PWC Oil and Gas Handbook - Final Sept 2013

www.pwc.
com/ca
PwC Calgary
Oil & Gas EGA
Handbook
September 2013
Table of Contents
1. Introduction .....................................................................................................................................................................3
2. Exploration & Evaluation Assets ....................................................................................................................................4
EGA: Detailed analysis – Exploration and evaluation assets .....................................................................................5

EGA: Test additions –Exploration and evaluation assets...........................................................................................8
EGA: Test the derecognition of exploration and evaluation assets (disposals and expiries) ................................. 17
EGA: Test transfers of E&E to PP&E .........................................................................................................................23
EGA: Consider whether indictors of impairment exist for exploration and evaluation assets...............................26
EGA: Test impairment assessment – exploration and evaluation assets ............................................................... 30
EGA: Test farm-outs, asset swaps and other conveyance agreements.....................................................................34
3. Property, Plant & Equipment ..................................................................................................................................... 40
EGA: Test additions – Property, plant and equipment............................................................................................. 41

EGA: Test well ownership and working interest ...................................................................................................... 50
EGA: Test disposals.....................................................................................................................................................55
EGA: Test capital accruals ......................................................................................................................................... 60
EGA: Test capitalized general and administrative costs, and overhead recoveries ................................................65
EGA: Test depletion of oil and gas properties, related equipment and facilities ....................................................70
EGA: Reserve Report Testing .....................................................................................................................................79
EGA: Plan involvement of expert ............................................................................................................................... 91
EGA: Evaluate the expert’s work – [Reserve Evaluator] ..........................................................................................94
EGA: Consider whether indicators of impairment exist – property, plant and equipment ...................................95
EGA: Test impairment assessment – property, plant and equipment................................................................... 101
4. Decommissioning provisions...................................................................................................................................... 123
EGA: Test decommissioning provisions .................................................................................................................. 124
5. Acquisitions ................................................................................................................................................................140
EGA: Test Acquisition Transactions ........................................................................................................................ 141
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1. Introduction
There are a number of industry-specific accounting considerations for clients with oil and gas operations. The oil
and gas value chain highlights the different stages of oil and gas operations where significant expenditures are
incurred. A new tier 3 library titled “Canada Energy Industry Supplement” has been added to Aura effective May
2013 and should be used for all clients with significant oil and gas operations.
The primary objective of the new Aura library is to enhance audit quality and efficiency by providing tailored
procedures that can be applied consistently to all clients with oil and gas operations. To further achieve this
objective, the PwC Calgary ATP Champions group has prepared this handbook to provide supplemental guidance to
assist engagement teams in the preparation and review of the EGA’s from the Canada Energy Industry Supplement
library.
The handbook is organized by EGA and will be supplemented with short training presentations on key topics. It is
meant to be used as a training tool that engagement teams can reference while out in the field. This training
material is supplemental guidance only and it will generally not be appropriate for engagement teams to reference
the handbook as part of documentation within their Aura files.
The Canada Energy Industry Supplement library and the guidance within this handbook is based on IFRS.
Guidance in certain areas herein may not be appropriate for clients reporting under U.S. GAAP or ASPE.
Oil & Gas Value Chain:
The oil and gas value chain can be illustrated as follows:
Pre-Exploration Costs Costs incurred prior to obtaining the legal right to explore (pre-license
costs). These costs must be expensed under IFRS.
Exploration and Evaluation (“E&E”) Costs incurred to discover hydrocarbon resources and assess the technical
feasibility and commercial viability of the resources found. These costs are
typically capitalized to a separate E&E line item on the balance sheet. See
Chapter 2 for detailed guidance on EGA’s addressing E&E.
Development Costs incurred to obtain access to proved reserves and to provide facilities
for extracting, treating, gathering and storing oil and gas. These costs are
capitalized to property, plant and equipment (“PP&E”). See Chapter 3 for
detailed guidance on EGA’s addressing PP&E.
Production Costs incurred to produce oil and gas for sale and marketing. All operating
costs incurred in the production phase must be expensed under IFRS.
Closure Costs incurred to abandon and reclaim oil and gas properties. This phase
is generally referred to as decommissioning liabilities (formerly “asset
retirement obligations”) under IFRS. See Chapter 4 for detailed guidance
on EGA’s addressing decommissioning liabilities.
3
2. Exploration & Evaluation Assets
IFRS 6 Exploration for and Evaluation of Mineral Resources (“IFRS 6”) is the standard that deals with accounting
for E&E assets in the extractive industries. The standard makes it clear that E&E expenditures are limited to those
that occur after an entity has obtained the legal rights to explore and before the entity has demonstrated that
extraction of minerals resources is technically feasible and commercially viable. IFRS 6 does not apply to
development and production activities.
At a high level, exploration costs are incurred to discover hydrocarbon resources and evaluation refers to costs
incurred to assess the technical feasibility and commercial viability of resources found. E&E is a very significant
phase for many oil and gas companies, and a significant amount of expenditure can be incurred throughout this
phase, primarily in the form of acquisition of mineral rights, exploration drilling, equipment and personnel costs,
engineering costs, and costs relating to the acquisition and analysis of seismic information. In instances where test
production occurs during the E&E phase, any income from such production may be netted against the costs
incurred rather than shown as revenue until commercially viable reserves can be demonstrated.
IFRS 6 provides entities with a policy choice with respect to whether E&E expenditures are capitalized or expensed.
Accordingly, when performing audit procedures over E&E assets it is important that engagement teams understand
the client’s accounting policy for E&E costs.
Audit EGA’s
Due to the significance of E&E balances for many oil and gas companies, a number of industry-specific EGA’s have
been developed. These EGA’s can be utilized in Aura by selecting the tier 3 library titled “Canada Energy Industry
Supplement”.
This chapter of the handbook summarizes the EGA’s relevant to E&E and provides supplemental guidance to assist
engagement teams in the preparation and review of the required procedures.
4
EGA: Detailed analysis – Exploration and evaluation assets
1. Overview and Background Information

This EGA is similar to the detailed analysis EGA for PP&E which is found in standard Aura libraries. The primary
purpose of the EGA is to obtain an understanding of the E&E account balance and movements in the balance
during the current period.
This EGA is utilized to identify key transactions impacting the E&E balance (e.g. additions, disposals, transfers to
PP&E, impairment) that will be subject to detailed testing in other EGA’s described later in this chapter.
2. Assertions and Likely Sources of Possible Misstatement

The primary assertions being addressed through this EGA are Accuracy and Presentation / Classification. The
Likely Sources of Potential Misstatement (“LSPM”) relevant to this EGA are summarized below:
3. Control Considerations
Generally, it is not expected that there will be significant reliance placed on key controls addressing the items
within this EGA on most financial statement audits. For integrated audits, an example of a key client control that
may be tested to address the assertions covered in this EGA is as follows:
 An E&E continuity schedule is prepared by the financial analyst. The schedule is reviewed and approved
by the manager of financial reporting. Any reconciling items between the continuity schedule and
detailed E&E listings are investigated.
4. Detailed EGA Analysis

Procedures Guidance Notes
a) Obtain an analysis of exploration and evaluation Clients should prepare a continuity schedule of their
assets (E&E) account balances (roll forward), E&E asset balances. Often the schedule will be prepared
including balances at the beginning of the in excel format.
period, additions, disposals, transfers, exchange
differences, adjustments arising from business The schedule should distinguish between the various
combinations and balances at the end of the types of transactions impacting the overall E&E balance.
period, and:
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i. trace account balances to the lead None
schedule and the previous year's
working papers;
ii. test the mathematical accuracy of the None

analysis; and
iii. review the analysis for any possible The most common types of transactions impacting E&E
omissions. are additions, transfers from E&E to PP&E and
impairment. Engagement teams should consider
whether transactions they become aware of through
discussions with the client or performance of other
EGA’s (e.g. acquisition, property swaps, farm-outs, etc.)
have been properly reflected in the E&E continuity
schedule.
Teams should consider work performed in other

sections of the audit file as well (e.g. minute review,
entity level control interviews, etc.) and explicitly
document their consideration of these other procedures
and the conclusions reached in regards to the
completeness of the schedule.
b) Obtain a detailed listing of E&E assets and: Engagement teams will need to understand how the
detailed E&E listing is generated and document their
consideration of reliability of data (i.e. how comfort is
obtained that the listing is accurate and complete).
Some clients may have a subledger within their
accounting system that maintains detailed E&E records
while other clients may monitor these assets using excel
spreadsheets.
i. trace totals to the analysis of E&E None

assets;
ii. select reconciling items and, in order to If reconciling items exist, engagement teams are
obtain the desired level of assurance reminded to obtain an understanding of why such
that accuracy is achieved, trace the reconciling items exist and to consider whether they are
selected reconciling items to supporting indicative of an internal control weakness.
documentation, and determine whether
the results of the client's investigations
have been reviewed and approved by a
responsible official;
iii. examine support for any significant None

adjustments made throughout the year
in reconciling the detailed E&E records
with the account(s) in the general
ledger;
iv. test, to an extent to obtain the desired None

level of assurance, the mathematical
accuracy of the detailed listing.
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5. Links to Templates and Best Practices
No specific templates have been created for this EGA as each client’s schedule will be unique. Teams are
encouraged to make use of client schedules to the extent possible to avoid unnecessary time spent re-entering
information into PwC spreadsheets.
6. GADM Consideration
GADM involvement is not likely to be appropriate for this EGA.
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EGA: Test additions –Exploration and evaluation assets

This EGA is similar to the additions EGA for PP&E which is described in more detail in Chapter 3 of this handbook;
however this EGA focuses on substantively testing (“vouching”) expenditures that qualify as E&E assets under IFRS
6.
IFRS 6 states the following with respect to E&E expenditures:
“An entity shall determine an accounting policy specifying which expenditures are recognized as exploration and
evaluation assets and apply the policy consistently. In making this determination, an entity considers the degree to
which the expenditure can be associated with finding specific mineral resources. The following are examples of
expenditures that might be included in the initial measurement of exploration and evaluation assets (the list is not
exhaustive):
(a) acquisition of rights to explore;

(b) topographical, geological, geochemical and geophysical studies;
(c) exploratory drilling;
(d) trenching;
(e) sampling; and
(f) activities in relation to evaluating the technical feasibility and commercial viability of extracting a
mineral resource.”
Other items that may be included within E&E additions include capitalized overhead and employee benefits
(including share based payments), capitalized borrowing costs and costs related to settlement of decomissioning
liabilities.
The PwC Publication “Financial Reporting in the Oil & Gas Industry” recommends that borrowing costs during the
E&E phase may be capitalized if they were capitalized under previous GAAP, or that any E&E assets that meet the
asset recognition criteria in IAS 23R in their own right should be considered qualifying assets. In practice, it is
uncommon for most E&E assets to meet the criteria for qualifying assets. For example, an exploration license
would not meet the definition of a qualifying asset as it is available for use in its current condition when purchased,
and does not take a substantial period of time to get ready for use. Large oil sands or offshore E&E projects which
take a significant time to construct may qualify for interest capitalization. If capitalized borrowing costs are
applicable, the EGA “Test borrowing costs capitalized” from the standard IFRS library should be imported into the
Aura file and completed.
8
The primary assertions being addressed through this EGA are Accuracy, Cut-off, Existence/Occurrence, Rights and
Obligations and Presentation / Classification. The Likely Sources of Potential Misstatement (“LSPM”) relevant to
this EGA are summarized below:
In many instances, engagement teams will be able to perform procedures to identify key controls that may be tested
by PwC and relied upon to reduce the extent of substantive testing required over E&E additions. The following are
examples of controls that engagement teams should consider when developing their audit strategy for E&E
additions:
 Authorization for Expenditures (“AFE’s”) are reviewed and approved based on an established delegation
of authority. Note: Typically, a key attribute of this control is the classification determination for a
project (i.e. capital versus expense / E&E versus PP&E).
 If actual expenditures exceed the forecast expenditure per the approved AFE a supplemental AFE must be
created and authorized based on an established delegation of authority.
 Invoices are reviewed and approved based on an established delegation of authority.
 Cheques or wire transfers for payments are approved based on an established delegation of authority.
 Automated controls within the accounting system calculate the ‘net expenditure amount’ based on
established ownership percentages (“gross versus net working interest”).
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Test, to an extent based on materiality and inherent risk,

exploration and evaluation ('E&E') additions relating to
either new acquisitions of rights to explore, exploratory
drilling, expenditures incurred in exploration for and
evaluation of mineral resources and evaluation of
technical feasibility and commercial viability
a) Obtain a detailed listing of E&E additions and The first step in performing detailed testing of E&E
perform the following: additions is to obtain a detailed listing of all transactions
which have been classified as ‘additions’ in the E&E
i. Agree the total to the detailed listing of
continuity schedule.
E&E (or lead sheet).
ii. Where there are reconciling items, Engagement teams need to document the procedures
select reconciling items for testing and performed to obtain comfort over the completeness and
trace the items to supporting accuracy of detailed listing from which the sample is
documentation; selected for testing.
iii. Test, to an extent to obtain the desired
degree of assurance, the mathematical
accuracy of the detailed listing
b) Select and test additions, to an extent based on Testing approach

materiality and risk, by performing the It is very uncommon to be able to obtain sufficient audit
following procedures: comfort over E&E additions through substantive
analytical procedures and therefore substantive tests of
details should be performed to test material E&E
additions.
As noted in Section 7041 of the PwC Audit Guide,

engagement teams are encouraged to first consider
targeted testing of high value or high risk items and then
assess whether additional evidence is necessary after
considering results of other audit procedures performed.
In many instances, a non-stat testing approach will be
appropriate as the E&E balance may be made up of a
large number of small / low value transactions.
Defining the Population

