity. The main feature of Hs legal form is that H (and not the parties) has the rights to the assets and
obligations for the liabilities relating to thearrangement.
The joint operations contractual agreement specifies that the rights and obligations arising from the joint arrangements
activities are shared among the parties in proportion to their holding in H, and in particular that the parties share the rights
and obligations arising from the exploration and development permits granted to H, the production obtained and all related
costs.
Costs incurred in relation to all work programmes are covered by cash calls on the parties, and in the event that a party fails
to meet its monetary obligations, the other party is required to contribute to H the amount in default; that amount will be
considered debt owed by the defaulting party to the other party.
In this case, the legal form provides the separate vehicle alone with rights to the assets and obligations for the liabilities;
therefore, there is an initial indication that the arrangement is a joint venture. However, as the contractual arrangement
explicitly provides the parties with rights to assets and obligations for liabilities, that initial indication is reversed and the joint
arrangement is determined to be a joint operation.
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Joint venturers
Joint operators
Recognises its own assets, liabilities and transactions, including its share of those incurred jointly.
Other parties to a
joint venture
Other parties to a
joint operation
Recognises its own assets, liabilities and transactions, including its share of those incurred jointly, if
it has rights to the assets and obligations for the liabilities.
Otherwise, it accounts for its interest in accordance with the IFRS applicable to that interest, e.g.
IAS 28 (2011) or IFRS 9/IAS 39, as the case may be.
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Disclosure checklist.
IFRS-related technical information also is available at
www.kpmg.com/ifrs.
For access to an extensive range of accounting, auditing
and financial reporting guidance and literature, visit KPMGs
Accounting Research Online. This web-based subscription
service can be a valuable tool for anyone who wants to stay
informed in todays dynamic environment. For a free 15-day
trial, go to www.aro.kpmg.com and register today.
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
KPMG International Standards Group is part of KPMG IFRG Limited.
Publication name: Impact on oil and gas companies
kpmg.com/ifrs