In order to appropriately determine the correct sample
size to test in accordance with guidance in the PwC
Audit Guide, engagement teams need to ensure that
they appropriately define the population to be tested.
The total amount of ‘additions’ from the E&E continuity
schedule may include items that are tested in other
EGA’s and should therefore be excluded from the
population for testing in this EGA. These items may
include:
 Capitalized Stock Based Compensation
 Business Combinations / Asset Acquisitions
 Asset Retirement Cost
 Borrowing Costs
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 Capital accruals
 Capitalized G&A
Often, these items are recorded to E&E through journal

entries and can therefore be identified when scanning a
detailed transaction listing. Engagement teams should
clearly document how the population entered into
substantive testing templates was determined (including
reconciliation to the total E&E balance) and provide
links to where each of the material items excluded has
been tested in the audit file.
Gross versus net accounting

Engagement teams should also consider the impact of
working interest percentages when establishing a testing
strategy for E&E additions. Jointly conducted
operations are common in the oil and gas industry. Two
or more parties with interests in an oil and gas property
(working interests) share the revenues and expenditures
in proportion to their ownership interest or the terms of
other joint venture agreements.
If the client holds 100% interest in all E&E properties,

no further consideration of working interests is
required. However, if the client has less than 100%
working interest, the accounting for E&E transactions
can be significantly impacted by the concept of ‘gross
versus net’ accounting.
Typically, operating agreements between working

interest holders designate one party as ‘operator’ and
require the operator to pay all of the costs incurred for
the property and then charge each non-operating party
its proportionate share of those costs. Accordingly, the
operator’s accounting system must properly accumulate
‘gross’ expenditures (100%) for operated properties and
then apply working interest percentages to determine
the ‘net’ cost to charge to each non-operating party.
For non-operated properties, costs are generally
recorded at 100% of the Joint Interest Billing invoiced
amount. This is because the operator will have already
calculated the working interest split and bill the non-
operator for only its portion of the costs incurred.
The concept of ‘gross / net’ accounting can cause

complications for engagement teams when attempting
to agree E&E additions to supporting documentation
when the working interest is less than 100%. In these
cases, if a ‘net’ interest listing is used to select items for
testing, the amounts included on that listing will
generally not agree directly to an invoice or other
supporting documentation (e.g. joint interest billing) as
these documents will be for the gross (100%) amount of
the expenditure. Engagement teams will need to discuss
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the testing approach with the client to determine the
most effective way to trace detailed transactions from
the E&E sub ledger to supporting documentation.
In situations where non-operated additions are

material, additional procedures may be required to gain
comfort over the completeness and accuracy of JIB
statements received from the operator. Identifying and
validating controls at the non-operator entity is typically
an effective way of accomplishing this (e.g. testing
control whereby management at the non-operator with
sufficient knowledge and experience reviews the JIB’s
received and approves after assessing the information
for reasonableness).
It is often more efficient and effective to trace gross

additions (select from a separate listing obtained from
the client’s accounting system) to supporting
documentation and then perform alternative procedures
to gain comfort over the calculation of the client’s net
working interest. Key considerations include:
 Need to complete separate EGA titled “Test well

ownership and working interest” which includes
testing automated calculation performed by the
accounting system and agreeing a sample of well
working interests to supporting documentation.
The rationale for the comfort generated from this
testing should be clearly documented.
 Documentation should be included in the audit file

as evidence of understanding of the process for E&E
additions including an overview of the process to
account for joint interest properties.
 For both target and non-stat samples, engagement

teams need to enter the ‘net’ amount tested in the
documentation template even if vouching gross
additions as it is the net working interest that
actually impacts the client’s accounting records.
There is a risk that if the operator has a low working
interest, the ‘net’ addition impacting the client’s
records may be much lower than the gross amount
of the addition.
Consider Dual Purpose Testing

Engagement teams are encouraged to consider whether
it may be efficient and effective to perform dual-purpose
testing when vouching E&E additions. Specifically,
consideration should be given to testing both control
attributes (e.g. AFE or invoice approval including review
of coding / classification) and substantive assertions
(existence / occurrence, accuracy) for the same sample
of transactions.
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i. Examine documentation (e.g. invoices, Refer to PwC Audit Guide 1051 Sufficient Appropriate
mineral lease agreements, purchase Audit Evidence for guidance on the concept of sufficient
agreements, titles,) that support appropriate audit evidence, sources of audit evidence, as
exploration and evaluation additions or well as relevance and reliability of audit evidence.
subsequent costs and examine the
Supporting documents for E&E additions ideally should
physical site, as necessary. Test to verify
be external, written and obtained directly by the auditor.
that additions are recorded at the
appropriate amount (i.e. cost) based on The engagement team’s documentation should be
supporting documentation. sufficiently detailed to address each of the relevant
assertions / attributes being addressed by the
procedure. Specifically, the documentation should
address:
Accuracy
Comfort is obtained by comparing the dollar amount per
the client’s accounting records (detailed listing) to the
amount referenced on the third party supporting
documentation (e.g. vendor invoice, joint interest billing
statement). If the invoice is denominated in a foreign
currency, the engagement team should document how it
gains comfort over the amount recorded by the client in
its functional currency.
Cut–off
Comfort is obtained by reviewing the details of the
invoice to determine whether the transaction is recorded
in the correct period (note: simply reviewing invoice
date is not appropriate as it is the date when the work
was performed which is most relevant). Additional
comfort is obtained through the search for unrecorded
liabilities and capital accrual testing performed in
separate EGA’s. Engagement teams should clearly
provide a reference to these other EGA’s, if applicable.
Existence / Occurrence
Comfort is obtained by reviewing invoice details and
assessing whether the service/goods have been received.
Classification
Engagement teams should review invoice details or

other supporting documentation to obtain an
understanding of the nature of the expenditure to
validate that it has been appropriately classified as an
E&E asset in accordance with IFRS 6 and the client’s
accounting policies [see tailored procedure (b) ii below].
Rights and Obligations

Comfort is obtained by examining supporting
documentation for evidence of approval in accordance
with the client’s delegation of authority and /or joint
venture arrangements with third parties. See
procedures (c) below for additional considerations for
the rights and obligations assertion.
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Important Reminder: The primary purpose of this
EGA is to test Existence/Occurrence and Accuracy.
Engagement teams are reminded of the importance of
understanding the population and selecting items for
testing that are relevant to these assertions in the
current year. Two common issues that arise during
testing of E&E or PP&E additions are:
 Sample item selected for testing relates to a

prior period. This is common when teams pick
items from January or February in the detailed
listing of additions. Often, these invoices relate
to work performed or supplies delivered in the
prior year. In these circumstances, engagement
teams need to ensure that the invoice was input
properly (Accuracy) and investigate to
determine whether the invoice amount was
properly accrued for in the prior year (e.g.
included in the capital accrual).
Note: Failure to accrue the invoice in the prior

year is evaluated separately in terms of the cut-
off assertion but it does not mean the current
year’s non-stat sample “fails” the testing
performed in this EGA. Engagement teams
should consider whether selecting an additional
item from the current period is appropriate.
 Engagement teams select an entry from a

detailed listing that is an ‘accrual’ entry and not
an actual transaction that can be tested.
Accrual entries recorded during the year are
typically reversed in a subsequent month when
actual invoices are received so testing a mid-
year accrual entry is unlikely to provide comfort
over the accuracy and existence assertions.
Capital accruals at period end are tested in a
separate EGA. For purposes of this EGA,
engagement teams should focus testing on
actual transactions only and not select accrual
entries as part of the target or non-stat sample.
ii. Evaluate whether capitalization is It is very important that engagement teams understand
appropriate in accordance with the the client’s policy for E&E expenditures. This
client’s policy for E&E expenditures understanding should be documented in the Aura file.
(IFRS 6). Assess whether the
expenditures were incurred before the For most clients that followed full-cost accounting under
entity obtained the legal rights to previous CICA HB Part V Canadian GAAP, the policy
explore a specific area or were incurred will be to capitalize expenditures incurred in the E&E
after the technical feasibility and phase. This would typically include costs incurred to
commercial viability of extracting acquire licenses, seismic and geological and geophysical
reserves was demonstrable. (“G&G”) costs and exploration drilling and evaluation
activities.
Note – Pre-exploration costs must be expensed.
Expenditures related to the development of
14
mineral resources shall not be recognized as For clients that followed successful efforts accounting
exploration and evaluation assets (IFRS 6.10). under previous CICA HB Part V Canadian GAAP, G&G
costs incurred during the E&E phase will be expensed.
License acquisition costs and drilling costs are initially
capitalized pending evaluation activities.
When vouching additions, it is important that the
engagement team obtain sufficient information to
determine the nature of the expenditure. This may be
evident from the description on the supporting
documentation (AFE, invoice); however in some
instances, discussion with engineers or operational
personnel may be required.
In addition to documenting the reference information

from the supporting documentation (AFE #, invoice #,
dollar amount, date), the engagement team should
clearly document their assessment as to whether:
 The expenditure is properly capitalized or

should be expensed; and
 The expenditure relates to a project in the E&E
phase (versus PP&E).
Reminder: Costs incurred prior to obtaining the legal

right to explore are known as pre-license costs. These
costs must be expensed under IFRS. Costs incurred
after commercial viability and technical feasibility is
established (usually when Proved + Probable reserves
are assigned) are considered development expenditures
and should be capitalized to PP&E and not E&E. It is
important that teams understand the client’s E&E
capitalization policies with respect to when “technical
feasibility and commercially viability” is determined and
that the policy is disclosed within the notes to the
financial statements.
iii. Verify that the additions have been Allocation of Costs

classified within the appropriate E&E Testing should include documenting whether or not the
area or cash generating unit by ensuring transaction was recorded to the right cost centre within
additions have been coded to the correct the client’s accounting system and then ultimately, that
cost centre or AFE through review of each cost centre rolls up to the appropriate depletion
approved invoices, mineral lease unit and/or CGU for purposes of depletion and
agreements, purchase agreements or impairment calculations.
payments.
Understanding which location a specific expenditure
relates to may require consultation with the client.
However, in many instances, location is included on the
invoice or supporting documentation. Engagement
teams can obtain a map of the client’s properties with
land surface description (LSD) to validate location.
There are also online mapping tools available (e.g. Base
Loc) for teams to use.
15
c) Verify, to an extent based on materiality and Supporting documentation for E&E additions can take
inherent risk, that rights and obligations is many forms depending on the nature of the operation
achieved for E&E by examining titles, deeds, and the jurisdiction in which the client operates.
registration documents, etc. supporting the
ownership of such assets and property. For Evidence supporting the acquisition of mineral rights
documents held by third parties (banks and may take the form of a license agreement, a purchase
other lending institutions) obtain confirmation and sale agreement or a joint operating agreement.
from the custodian that the client has valid title Evidence supporting E&E activity (e.g. drilling, seismic)
to the asset and whether the asset has been may include invoices or joint interest billing statements
pledged as security for liabilities of the client or from an operator partner.
third parties.
Foreign Jurisdictions
The risk associated with Rights and Obligations may be

significantly increased when a client operates in foreign
jurisdictions; particularly those in emerging markets
where laws and regulations may not be well defined.
Engagement teams working with international clients
should consult available AQM guidance documents on
auditing in emerging markets to determine the nature
and extent of testing required to obtain sufficient
comfort over the Rights and Obligations assertion for
E&E assets.
Comfort can be obtained by examining relevant

d) Verify the additions or subsequent costs have
documents for evidence of approval following the
been authorised and approved.
client’s delegation of authority. As discussed above,
comfort over authorization and approval of expenditures
may be most efficiently and effectively obtained by
testing the client’s internal controls over financial
reporting or by conducting a dual purpose test.

Engagement teams are encouraged to utilize the documentation template titled “Additions Testing Templates
(PP&E and E&E)_FINAL.xls” available on Template Manager when completing this EGA. The template can
be modified to incorporate specific testing attributes that may be necessary to document based on client-specific
accounting systems or operations.
Engagement teams should consider whether GADM can be utilized to assist in the completion of this EGA.
Whether GADM is an effective alternative will be based on the extent of testing (larger sample size may indicate
GADM use is warranted) and the process required to obtain supporting documentation for additions from the
client. In circumstances where supporting documentation (e.g. invoices, AFE’s) can be obtained electronically,
engagement teams should consider whether efficiencies can be achieved by sending detailed listing of additions,
sample selection and related supporting documentation to GADM with instructions for them to prepare the
detailed audit documentation for this EGA. However, it is expected that certain attributes discussed above (e.g.
classification as E&E versus PP&E, capital versus expense classification, and CGU allocation) will likely have to be
performed by the local engagement team as GADM will not have the ability to perform these aspects of the testing.
16
EGA: Test the derecognition of exploration and
evaluation assets (disposals and expiries)

Disposals
Disposals may occur when an entity enters into an agreement with another party to sell an entire E&E property. In
such cases, the gain or loss is determined as the difference between the proceeds received and the net book value of
the E&E asset disposed of. Gains or losses are recognized in profit or loss, but not classified as revenue. The most
appropriate presentation is as a separate line item on the statement of comprehensive income.
An entity may enter into a partial disposal of an E&E property. In such instances, entities have a policy choice
under IFRS 6. An entity can chose to calculate net book value for the interest disposed and derecognize the asset
sold and recognize a gain or loss. Alternatively, an entity may choose to follow their policy from previous CICA HB
Part V Canadian GAAP and apply the proceeds received against the E&E balance with no gain or loss recognized.
Once a policy choice is made, it must be applied consistently to all similar transactions.
Lease expiries
The right to explore for hydrocarbons is typically granted by governments or landholders in the form of mineral
leases or licenses. In most jurisdictions, rights are obtained for a finite length of time. In Canada, mineral leases
typically have a 5 year term. If no drilling activity is undertaken over the lease term, the lease ‘expires’ and the
entity forfeits its rights to explore. There are a number of ways that lease terms can be extended; the most common
of which in many jurisdictions is for an entity to drill a well on the leased land.
Costs incurred to obtain leases / licenses are initially capitalized as E&E assets. IFRS 6 provides entities with
accounting policy choices in respect to how these costs are subsequently measured. Once selected, the accounting
policy should be consistently applied. The most common accounting policies seen in practice are:
a. Lease acquisition costs are initially capitalized and are tracked at a lease level in E&E. If commercially
viable reserves are identified, the lease acquisition costs are transferred to PP&E (along with the cost of the
exploration drilling). If no drilling activity occurs and the entity forfeits its right to explore, the lease
acquisition costs, and any related exploration or evaluation costs (e.g. seismic) are derecognized and
charged to profit and loss (typically referred to as expiries).
b. Lease acquisition costs are initially capitalized in E&E but are tracked by resource play or area. No
accounting entry is recorded upon expiry of individual leases. Instead, costs (including related seismic or
other capitalized exploration and evaluation costs) are evaluated at an area level and either transferred to
PP&E upon determination of commercially viable reserves or charged to the profit and loss if no
commercially viable reserves are found for the aggregate area.
c. Lease acquisition costs are initially capitalized in E&E and are tracked at a lease level in E&E. Upon expiry,
lease costs (and related seismic or other capitalized exploration and evaluation costs) are either transferred
to PP&E and subject to impairment assessment when there is a related CGU or expensed if there is no
related CGU to transfer the costs into;
d. Lease acquisition costs are initially capitalized in E&E and are amortized to profit and loss on a rational
and systematic basis over the term of the lease (usually on a straight line basis). There is no accounting
entry recorded on the date an individual lease expires.
17
For E&E disposals the following assertions are most relevant: Existence/ Occurrence, Accuracy / Valuation,
Presentation & Disclosure. The Likely Sources of Potential Misstatement (“LSPM”) relevant to this EGA are
summarized below:
Generally, it is not expected that there will be significant reliance placed on key controls addressing the disposal
aspects of this EGA. For integrated audits, the key client controls addressing the assertions covered in this EGA
would usually be something like the following:
 Disposal AFE’s are reviewed and approved by the operations manager who agrees the net book value of
the assets disposed to the fixed asset sub ledger and recalculates the gain / loss based on the terms of the
purchase and sale agreement.
 Significant contracts entered into are reviewed by the accounting group to determine whether any
accounting implications arise. A memo is prepared for each significant, unusual transaction outlining the
relevant accounting guidance and entries proposed to record the transaction. The memo and related
journal entries are reviewed and approved by the Controller.
In some instances, engagement teams may be able to perform procedures to identify key controls that may be
tested by PwC and relied upon to reduce the extent of substantive testing required over E&E lease expires. The
following are examples of controls that engagement teams should consider when developing their audit strategy for
lease expiries:
 Each quarter, the land manager reviews a detailed listing of E&E properties. He reviews listing and
ensures that all lands that expired prior to the balance sheet date have been appropriately derecognized
from E&E.
 The financial analyst meets with the land manager each quarter to understand the movements in E&E
properties during the period (e.g. disposals, drilling activity and lease expiries) and prepares a journal
entry to transfer costs to PP&E or derecognize costs for expired leases. The journal entries are reviewed
and approved by the Controller.
18
Disposals - Test disposals of exploration and evaluation

(E&E) items by performing the following audit
procedures:
a) Obtain a listing of derecognised E&E items and The first step in performing detailed testing of E&E
agree to the detailed listing of E&E. Obtain disposals is to obtain a detailed listing of all transactions
explanation for any significant reconciling items which have been classified as ‘disposals’ in the E&E
and agree to support documentation, where continuity schedule.
applicable.
Note: Often, a client’s continuity schedule for E&E may
group transfers, expiries and disposals together as one
item. As there are separate EGA’s and separate
procedures performed over each of these types of
transactions, engagement teams need to ensure that the
detailed listing provides enough detail to distinguish
between them. Often AFE or cost centre details within
the client’s accounting system can be used to prepare an
appropriately detailed analysis.
Engagement teams need to document the procedures

performed to obtain comfort over the completeness and
accuracy of detailed listing from which the sample is
selected for testing.
Note: This EGA deals with disposals of E&E and lease

expiries only. There is a separate EGA titled “Test
Transfers of E&E to PP&E” that deals with amounts
removed from E&E and transferred to PP&E in
accordance with IFRS 6.
b) Select and test disposals, to an extent based on Target testing is the most common approach for testing
materiality and risk, by agreeing to supporting disposals. When selecting items to test, engagement
documentation such as sale agreements, finance teams should consider targeting both disposals where
lease agreements or receipts for donations and there is large net book value disposed of (significant to
consider obtaining external confirmations (IAS balance sheet) and disposals that give rise to significant
16.67(a), 69-70); gains/losses (significant to income statement).
c) Test the calculation of gains or losses on

disposals by
i. Agreeing the net disposal proceeds to Engagement teams should obtain and review relevant
supporting documentation (sale agreements. It is important to read a purchase and sale
agreement, bank deposit, etc.); agreement (or similar document) in full to ensure that
there are no terms or conditions attached to the sale that
would indicate that risks and rewards have not been
fully transferred to the purchaser (e.g. seller retains an
overriding royalty or seller has rights to put the asset
back to the seller).
19
Proceeds should be agreed to the signed documents and
traced to bank records for evidence of receipt.
ii. If payment is deferred, recalculating the These types of arrangements are not common in the oil
cash price equivalent of the and gas industry. If a deferred payment is material,
consideration receivable (the difference engagement teams should consider whether discounting
between the nominal amount of the is appropriate.
consideration and the cash price
equivalent is recognised as interest
revenue (IAS 16.72));
iii. Agreeing the carrying amount to the In instances where an entity disposes of assets that
client’s accounting records and relevant comprise a complete E&E area, the net book value of the
working papers; and area is derecognized and the gain or loss is calculated as
the difference between the net book value of the area
and the proceeds received.
In the case of a partial disposal, engagement teams will
need to review the client’s allocation of net book value to
ensure the allocation methodology is reasonable.
Typically, an allocation based on land units disposed
(e.g. acres, hectares) would be considered reasonable.
iv. Re-calculate the gain or loss to verify None

mathematical accuracy (IAS 16.71-72).
d) Verify that the gain / loss on disposal are Gains / losses cannot be included within revenue. The
appropriately classified within “other income” most appropriate presentation is as a separate line item
or expenses on the statement of comprehensive on the statement of comprehensive income.
income.
Note: Gains on disposal of assets do not meet the

definition of ‘revenue (IAS 16.68).
Lease Expiries
It is very important that the engagement team obtain an

e) Obtain a listing of lease expiries during the year.
understanding of the client’s accounting policy for lease
If expiries are significant, perform procedures to
acquisition costs as the nature of testing to be performed
confirm that the costs associated with expired
will vary significantly depending on the client’s policy.
leases have been derecognized in accordance
with the client’s accounting policy for E&E.
Policy Choice #1 – Account for individual leases
If costs are tracked by lease and the client’s policy is to

derecognize such costs on lease expiry, teams should
perform procedures to ensure expiries have been
properly accounted for. Procedures should be performed
to test the accounting entries recorded by the client for
expiries (accuracy, occurrence) and to ensure that all
expiries have been appropriately accounted for
(completeness). Example test procedures that can be
performed include:
Accuracy
Obtain the journal entry and supporting documentation
for all lease expiries recorded in the period. Trace the
20
expired acreage to supporting documentation (land
files) to validate the acreage for the lease that expired
during the period. Agree costs derecognized to details
within the client’s accounting system. In many
instances, clients track lease costs in a ‘pool’ and use an
allocation methodology ($/acre) to determine the net
book value of an individual lease on expiry. In such
cases, tests should be performed to obtain comfort over
the $/acre used in the calculation (e.g. validating total
acres and total costs and reperforming the calculation)
Completeness
The more significant risk for this EGA is that the client
may not have accounted for all expired leases during the
period. For many clients, lease continuities are
maintained outside the accounting function (by the land
department) and a risk exists that leases expire without
the accounting group being made aware of it.
Engagement teams can perform a test that addresses

this risk by obtaining a detailed listing of the leases
included in E&E at period end and, using an
Accept/Reject testing methodology, for a sample of
leases, perform the following:
 Review lease documentation to verify that the

expiry date is not prior to the balance sheet
date. If the lease expires shortly after the
balance sheet date, additional discussion with
the client is required to understand whether or
not there are plans to drill on the land before
the expiry date. If no such plans exist,
consideration should be given to whether
impairment should be recorded at the balance
sheet date.
Policy Choice #2 – Account for lease costs at a

resource play or area level
In this case, no specific testing is required for lease

expiries as no accounting entry is recorded upon expiry.
Costs are accumulated and evaluated at an area basis
based on the success of E&E drilling activities. See
EGA’s “Test transfers of E&E to PP&E” and “Consider
whether indicators of impairment exist for exploration
and evaluation assets” for relevant testing.
Policy Choice #3 – Lease expiries transferred to

existing CGU’s on expiry
In this case, procedures should be performed to test the

accounting entries recorded by the client to transfer
costs to PP&E upon lease expiry (accuracy, occurrence)
and to ensure that all expiries have been appropriately
21
accounted for (completeness). The procedures to be
performed would be consistent with those described
under Policy Choice #1 above. Engagement teams will
also need to consider whether transferring costs to
PP&E could result in impairment at the CGU level.
Policy Choice #4 – Amortize lease costs
In this case, no specific testing is required for lease

expiries as no accounting entry is recorded upon expiry.
However, in this case, an appropriate audit test should
be developed to test the client’s amortization of lease
acquisition costs. Typically, a substantive analytical
procedure or reperformance test would be appropriate.

22
EGA: Test transfers of E&E to PP&E

Under IFRS 6, exploration and evaluation costs remain in E&E until the point where technically feasible and
commercially viable reserves are identified. Typically, commercial viability is considered to be the point where the
entity determines that an area is worth bringing to development (e.g. Board approves development expenditure)
and proved and/or probable reserves have been assigned by the client’s reserve evaluators.
Similar to the discussion on lease expiry accounting, the level (e.g. by well, by lease, by area) at which entity’s track
E&E costs varies depending on the accounting systems in place and the nature of operations. Accordingly, there
are a variety of accounting policies and calculation methodologies applied in respect to transferring costs to PP&E.
The methodology applied for transfers to PP&E would generally be expected to be consistent with the approach to
lease expiries [see discussion under EGA: Test derecognition of exploration and evaluation assets (disposals and
expiries) above for details]. Once selected, the accounting policy and calculation methodology should be
consistently applied.

The following assertions are most relevant for this EGA: Existence/ Occurrence, Accuracy / Valuation, Presentation
& Disclosure. The Likely Sources of Potential Misstatement (“LSPM”) relevant to this EGA are summarized below:
Generally, it is not expected that there will be significant reliance placed on key controls addressing transfers of
E&E to PP&E for many financial statement audits. For integrated audits, the key client controls addressing the
assertions covered in this EGA would usually be something like the following:
 Each quarter, the land manager reviews a detailed continuity schedule of E&E properties. He also reviews
the drilling activity report for the quarter and ensures that all lands drilled during the quarter have been
removed from the E&E properties listing.
 The financial analyst meets with the land manager each quarter to understand the movements in E&E
properties during the period (e.g. disposals, drilling activity and lease expiries) and prepares a journal entry
to transfer costs to PP&E or derecognize costs for expired leases. The journal entries are reviewed and
approved by the Controller.
23
a) Update understanding of the client’s Engagement teams are reminded to document their understanding
accounting policies for (E&E) of the client’s accounting policies in the Aura file.
transfers.
b) Obtain a detailed listing of E&E The first step in performing detailed testing of transfers of E&E to
transfers for the period and agree PP&E is to obtain a detailed listing of all transactions which have
totals to the detailed analysis of been classified as ‘transfers’ in the E&E continuity schedule.
Note: Often, a client’s continuity schedule for E&E may group
E&E. Obtain explanation for any
transfers to PP&E, expiries and disposals together as one item. As
significant reconciling items and there are separate EGA’s and separate procedures performed over
agree to supporting documentation, each of these types of transactions, engagement teams need to
if applicable. ensure that the detailed listing provides enough detail to distinguish
between them. Often AFE or cost centre details within the client’s
accounting system can be used to prepare an appropriately detailed
analysis.
Engagement teams need to document the procedures performed to

obtain comfort over the completeness and accuracy of detailed
listing from which the sample is selected for testing.
Note: This EGA deals with transfers of E&E only. There is a separate
EGA titled “Test the decrecognition of exploration and evaluation
assets (disposals and expiries)” that deals with other transactions
where E&E costs are derecognized in accordance with IFRS 6.
c) Examine documentation supporting E&E costs are transferred to PP&E when commercially viable
the transfer of E&E to PP&E (e.g. reserves are assigned. Engagement teams should obtain evidence
reserve reports supporting the that reserves were assigned for each transfer recorded. This is
technical feasibility and commercial typically achieved through inquiry of the client’s reserve engineer
viability of extracting reserves). and examination of the detailed reserve report (on a well or area
basis depending on the client’s accounting policy).
Engagement teams also need to consider whether the appropriate

amount of costs have been transferred to PP&E. The transferred
amounts should include both costs associated with the wells
(drilling, completion, decommissioning costs, etc.) and an allocation
of land acquisition and seismic costs previously capitalized.
Generally, clients should allocate these costs using a systematic
approach. A common methodology is to allocate a pro-rata share
based on the overall drilling planned for an area (e.g. if there is an
exploration plan to drill 4 wells on a section, then 25% of
land/seismic costs for that section would be transferred to PP&E
with each successful well). The allocation methodology is a policy
choice and should be applied consistently. If an allocation
methodology is used (e.g. $/acre) it would be expected that the rate
applied for transfers would be similar to the rate applied for lease
expiries.
24
d) To ensure completeness of transfers This test should be performed in conjunction with the test described
of E&E, select a sample of under part (e) of the EGA titled “Test the derecognition of
suspended/development wells exploration and evaluation assets (disposals and expiries)”.
included in E&E at the period end
Engagement teams can perform a test that addresses this risk by
and assess whether classification as obtaining a detailed listing of the leases included in E&E at period
E&E is still considered appropriate. end and, using an Accept/Reject testing methodology, for a sample
Evaluate for completeness and of leases, perform the following:
accuracy based on knowledge of the
client and other audit procedures  Perform inquiry of the client’s reserve engineer and review
reserve report detail to verify that there are no reserves
performed (e.g. review of reserve
assigned to the lease and therefore it is appropriately classified
report, dry hole expense, PP&E as E&E. If reserves have been assigned, inclusion in the E&E
additions testing). balance is likely not appropriate and an entry to transfer costs
to PP&E may be required.
In practice, impairment tests are typically not completed for each

e) Prior to reclassification to PP&E,
well when the costs are to be transferred to an existing CGU within
exploration and evaluation assets PP&E. Instead, PP&E and E&E are tested for impairment each
should be assessed for impairment. quarter if indicators exist (see separate EGA’s).
Perform this assessment as part of
the EGA “Consider whether In cases where there is not an existing PP&E CGU affiliated with the
E&E costs (e.g. will be a new CGU if reserves are found), it is
indicators of impairment exist for
important that engagement teams obtain an understanding of the
Exploration and evaluation assets” results of drilling when significant costs are to be transferred to
PP&E from E&E. If drilling costs are significantly over budget or the
value of reserves assigned is less than anticipated, it may not be
appropriate to transfer all of the costs from E&E to PP&E. Any
deficiency between the net book value to be transferred and the
recoverable amount (based on reserves identified) should be written
off and recorded as impairment on the statement of comprehensive
income.
Under IFRS, impairment of PP&E is evaluated at the CGU level.

f) Examine documentation supporting
Therefore, when testing transfers from E&E to PP&E it is important
the allocation or classification of that engagement teams verify that the costs are being transferred
E&E transfers into the appropriate into the appropriate CGU. This will typically be based on the
CGUs. physical location of the wells / property.
Note: If the client has mapped their E&E cost centres in the
accounting system to relevant CGU, engagement teams may be able
to rely on testing performed over E&E additions to get comfort that
transfers are being recorded to the correct CGU.

25
EGA: Consider whether indictors of impairment exist for
exploration and evaluation assets

Impairment considerations for all long-lived assets, except for E&E assets, are covered by IAS 36, Impairment of
Assets (IAS 36). E&E assets are subject to IFRS 6, Exploration for and Evaluation of Mineral Resources (IFRS 6)
and IAS 36.
The general principles in these standards require companies to assess at each reporting period whether there are
any indications that assets may be impaired. The existence of one or more indicators does not mean the assets are
impaired; however, it does require further testing to assess whether the assets are actually impaired.
Paragraph 18 of IFRS 6 states that “Exploration and evaluation assets shall be assessed for impairment when facts
and circumstances suggest the carrying amount of an exploration and evaluation asset may exceed its recoverable
amount”
Accordingly, it is not a requirement to formally test E&E assets for impairment at each balance sheet date.
However, an entity is required to assess E&E for impairment indicators at each balance sheet date (i.e. quarterly for
public companies). Paragraph 20 of IFRS 6 provides examples of indicators of impairment for E&E assets (note:
this list is not exhaustive):
 Rights to explore have expired or have not been renewed

 No further E&E is planned
 Decisions have been made to discontinue E&E due to lack of commercial viability
 Data exists that indicates the book value may not be recoverable from future development and production
As discussed further below under the EGA titled “Test impairment assessment – exploration and evaluation
assets”, there is an accounting policy choice for entities as to the level at which E&E costs are quantitatively tested
for impairment. In some instances, entities may chose to aggregate E&E with producing CGU’s at an operating
segment level (e.g. Canada) for quantitative testing. However, impairment indicators should be considered for
each ‘sub-component’ (e.g. property, or geographic region) of E&E rather than at an aggregated level.

The primary assertion being addressed in this EGA is Valuation of E&E. The risk that impairment is not correctly
identified or calculated is included within the LSPM for E&E. A screenshot of the relevant sections of the LSPM is
shown below:
26
Generally, it is not expected that there will be significant reliance placed on key controls addressing potential
indicators of impairment for E&E for most financial statement audits (comfort will be obtained from substantive
testing). For integrated audits, the key client control addressing the assertions covered in this EGA would usually be
something like the following:
 Each quarter, the manager of financial reporting prepares an impairment indicator checklist for E&E
assets to determine whether a quantitative impairment assessment should be performed. A memo is
prepared highlighting the potential indicators considered and the conclusion as to whether or not a
quantitative assessment is performed. The memo is reviewed and approved by the Controller.

Consider whether indicators of impairment

exist for exploration and evaluation (E&E)
items by performing the following
procedures:
a) Obtain management's assessment of Management should prepare an analysis that addresses each of the
whether indications exist that items potential indicators noted in the Overview section above. The
of E&E are impaired and supporting analysis should be prepared for each ‘sub-component’ of E&E (e.g.
documentation (such as budgets, geographic location) rather than at an aggregated level.
business plans, schedule of lease In cases where management does prepare an appropriate
expiries, etc.) IFRS 6.20(a-d) impairment indicator memo, engagement teams should review to
ensure all potential indicators have been considered. It is important
that engagement teams evidence their review of the memo and the
reasonableness of the assumptions and conclusions therein (e.g.
verifying price trends by comparing to third party pricing
informatin). The most efficient way to do this is often to include
audit ticks or other commentary directly in management’s memo
prior to including it in the file. PwC commentary should be clearly
distinguishable on the version retained.
If management does not prepare a formal analysis, engagement

teams should document their own assessment of the potential
indicators including:
Expiry of rights
Lease expiry is addressed in the EGA titled “Test the decrecognition
of exploration and evaluation assets (disposals and expiries) and
should not be retested here. However, teams are reminded that if a
lease is set to expire shortly after the balance sheet date, additional
discussion with the client is required to understand whether or not
there are plans to drill on the land before the expiry date. If no such
plans exist, consideration should be given to whether impairment
should be recorded at the balance sheet date.
No further exploration activity planned

A decision by the client not to allocate capital resources to E&E
activity may be an indicator of impairment. Engagement teams
should perform detailed inquiry of management regarding their
27
future plans to verify that there continues to be potential for E&E
assets to be developed. A short term delay in exploration activity
(e.g. excluding activity from the next year’s annual capital budget)
may not be an impairment indicator; however no activity considered
in a client’s long-term capital budget (next 3-5 years) is likely to be
an indicator that a formal impairment assessment is warranted.
Poor drilling results

Engagement teams should consider whether data exists that
indicates the book value may not be recoverable from future
development and production. Making such a determination for E&E
properties requires significant judgment. Dry holes (unsuccessful
wells) are common and may not necessarily be indicative of
impairment if the exploration plan for an area includes drilling
multiple wells. However if a trend of negative drilling results has
occurred, or if actual drilling costs incurred are significantly higher
than budgeted, engagement teams should perform detailed inquiry
of operational management to understand the reasons behind the
poor results and the potential impact on the future viability of the
E&E property overall.
Market Capitalization
Paragraph 12(d) of IAS 36 requires impairment testing when the
carrying amount of the net assets of an entity is more than its
market capitalization. This “market cap” indicator is not included in
IFRS 6.
At its October 2012 meeting, the IDG committee of the CICA

discussed whether the ‘market cap’ indicator should be considered
for entities that only have E&E assets and no development /
producing properties.
The conclusion reached was that ‘market cap’ is not a direct

indicator of impairment for E&E, but for those entities with only
E&E assets, it should be considered an indirect indicator of
impairment if there is a significant difference in the net asset value
compared to market capitalization. In such instances, engagement
teams should perform detailed inquiry of management to
understand results to date, the nature and extent of planned E&E
activities and potential reasons why market capitalization is not
considered to be a true reflection of the fair value of the entity’s E&E
assets. If adequate support is obtained to support the assertion that
the market cap deficiency is not an indicator of impairment, no
formal impairment test may be required.
Note: Whether there are indicators of E&E is an area of

management judgement. If the E&E balance is material and there is
significant judgement involved the client should consider disclosing
this as a key area of judgement in the notes to the financial
statemnets in accordance with IAS 1.22
28
b) Evaluate the reasonableness of the Engagement teams should explicitly document their conclusion with
impairment indicators used by respect to whether or not impairment indicators exist such that a
management and the judgments formal impairment test is required.
and estimates made during their
impairment evaluation process and Note: If the conclusion is that no indicators exist, it is very
assess whether management’s important that sufficient validation procedures have been
conclusion regarding whether E&E performed by PwC in (a) above to support the conclusion. For
should be tested for recoverability example, if management’s indicator analysis indicates that future
based on the existence of an exploration activity is planned, PwC engagement teams should be
impairment indicator during the validating this assertion by obtaining the long-range capital budget
current period. and reviewing Board minutes where the allocation of resources to
capital projects is discussed. It may also be appropriate to include
specific representations of future exploration plans in the
management representation letter.
c) If impairment indicators exist, Refer to EGA titled “Test impairment assessment – exploration and
perform EGA 'Test impairment evaluation assets” for guidance on testing E&E assets for
assessment – Exploration and impairment.
evaluation assets'.
d) Assess whether there is any Engagement teams are reminded to explicitly document their
indication that an impairment loss consideration of whether indicators exist that an impairment
recognised in a prior period should recognized in prior periods should be reversed. Generally, these
be reversed. IAS 36.110-116. indicators would be the same as those discussed in (a) above, but
based on opposite trends (e.g. an entity’s Board makes a decision to
re-allocate capital to an E&E project which was previously
cancelled).

No specific templates have been created for this EGA as each client’s circumstances will be unique.
29
EGA: Test impairment assessment – exploration and
evaluation assets

If indicators of impairment are determined to exist for E&E assets, an entity is required to conduct a quantitative
impairment asessment. IFRS 6 provides entities with an accounting policy choice in terms of the level at which E&E
assets are assessed at impairment. Paragraph 21 of IFRS 6 states:
21 An entity shall determine an accounting policy for allocating exploration and evaluation assets to
cash-generating units or groups of cash-generating units for the purpose of assessing such assets for
impairment. Each cash-generating unit or group of units to which an exploration and evaluation
asset is allocated shall not be larger than an operating segment determined in accordance with IFRS
8 Operating Segments
In practice, the following policies are most commonly applied with respect to assessing E&E assets for impairment:
 E&E properties are assessed for impairment individually at the property level. This is often the case for
‘wildcat’ E&E properties that are not located near an existing development / producing property for the
entity (i.e. will be a new PP&E CGU if reserves are discovered).
 E&E properties are grouped with a development / producing CGU in a similar geographic location for
purpose of impairment testing. This is a common approach when an entity’s E&E assets are primarily
unproved acreage located around existing development / producing properties.
 E&E properties are aggregated with multiple development / producing CGU’s without consideration to
geographic location (e.g. at the country level). The grouping of CGU’s in this case cannot be larger than an
operating segment.
30
The primary assertion being addressed in this EGA is Valuation of E&E. The risk that impairment is not correctly
identified or calculated is included within the LSPM for E&E. A screen shot of the relevant LSPM components is
shown below:
Generally, it is not expected that there will be significant reliance placed on key controls addressing testing
impairment for E&E for most financial statement audits (comfort will be obtained from substantive testing). For
integrated audits, the key client controls addressing the assertions covered in this EGA would usually be something
like the following:
 When indicators of impairment are determined to exist, a formal impairment calculation is performed.
The impairment calculation is prepared by the Financial Analyst based on information provided by the
business development, tax and treasury groups. The impairment calculation is reviewed and approved
by the Controller.
 The impairment model (excel spreadsheet) is located on a password-protected network drive and access
is restricted to the Financial Analysis. Key formula cells within the model are ‘locked’ to prevent
unauthorized changes.
31
1. Impairment testing
a) Perform inquiry of management to determine Clients are required to select an accounting policy for
whether there have been any changes to the testing E&E assets for impairment upon adoption of
client’s policy for assessing impairment of IFRS. Once a policy is selected, it is required to be
exploration and evaluation assets (E&E). applied consistently from period to period.
Under IFRS 6.21, E&E assets may be evaluated Accordingly, no changes are expected unless there has
separately, or grouped with a producing CGU been a significant change in circumstances. If
or group of producing CGU’s. The level at engagement teams determine that the level at which the
which E&E assets are tested for impairment is a client is testing E&E is different from prior years,
policy choice under IFRS that should be detailed inquiry of management should be performed
applied consistently. to understand the rationale for the change.
Engagement teams are reminded that the client’s

policies should be documented in the Aura file.
b) Obtain management’s analysis of E&E See policy choices in the Overview section above.
impairment and ensure the allocation of E&E Engagement teams should review the allocation of E&E
assets to CGU’s is consistent with the policy to verify it is consistent with the client’s accounting
noted in (a) above. policy for testing impairment. It is expected that the
allocation of E&E to development/producing CGU’s
would be applied consistently from period to period. If
an E&E asset is allocated to a different CGU than in
prior periods, engagement teams should perform
detailed inquiry of management to understand why and
to gain comfort that the change is not indicative of
management bias to avoid impairment.
c) Test CGU with allocated E&E assets for When E&E assets are grouped with PP&E CGU’s for
impairment following the guidance in the EGA: impairment testing, engagement teams should
“Test Impairment Assessment – Property, document our testing procedures once in the EGA titled
plant and equipment”. “Test impairment assessment – property, plant and
equipment” and include a link to that testing in this
EGA.
d) If applicable, for E&E assets where there are no For entities that are in the exploration stage (no
CGUs or group of CGUs to allocate to for developed / producing properties), the impairment
testing of impairment, consider other means of assessment of E&E can be more complex since typically
determining the recoverable amount such as: no reserve information (future cash flows) exists. In
a. Land valuation report prepared by 3rd these cases, alternative sources of evidence should be
party obtained to determine whether E&E assets are
b. Recent land sales for comparative impaired. In some instances, clients will obtain third
locations party valuation reports on their E&E properties (e.g.
c. Value of any tangible costs associated Seaton Jordan). If this is the primary source of
with E&E evidence for impairment purposes, engagement teams
need to consider performing specific “reliance on
experts” procedures in relation to the land evaluator
using EGA titled – Evaluate the Experts Work.
32
Alternatively, engagement teams can compare the net
book value of E&E assets on a per hectare or acre basis
to recent government land sale information (available
from government websites) or to relevant market
transactions for similar assets. Market transaction data
can be obtained from PwC’s VMD group.
In all instances, it is important that engagement teams

document the source of the data used, the period to
which it relates and any other information needed to
indicate why such data is relevant to client’s
impairment assessment.

Refer to the EGA titled “Test impairment assessment – property, plant and equipment” for example template for
impairment testing.
33
EGA: Test farm-outs, asset swaps and other conveyance
agreements
1. Overview and background information

This EGA covers farm-outs, asset swaps and other conveyance agreements. It is very important that engagement
teams obtain a full understanding of the terms and conditions of any such agreements as there may be financial
statement implications. Under previous CICA HB Part V Canadian GAAP, these contracts were typically not valued
for accounting purposes; however differences may exist under IFRS depending on the nature of the transaction
and/or the client’s accounting policy choices.
Asset Swaps
An entity may exchange part or all of their future production interest in a property for an interest in another
property. The properties may be in different stages of development, and depending on how advanced the
development is, the swap transaction could be considered to be an exchange of businesses. The accounting
requirements will be different if the transaction represents the exchange of assets or a business combination.
Under IFRS, an exchange of one non-monetary asset for another is accounted for at fair value unless (i) the
exchange transaction lacks commercial substance, or (ii) the fair value of neither of the assets exchanged can be
determined reliably. There may be more than one asset exchanged or a combination of cash and nonmonetary
assets.
Commercial Substance
Under previous CICA HB Part V Canadian GAAP, exchanges of E&E assets were typically recorded at ‘cost’. The net
book value of the property acquired was equal to the net book value of the property given up and no gain or loss was
recognized.
Under IFRS 6, entities can make an accounting policy choice with respect to exchanges for E&E assets. Entities
may choose to record a gain or loss on a swap of E&E properties if they determine that the transaction has
commercial substance. Once this policy is adopted, it must be applied consistently to all similar transactions. Most
Canadian clients chose to continue with their existing policy for E&E swaps and therefore no entry is recorded as a
result of these transactions.
It is important to note, however, that there is no such policy choice in regards to swaps of properties which are
included within PP&E (i.e. properties that have commercial reserves assigned). For those types of transactions, an
entity must determine whether the exchange transaction has commercial substance by considering the extent to
which the amount, timing and risk relating to future cash flows is expected to change as a result of the transaction.
IAS 16 provides guidance to determine when an exchange transaction has commercial substance.
In most instances, we would expect that a swap transaction involving two properties in the development or
production stage would have commercial substance and therefore the transaction would be recorded at ‘fair value’
with a resulting gain or loss recognized. When an exchange of assets involves both development/producing
properties and E&E properties, this determination becomes more complex and teams should consider consulting
with ACS to determine the appropriate accounting treatment.
Fair Value
If a transaction has commercial substance, the acquired property is measured at the fair value of assets
relinquished unless the fair value of asset or assets received is more readily determinable. A gain or loss is
recognised on the difference between the carrying amount of the asset given up and fair value recognised for the
asset received.
34
Generally, if the assets acquired or disposed of have proved or probable reserves attributed, this is an indication
that one or more of the assets has an associated fair value. The transaction likely involves PP&E. Fair value can
generally be established through reserve reports, which are included in most purchase & sales agreements of oil and
gas properties where there are reserves associated.
There are cases where a combination of properties with and without reserves is exchanged. Engagement teams will
have to consider the extent to which a reliable fair value measure can be determined. Note that some purchase &
sales agreements have reference to an estimated contract price, even though no cash is exchanged. Discussions will
have to be held with management to determine whether this contract price is an appropriate representation of fair
value of the contract.
Other Considerations
In some swap transactions, one or both of the properties exchanged may meet the definition of a business as
defined in IFRS 3. If control is obtained over a property that meets the definition of a business then a business
combination has occurred. If the transaction is determined to be a business combination, the more complex
requirements of IFRS 3 apply (refer to Chapter 5 of this handbook for detailed guidance on auditing business
combinations in the oil and gas industry). An entity may also obtain joint control or significant influence when it
acquires an interest in a property through a swap. In such cases, the interest is initially recognised at fair value as
determined above and then the requirements of IAS 28 Investments in Associates and Joint Ventures (amended in
2011) or IFRS 11 Joint Arrangements would apply.
Farm In/Out
A “farm in/out” transaction occurs when a party (the “farmor”) assigns an interest in the reserves and future
production of a property to another party (the “farmee”). This is often in exchange for an agreement by the farmee
to pay for both its own share of the future development costs and those of the farmor. There may also be a cash
payment made by the farmee to the farmor.
This type of transaction is referred to as a “farm in” when considered from the farmee’s perspective and a “farm
out” when considered from the farmor’s perspective. These types of transactions typically occur during the
exploration or development stages and are a common method entities use to share the cost and risk of developing
oil and gas properties. The farmee hopes that their share of future production will generate sufficient revenue to
compensate them for performing the exploration or development activity on behalf of the farmor.
Accounting by the Farmee
In all cases, the farmee will only recognize costs as incurred, regardless of the stage of development of the asset. The
farmee is required to disclose their contractual obligations to construct the asset and meet the farmor’s share of
costs. The farmee should follow its normal accounting policies for capitalization, and also apply them to those costs
incurred to build the farmor’s share.
35
Accounting by the Farmor
Farm out agreements are often non-monetary transactions with no exchange of cash at the date the agreement is
signed. There is no specific guidance in IFRS for these transactions. Accordingly, an accounting policy choice exists
under IFRS. The accounting depends on the specific facts and circumstances of the arrangement, particularly the
stage of development of the underlying asset.
1. Assets with no reserves (E&E assets)
If the farm out transaction relates to an E&E property that has no reserves assigned, the transaction is accounted
for under IFRS 6.
Under IFRS 6, entities can make an accounting policy choice with respect to farm out transactions involving E&E
assets. Entities may choose to record a gain or loss on a transaction as would be the case for a property with proved
reserves (see discussion below) or they can choose to follow their policy under previous GAAP whereby a gain or
loss would not be recognized. Once a policy is adopted, it must be applied consistently to all similar transactions.
The following policy choices have developed under IFRS and engagement teams should be aware of these if the
client has not determined its accounting policy for farm outs:
(1) Recognize only any cash payments received and do not recognise any consideration in respect of the value
of the work to be performed by the farmee and instead carry the remaining interest at the previous cost of
the full interest reduced by the amount of any cash consideration received for entering the agreement. The
effect will be that there is no gain recognised on the disposal unless the cash consideration received exceeds
the carrying value of the entire asset held;
(2) Follow an approach similar to that for assets with proven reserves, recognising both cash payments
received and value of future asset to be received, but only recognise the future asset when it is completed
and put into operation, deferring gain recognition until that point; or
(3) Follow an approach similar to that for assets with proven resources, recognising both cash payments
received and value of future asset to be received, and recognise future asset receivable when the agreement
is signed with an accompanying gain in the income statement for the portion of reserves disposed of.
It is important to remember that if results of exploratory farm-out drilling are unsuccessful, the E&E property
should be evaluated for impairment if management plans to abandon it as a result of the findings.
Assets with proven or probable reserves
If there are reserves associated with the property, the farm out should be accounted for in accordance with the
principles of IAS 16, similar to the asset swap above. The farm out will be viewed as an economic event, as the
farmer has relinquished its interest in part of the asset in return for the farmee delivering a developed asset in the
future. There is sufficient information for there to be a reliable estimate of fair value of both the asset surrendered
and the commitment given to pay cash in the future. The rights and obligations of the parties need to be understood
while determining the accounting treatment.
The consideration received by the farmor in exchange for the disposal of their interest is the value of the work
performed by the farmee (e.g. costs incurred to drill wells or complete seismic in accordance with the farm-in
agreement) plus any cash received. This is presumed to represent the fair value of the interest disposed of in an
arm’s length transaction. The farmor should derecognize the carrying value of the asset attributable to the interest
in the proportion given up, and then recognize the “new” asset to be received at the expected value of the work to be
performed by the farmee. After also recording any cash received as part of the transaction, a gain or loss is
recognised in the statement of comprehensive income.
36
Assessing the value of the asset to be received may be difficult, given the unique nature of each development. Most
farms out agreements will specify the expected level of expenditure to be incurred on the project (based on the
overall budget approved by all participants in the field development). The agreement may contain a cap on the level
of expenditure the farmee will actually incur. The value recognised for the asset will often be based on this amount
stipulated in the contract.
The following example helps to illustrate the accounting entries required for a farm out
transaction for a property in the development or production stage:
Company N owns 18% and Company P owns 82% undivided interest share in a property. On January 1, 2012 the
companies entered into a farm out agreement with Company R. In exchange for $1.8M and $8.2M respectively,
Company R will drill 2 wells with an anticipated cost of $24M by the end of 2013, and earn 45% interest (Company
N will have 10%, Company P will have 45%). Company R can walk away from the agreement at any time, but will
forego costs incurred to date and will not earn its interest. The carrying value of the assets on Company N’s books
prior to the transaction is $3M. Company R drilled 1 well by December 31, 2012 at an actual cost of $15M and a
second well by June 30, 2013 for $14M. As a result, Company R earned its interest of 45% on June 30, 2013 and is
subsequently responsible for contributing 45% of ongoing costs and earning 45% of revenues. Journal entries for
Company N (the Farmor) are as follows:
January 1, 2012:
DR Cash $1.8M Equal to cash received

CR Deposit for sale of property $1.8M
December 31, 2012:
DR PP&E $1.5M
CR Deposit for sale of property $1.5M ($15M * 10% new anticipated WI)
June 30, 2013:
DR PP&E $1.4M
CR Deposit for sale of property $1.4M ($14M * 10% new anticipated WI)
DR Deposit for sale of property $4.7M ($1.8M + $1.5M + $1.4M)

CR PP&E $1.33M (8/18th of Company N’s property is derecognized * $3M)
CR Gain on farm-out $3.37M ($4.7M - $1.33M)

The primary assertions being addressed through this EGA are Accuracy, Existence/Occurrence and Rights and
Obligations. The Likely Sources of Potential Misstatement (“LSPM”) relevant to this EGA are summarized below
37
within this EGA. For integrated audits, the key client control addressing the assertions covered in this EGA would
usually be something like the following:
accounting implications arise. A memo is prepared for each significant, unusual transaction outlining the
relevant accounting guidance and entries proposed to record the transaction. The memo and related

a) Perform inquiry of management to determine It is recommended that engagement teams include
whether the client entered into any farm out/in reference to swaps, farm-outs and conveyance
transactions, asset swaps or other conveyance arrangements in the PBC listing sent to clients.
arrangements (transfers of ownership in
mineral interests) during the period. Obtain Specific inquiry should be performed as part of the
and document an understanding of the client’s planning phase of the audit (with update at year end) to
process for identifying and monitoring these ensure all such arrangements have been communicated.
types of transactions. Since these types of arrangements did not give rise to
accounting implications under previous CICA HB Part V
Canadian GAAP, there may not be an effective process
in place at the client to ensure all such transactions get
communicated to the accounting group. Accordingly, it
is recommended that engagement teams perform
inquiry of appropriate client contacts in accounting,
land and engineering departments to ensure a complete
listing of these transactions has been provided.
Engagement teams should also consider the results of
minute and contract review performed in planning.
b) If material, test conveyance transactions during Refer to Overview and Background Information
the period by performing the following: section above on how to account for these agreements
i. Obtain and review the related under IFRS.
agreements and document our
understanding of the facts and It is very important that engagement teams obtain and
circumstances and our conclusion on review copies of final signed agreements underlying
the type of conveyance transacted, these transactions rather than simply relying on a
giving consideration to whether the client’s memo summarizing the transaction. Client
terms of the agreement indicate the memos are often prepared by the accounting group and
conveyance could be in substance a may not accurately reflect all of the terms and
borrowing; and conditions in the agreement that can have an impact on
the accounting treatment.
ii. Considering the nature of the
transaction; relevant guidance under In connection with borrowing agreements, companies
applicable GAAP and the client’s may also enter into farm-in options with the
accounting policy for these counterparty. For example, a loan between two parties
transactions, perform additional could be executed, but cancelled upon transfer of
procedures, as appropriate, based on working interest to the counterparty upon the
materiality and the assessed level of completion of certain events. Conversely, a company
inherent risk. could enter into a farm-out agreement which in
substance is a loan agreement collateralized by its oil
and gas leases. These are more common within
international oil and gas operations.
38
These types of arrangements can be complex. If the
transaction is material, consultation with ACS on the
appropriate accounting treatment is encouraged.

No specific templates have been created for this EGA as each transaction will be unique.
39
3. Property, Plant & Equipment
PP&E
IAS 16 – Property, plant & equipment is the standard that deals with accounting for PP&E. For oil and gas
companies, PP&E will include costs transferred from E&E upon identification of commercially viable reserves as
well as capitalized costs relating to the development, construction, and production phases of an upstream oil and
gas operation. PP&E may also include mobile equipment, midstream assets (pipelines, processing facilities) and
corporate assets (furniture, fixtures, etc.).
Audit EGA’s
Due to the significance of PP&E balances for most oil and gas companies, a number of industry-specific EGA’s have
been developed. These EGA’s can be utilized in Aura by selecting the tier 3 library titled “Canada Energy Industry
Supplement”. This chapter of the handbook summarizes the EGA’s relevant to PP&E and provides supplemental
guidance to assist engagement teams in the preparation and review of the required procedures.
40
EGA: Test additions – Property, plant and equipment

For purposes of testing PP&E additions, a separate industry-specific EGA was not considered necessary as the
tailored procedures in the standard Aura library EGA cover the required assertions. Accordingly, there is not a
separate EGA for PP&E additions in the tier 3 library titled “Canada Energy Industry Supplement”.
However, there are some important industry-specific considerations that teams should incorporate into their
testing approach for oil and gas companies and these are outlined in the sections below.
For most oil and gas companies, PP&E additions will relate to the following items:
 development drilling
 completion activities
 construction of infrasture / midstream assets
 seismic activity
 activities in relation to development of identified mineral resources
 corporate assets (e.g. furniture, fixtures, etc.)
 capitalized workovers*
 capitalized overhead and employee benefit expenses (including share-based payments)
 costs related to recognition of decomissioning liabilities
 acquisition of oil and gas properties
 capitalized borrowing costs **
 turnarounds and major inspection costs ***
* Workovers are a common activity for oil and gas companies and are generally defined as:
“To perform one or more of a variety of remedial operations on a producing oil well to try to increase
production”
Examples of activities conducted as part of a workover include deepening, plugging back, pulling and resetting
liners, squeeze cementing, etc. It is important to understand the nature of the work being done to determine the
appropriate accounting treatment (capital versus expense). Generally, workover costs should only be capitalized if
they result in an increase in reserves.
** Borrowing costs must be capitalized during the construction of PP&E that meets the definition of a qualifying
asset under IAS 23R. In practice, it is generally uncommon for most conventional upstream assets (e.g. wells) to
meet the criteria for qualifying assets as they generally take less than one year to construct. However, constructed
midstream assets (gas processing plants, pipelines) or oil sands assets (e.g. upgraders) are likely to meet the
definition of a qualifying asset and therefore capitalization of borrowing costs would be mandatory. If capitalized
borrowing costs are applicable, the EGA “Test borrowing costs capitalized” from the standard IFRS library should
be imported into the Aura file and completed.
*** Under IAS 16, cost incurred for major turnarounds or inspection costs are capitalized and amortized over the
period until the next turnaround or inspection. Material turnaround or inspection costs are not common for
conventional upstream oil and gas assets; however clients with oil sands operations or offshore production may
incur significant turnaround costs on a regular basis.
41
The primary assertions being addressed through this EGA are Accuracy, Cut-off, Existence/Occurrence, Rights and
Obligations and Presentation / Classification. The Likely Sources of Potential Misstatement (“LSPM”) relevant to
this EGA are summarized below:
In many instances, engagement teams will be able to perform procedures to identify key controls that may be tested
by PwC and relied upon to reduce the extent of substantive testing required over PP&E additions. The following are
examples of controls that engagement teams should consider when developing their audit strategy for PP&E
additions:
 Authorization for Expenditures (“AFE’s”) are reviewed and approved based on an established delegation
of authority. Note: Typically, a key component of this control is the classification determination for a
project (i.e. capital versus expense / E&E versus PP&E).
 If actual expenditures exceed the forecast expenditure per the approved AFE a supplemental AFE must be
created and authorized based on an established delegation of authority.
 Invoices are reviewed and approved based on an established delegation of authority to ensure they relate
to the proper period and have appropriate coding.
 Cheques or wire transfers for payments are approved based on an established delegation of authority.
 Automated controls within the accounting system calculate the ‘net expenditure amount’ based on
established ownership percentages (“gross versus net working interest”).
42
a) Obtain detailed listings of PP&E additions, The first step in performing detailed testing of PP&E
agree balances and test mathematical accuracy. additions is to obtain a detailed listing of all transactions
which have been classified as ‘additions’ in the PP&E
continuity schedule.
Note: The PP&E continuity schedule should be obtained

by CGU/depletion unit as these amounts will be
required for impairment and depletion testing.
b) Test additions: Testing approach

i. Agree the addition to supporting It is very uncommon to be able to obtain sufficient audit
documentation to verify ownership and comfort over PP&E additions through substantive
that the addition was initially recorded analytical procedures and therefore substantive tests of
at cost. details should be performed to test material PP&E
ii. Determine whether the addition is additions.
appropriately capitalized to the correct
asset category, or should be expensed, As noted in Section 7041 of the PwC Audit Guide,
in accordance with the applicable engagement teams are encouraged to first consider
financial reporting framework and the targeted testing of high value or high risk items and then
entity's PP&E policy. assess whether additional evidence is necessary after
considering results of other audit procedures performed.
In many instances, a non-stat testing approach will be
appropriate as the PP&E balance may be made up of a
large number of small / low value transactions.
Defining the Population

In order to appropriately determine the correct sample
size to test in accordance with guidance in the PwC
Audit Guide, engagement teams need to ensure that
they appropriately define the population to be tested.
The total amount of ‘additions’ from the PP&E

continuity schedule may include items that are tested in
other EGA’s and should therefore be excluded from the
population for testing in this EGA. These items may
include:
 Capitalized Stock Based Compensation

 Business Combinations
 Asset Retirement Cost
 Borrowing Costs
 Capital accruals
Often, these items are recorded to PP&E through journal

entries and can therefore be identified when scanning a
detailed transaction listing. Engagement teams should
clearly document how the population entered into
43
substantive testing templates was determined (including
reconciliation to the total PP&E balance) and provide
links to where each of the material items excluded has
been tested in the audit file.
Gross versus net accounting

Engagement teams should also consider the impact of
working interest percentages when establishing a testing
strategy for PP&E additions. Jointly conducted
operations are common in the oil and gas industry. Two
or more parties with interests in an oil and gas property
(working interests) share the revenues and expenditures
in proportion to their ownership interest or the terms of
other joint venture agreements.
If the client holds 100% interest in all PP&E properties,

no further consideration of working interests is
required. However, if the client has less than 100%
working interest, the accounting for PP&E transactions
can be significantly impacted by the concept of ‘gross
versus net’ accounting.
Typically, operating agreements between working

interest holders designate one party as ‘operator’ and
require the operator to pay all of the costs incurred for
the property and then charge each non-operating party
its proportionate share of those costs. Accordingly, the
operator’s accounting system must properly accumulate
‘gross’ expenditures (100%) and then apply working
interest percentages to determine the ‘net’ cost to charge
to each non-operating party.
For non-operated properties, costs are generally

recorded at 100% of the JIB amount. This is because the
operator will have already calculated the working
interest split and bill the non-operator for only its
portion of the costs incurred. Engagement teams should
document their consideration as to whether or not
agreeing amounts to the JIB provides sufficient audit
evidence.
The concept of ‘gross / net’ accounting can cause

complications for engagement teams when attempting
to agree PP&E additions to supporting documentation
when the working interest is less than 100%. In these
cases, if a ‘net’ interest listing is used to select items for
testing, the amounts included on that listing may not
agree directly to an invoice or other supporting
documentation (e.g. joint interest billing) as these
documents will be for the gross (100%) amount of the
expenditure for operated properties. Engagement teams
will need to discuss the testing approach with the client
to determine the most effective way to trace detailed
transactions from the PP&E sub ledger to supporting
documentation.
In situations where non-operated additions are
44
material, additional procedures may be required to gain
comfort over the completeness and accuracy of JIB
statements received from the operator. Identifying and
validating controls at the non-operator entity is typically
an effective way of accomplishing this (e.g. testing
control whereby management at the non-operator with
sufficient knowledge and experience reviews the JIB’s
received and approves after assessing the information
for reasonableness).
It is often more efficient and effective to trace gross

additions (select from a separate listing obtained from
the client’s accounting system) to supporting
documentation and then perform alternative procedures
to gain comfort over the calculation of the client’s net
working interest. Key considerations include:
 Need to complete separate EGA titled “Test well

ownership and working interest” which includes
testing automated calculation performed by the
accounting system. The rationale for the comfort
generated from this testing should be clearly
documented.
 Documentation should be included in the audit file
as evidence of understanding of the process for
PP&E additions including an overview of the
process to account for joint interest properties.
 For both target and non-stat samples, engagement
teams need to enter the ‘net’ amount tested even if
vouching gross additions as it is the net working
interest that actually impacts the client’s records.
There is a risk that if the operator has a low
working interest, the ‘net’ addition impacting the
client’s records may be much lower than the gross
amount of the addition.
Consider Dual Purpose Testing

Engagement teams are encouraged to consider whether
it may be efficient and effective to perform dual-purpose
testing when vouching PP&E additions. Specifically,
consideration should be given to testing both control
attributes (e.g. AFE or invoice approval including review
of coding / classification) and substantive assertions
(existence / occurrence, accuracy) for the same sample
of transactions.
Documenting Testing Performed
Refer to PwC Audit Guide 1051 Sufficient Appropriate

Audit for guidance on the concept of sufficient
appropriate audit evidence, sources of audit evidence, as
well as relevance and reliability of audit evidence.
Supporting documents for PP&E additions ideally
should be external, written and obtained directly by the
auditor.
45
The engagement team’s documentation should be
sufficiently detailed to address each of the relevant
assertions / attributes being addressed by the
procedure. Specifically, the documentation should
address:
Accuracy
Comfort is obtained by comparing the dollar amount per
the client’s accounting records (detailed listing) to the
amount referenced on the third party supporting
documentation (e.g. vendor invoice, joint interest billing
statement). If the invoice is denominated in a foreign
currency, the engagement team should document how it
gains comfort over the amount recorded by the client in
its functional currency.
Cut–off
Comfort is obtained by reviewing the details of the
invoice to determine whether the transaction is recorded
in the correct period (note: simply reviewing invoice
date is not appropriate as it is the date when the work
was performed which is most relevant). Additional
comfort is obtained through the search for unrecorded
liabilities and capital accrual testing performed in
separate EGA’s. Engagement teams should clearly
provide a reference to these other EGA’s, if applicable.
Comfort is obtained by reviewing invoice details and
assessing whether the service / goods have been
received.
Classification
Engagement teams should review invoice details or
other supporting documentation obtain an
understanding of the nature of the expenditure to
validate that it has been appropriately classified as
PP&E in accordance with IAS 16 and the client’s
accounting policies.
Rights and Obligation

Comfort is obtained by examining supporting
documentation for evidence of approval in accordance
with the client’s delegation of authority and /or joint
venture arrangements with third parties.
Important Reminder: The primary purpose of this

EGA is to test Existence/Occurrence and Accuracy.
Engagement teams are reminded of the importance of
understanding the population and selecting items for
testing that are relevant to these assertions in the
current year. Two common issues that arise during
testing of E&E or PP&E additions are:
46
 Sample item selected for testing relates to a
prior period. This is common when teams pick
items from January or February in the detailed
listing of additions. Often, these invoices relate
to work performed or supplies delivered in the
prior year. In these circumstances, engagement
teams need to ensure that the invoice was input
properly (Accuracy) and investigate to
determine whether the invoice amount was
properly accrued for in the prior year (e.g.
included in the capital accrual).
Note: Failure to accrue the invoice in the prior

year is evaluated separately in terms of the cut-
off assertion but it does not mean the current
year’s non-stat sample “fails” the testing
performed in this EGA. Engagement teams
should consider whether selecting an additional
item from the current period is appropriate.
 Engagement teams select an entry from a

detailed listing that is an ‘accrual’ entry and not
an actual transaction that can be tested. Capital
accruals at period end are tested in a separate
EGA. For purposes of this EGA, engagement
teams should focus testing on actual
transactions only and not select accrual entries
as part of the target or non-stat sample.
Classification
When vouching additions, it is important that the
engagement team obtain sufficient information to
determine the nature of the expenditure. This may be
evident from the description on the supporting
documentation (AFE, invoice); however in some
instances, discussion with engineers or operational
personnel may be required.
In addition to documenting the reference information

from the supporting documentation (AFE #, invoice #,
dollar amount, date), the engagement team should
clearly document their assessment as to whether:
 The expenditure is properly capitalized or

should be expensed; and
 The expenditure relates to a project in the
development phase (versus E&E).
Workovers are one area where there may be subjectivity

in terms of the classification of the expenditure as
capital or expense. Engagement teams should consider
whether the total work over activity in the year is
material and if so, consider whether any additional
procedures are required to test the client’s accounting
47
treatment for these activities. Often workovers can be
flagged with separate identifiers within the client’s
accounting system. Scanning a listing of costs included
in this category can be done to determine whether the
risk of inappropriate capitalization is significant enough
to warrant specific procedures.
Generally, under IFRS, workover costs can only be

capitalized if they increase reserves. Often, workovers
will increase production, but the engagement team must
consider whether the increased production will
ultimately lead to a change in the assigned reserves or if
it simply accelerates production of existing reserves.
Discussion with operational staff at the client will
usually be required to make this determination.
Reminder: All costs incurred that relate to production

must be expensed.
Allocation of Costs
Testing should include documenting whether or not the
transaction was recorded to the right cost centre within
the client’s accounting system and then ultimately, that
each cost centre rolls up to the appropriate depletion
unit and/or CGU for purposes of depletion and
impairment calculations.
Understanding which location a specific expenditure

relates to may require consultation with the client.
However, in many instances, location is included on the
invoice or supporting documentation. Engagement
teams can utilize a map of the client’s properties with
land surface description (LSD) or online tools such as
Base Loc to map the location and compare it to PwC’s
understanding of where the client’s assets are located.
c) If significant additions relate to the replacement Engagement teams should consider whether any of the
of an existing asset, consider whether the additions to PP&E relate to the replacement of existing
replaced asset requires write assets rather than the construction of a new asset. For
down/derecognition. upstream oil and gas operations, it is not expected that
there would be material replacements; however teams
should be aware of the possibility. Specific consideration
should be given to material amounts capitalized for
workovers or at existing infrastructure (e.g. if the client
has a plant expansion or enhancement project that is
being capitalized).
If an addition relates to a replacement of an existing
asset, the client must determine the remaining net book
value of the existing asset and write it down to nil with a
corresponding derecognition loss to the statement of
comprehensive income.
For additional details refer to EGA – Test Disposals.
48
Engagement teams are encouraged to utilize the documentation template titled “Additions Testing Templates
(PP&E and E&E)_FINAL.xls” available on Template Manager when completing this EGA. The template can
be modified to incorporate specific testing attributes that may be necessary to document based on client-specific
Engagement teams should consider whether GADM can be utilized to assist in the completion of this EGA.
Whether GADM is an effective alternative will be based on the extent of testing (larger sample size may indicate
GADM use is warranted) and the process required to obtain supporting documentation for additions from the
client. In circumstances where supporting documentation (e.g. invoices, AFE’s) can be obtained electronically,
engagement teams should consider whether efficiencies can be achieved by sending detailed listing of additions,
sample selection and related supporting documentation to GADM with instructions for them to prepare the
detailed audit documentation for this EGA. However, it is expected that certain attributes discussed above (e.g.
classification as E&E versus PP&E, capital versus expense classification, and CGU allocation) will likely have to be
performed by the local engagement team as GADM will not have the ability to perform these aspects of the testing.
49
EGA: Test well ownership and working interest

Working interest is the term used to describe the right granted to the lessee of a property to explore for and to
produce and sell oil, gas or other minerals. The working interest owners bear the exploration, development, and
operating costs.
Jointly conducted operations are common in the oil and gas industry. Two or more parties will own undivided
working interests in specific wells or an entire property and will share in the costs and risks of operations. This can
be beneficial for an entity that has significant land holdings but limited access to capital (or a number of projects on
the go that compete for corporate capital) because the entity may leverage the resources of a partner with the
capital required to exploit the property.
If a client holds 100% interest in all of its E&E and PP&E properties, detailed testing of working interests in this
EGA can be limited to validating the client’s 100% ownership percentage. However, if the client has less than 100%
working interest, the accounting for PP&E transactions can be significantly impacted by the concept of ‘gross versus
net’ accounting and validation of working interest percentages is an important audit procedure.
Typically, operating agreements between working interest holders designate one party as ‘operator’ in the
Operating Agreement. The operator deals with all the day to day activities of conducting the operations of the well
including:
 Regular maintenance of the wells

 Potential marketing of products (i.e. oil, gas, liquids)
 General accounting including sending out joint interest billings
 Monitoring of AFEs and cash calls
Non-operator parties are those that have a working interest in the well / property but do not deal with the day to
day operations.
Operating Agreements typically require the operator to pay all of the costs incurred for the property and then
charge each non-operator party its proportionate share of those costs. Accordingly, the operator’s accounting
system must properly accumulate ‘gross’ expenditures (100%) and then apply working interest percentages to
determine the ‘net’ costs to record and the amounts to charge to each non-operator party. The concept of ‘gross /
net’ accounting impacts accounting for E&E and PP&E as well as revenues and operating expenditures as the
operator enters invoices into the system on a gross basis and the accounting system automatically calculates net
amounts. The difference between the gross and the net amounts recorded by the operator is allocated to the non-
operator partners through joint interest billings (“JIBs”).
50
The primary assertions being addressed through this EGA are Accuracy and Rights and Obligations. The Likely
Sources of Potential Misstatement (“LSPM”) relevant to this EGA are summarized below:
For many financial statement audits, engagement teams may choose not to rely on internal controls surrounding
working interest as audit comfort addressing this risk is more efficiently obtained through substantive testing.
However, for integrated audits, and in some financial statement audits, engagement teams may be able to perform
procedures to identify key controls that may be tested by PwC and relied upon to reduce the extent of substantive
testing required over working interest. The following are examples of controls that engagement teams should
consider when developing their audit strategy for working interest:
 Changes to working interest percentages within the land system, production accounting system and
general ledger system are reviewed and approved by the Manager of Joint Venture Accounting.
 Each quarter, working interest information in the land administration system is reconciled to the
production accounting system, the general ledger system, the reserve model and the asset retirement
model. Any differences are investigated and appropriate adjustments are made as required.

a) Obtain an understanding of the client's process Engagement teams should document their
for ensuring that changes to working interest are understanding of the client’s processes over working
accurately reflected in key systems (e.g. interest even if a controls reliance approach is not
production accounting, land, decommissioning planned. For most entities, working interest
(ARO) model, reserve report). percentages are important inputs into a variety of
systems (land administration, production
accounting, general ledger, reserve model, etc.) and
the inputs are usually updated in each system
manually with limited interfaces.
Understanding the client’s processes and systems is a

critical first step in designing an appropriate
substantive test of details to address the accuracy of
working interest information.
51
b) Obtain a well listing from the client’s accounting The first step in performing detailed testing of
system that includes the description of the well, working interest information is to obtain a detailed
location and the client's working interest. listing of all wells.
Engagement teams should consider audit work Engagement teams need to document the procedures
performed in the prior year over well listings as a performed to obtain comfort over the completeness
potential source of audit evidence and the impact and accuracy of detailed well listing from which the
on the level of work required over the current sample is selected for testing.
year well listing (i.e. agreeing the listing to the
prior year testing and performing audit The extent of work required will depend on how
procedures over current year well additions and effective the client’s internal controls are with respect
well de-recognitions may be sufficient in most to ensuring accuracy and completeness of working
cases). interest within the accounting system.
Engagement teams are reminded of the Similar to an inventory count, one way of testing the
requirement to document consideration of the accuracy and completeness of working interest would
nature and extent of audit evidence supporting be to sample from a list of wells extracted from the
the reliability of information used in testing of accounting system back to supporting source
non-financial data. If required, ensure documentation to verify the working interest (such
appropriate audit procedures have been planned, as a land file), using accept/reject sampling
executed and documented to support reliance on methodology. Careful reading of the land file will
non-financial data (e.g. well listings). need to take place, as working interest may vary over
time and at what stage of development the well is in
(i.e. exploration, development or post-payout phase).
Discussions with the land department may also be
required to confirm accuracy of the land file. For
some clients with stronger controls, verifying
working interest by comparing to the land system
(e.g. CS Explorer) may be sufficient. Another source
of evidence supporting working interest might also
be documents with the counterparty, such as recently
signed AFE’s. For wells recently purchased, the
purchase and sales agreement should specify the well
and working interest acquired.
To confirm completeness, similar procedures can be
performed, except as a reverse of the process – a
sample of wells from supporting source
documentation such as the well file or land system
can be traced to the accounting system to ensure that
the well is appropriately within the general ledger, at
the accurate working interest.
Engagement teams are cautioned to use professional
skepticism and judgment when performing testing
over working interest to ensure persuasive evidence
has been obtained over completeness and accuracy.
Depending on the client, well files may not be
maintained in an orderly manner, and discussions
outside the finance group may be required. It is
important to keep in mind PwC sampling
methodology with respect to exceptions and when
additional testing is required.
Note: If the test is performed on a combined basis to
cover working interest for both E&E and PP&E,
engagement teams need to ensure the well listing
includes both types of wells.
52
c) Based on materiality and risk, select a sample of
wells included in the listing and perform an
Accept/Reject test to obtain assurance over the
working interest information in key finance
systems/spreadsheets by performing the
following:
i. Agree well description and working Accept/reject is considered an appropriate testing

interest per well listing to source methodology as engagement teams are seeking
documentation (i.e. land contract, title comfort over a specific attribute (correct working
documentation) interest %) and not testing valuation.
If the engagement team has comfort over the

completeness and accuracy of input data to the
client’s land administration system (e.g. CS
Explorer), it may be sufficient to agree working
interest information to details within that system.
However, in many instances, it will be more
appropriate to trace well information back to hard
copy information maintained in a client’s land files
as the land administration system is not always
updated for working interest changes on a timely
basis.
ii. Verify that well description and working For each sample selected for (i), a 3-way or 4-way
interest for each well selected for testing match should be conducted. This ensures that
is consistent among the following: working interest information is consistent in the
various systems / models that are impacted by
 Client's production system; ownership percentages for accounting purposes.
 Reserve report; Specifically, engagement teams should be agreeing
working interest information in the production
 Decommissioning (ARO) model; accounting system, the general ledger system, the
ARO liability model and the reserve model. Any
 Client’s land system or land files inconsistencies should be investigated.
(Note: in some instances it may not
be necessary to trace amounts to Note: There may be instances where a well is
physical land files if the client has a included in the ARO model but not in the production
control in place to reconcile working accounting system or reserve model. This would be
interest %'s or changes from their the case if a well is no longer producing but has not
land files to the accounting system. yet been abandoned.
Consider whether testing such a
control provides more effective and There may also be inconsistencies when the client is
efficient method of obtaining not the operator of a property. In these instances, the
comfort that accounting systems well may be recorded at 100% in the accounting
match land file support). system but recorded at the actual ownership working
interest percentage in the client’s land systems, ARO
model, etc.
iii. For JV operators, where the accounting Typically, the various systems will calculate the
system automatically allocates capital division of interest based on the working interest
expenditures, operating expenditures data input into the system.
and revenues using the WI % in the
system, select a sample of 1 capital AFE It is important that we re-calculate a sample to
and 1 project code (or similar unit for ensure the system is allocating gross costs or
P&L allocations) and perform a re- revenues appropriately to the operator and non-
computation of the allocation to JV operator partners based on working interest
partners (gross to net) to verify that the percentages. Typically, only one item is needed to be
system is properly computing the WI
53
allocation performed as this is an automated control.
Note: As this is an automated process a sample of 1 is
deemed appropriate.

Engagement teams are encouraged to utilize the documentation template titled “Working Interest Testing
Template_FINAL.xls” available on Template Manager when completing this EGA. The template can be
modified to incorporate specific testing attributes that may be necessary to document based on client-specific
GADM involvement is not likely to be required for this EGA.
54
EGA: Test disposals

Disposals may occur when an entity enters into an agreement with another party to sell an asset. In such cases, the
gain or loss is determined as the difference between the proceeds received and the net book value of the asset
disposed of. Gains or losses are recognized in profit or loss, but not classified as revenue. The most appropriate
presentation is as a separate line item on the statement of comprehensive income.
It is also necessary to consider the results of testing over PP&E additions / workovers to determine whether any
assets need to be derecognised. Specifically, if expenditure is incurred to replace an existing item of PP&E the
expenditure is capitalized and the carrying value of the replaced item must be derecognized. The carry value
derecognized is shown as a loss on disposal or as additional depletion or depreciation on the statement of

For PP&E disposals the following assertions are most relevant: Existence/ Occurrence, Accuracy / Valuation, Cut-
off and Presentation & Disclosure. The Likely Sources of Potential Misstatement (“LSPM”) relevant to this EGA are
summarized below:
within this EGA. For integrated audits, the key client controls addressing the assertions covered in this EGA would
 Disposal AFE’s are reviewed and approved by the operations manager who agrees the net book value of
the assets disposed to the fixed asset sub ledger and recalculates the gain / loss based on the terms of the
purchase and sale agreement.
accounting implications arise. A memo is prepared for each significant, unusual transaction outlining
the relevant accounting guidance and entries proposed to record the transaction. The memo and related
55
a) Obtain detailed listings of property, plant and The first step in performing detailed testing of PP&E
equipment (PP&E) disposals (cost and disposals is to obtain a detailed listing of all transactions
accumulated depreciation), agree balances which have been classified as ‘disposals’ in the PP&E
and test mathematical accuracy. continuity schedule.
b) Test disposals: Target testing is the most common approach for testing
disposals. When selecting items to test, engagement
teams should consider targeting both disposals where
there is large net book value disposed of (significant to
balance sheet) and disposals that give rise to significant
gains/losses (significant to income statement).
For significant asset disposals, engagement teams should
document their consideration as to whether or not the
disposed assets meet the definition of “discontinued
operations”. Generally, only significant disposals that
represent a separate operating segment (as defined in IAS
8) would meet the criteria for discontinued operations
under IFRS 5.
IFRS 5 requires that when assets will be disposed of
through a sale transaction, they should be reclassified to
current and classified as ‘held for sale’. To meet the
‘assets held for sale (AHFS)’ criteria:
 the assets must be available for immediate sale in
its present condition, and
 the sale must be considered highly probable (i.e.
the appropriate level of management has
committed to a plan, an active program to locate
a buyer has been initiated, the asset must be
marketed at a reasonable price in relation to fair
value, and it is expected the sale will take place
within a year.
When a client is actively marketing its oil and gas assets,
generally Board of Director approval is required, and a
data room is set up for prospective buyers. For
significant disposals, companies may also engage third
parties to assist in the transaction. Review of board
minutes or contract review might indicate pending
disposal transactions. For disposals that have already
occurred subsequent to the period end, engagement
teams should consider whether the assets should be
moved to AHFS within the current period financial
statements.
An AHFS may also be considered a discontinued
56
operation if a component of an entity is disposed. A
component must comprise operations and cash flows that
can be clearly distinguished operationally and for
financial reporting purposes (i.e. is a CGU or group of
CGU’s).
A component must also:
(a) represent a separate major line of business or a
geographical segment. Geographical segments
are defined under IAS 8 as separate countries.
(b) represent a single coordinated plan to dispose of
a separate major line of business or geographical
segment, or
(c) is a subsidiary acquired exclusively with a view to
resale.
Example 1: A client may dispose of its natural gas assets
within Alberta but retains its oil assets within the same
location. This would not be considered a discontinued
operation as the gas assets would not be considered a
separate major line of business, and the client would still
be operating within the same geographical segment.
Example 2: A client has international operations and
disposes of its oil and gas assets within Chile but retains
its interests in Brazil and Nigeria. This would be
considered a discontinued operation as the Chilean assets
would represent a separate geographic segment.
Note that sale of an entire company does not require
‘discontinued operations’ or ‘AHFS’ accounting.
i. Agree the disposal to supporting Engagement teams should obtain and review relevant
documentation to verify the transfer agreements. It is important to read a purchase and sale
of ownership and proceeds on sale. agreement (or similar document) in full to ensure that
there are no terms or conditions attached to the sale that
would indicate that risks and rewards have not been fully
transferred to the purchaser (e.g. seller retains an
overriding royalty or seller has rights to put the asset back
to the seller).
It is also important to determine whether the associated

decommissioning obligation will also transfer to the
acquirer or if it remains with the client. There may be
instances where legal rules prohibit the transfer of the
decommissioning obligation for certain wells (e.g. those
that have been abandoned but not reclaimed).
Proceeds should be agreed to the signed documents and

traced to bank records for evidence of receipt.
ii. Recalculate the gain or loss on In instances where an entity disposes of assets that
disposal and determine that it is comprise a complete cash generating unit (“CGU”), the
recorded correctly in the general net book value of the CGU is derecognized and the gain or
ledger. loss is calculated as the difference between the net book
57
value of the CGU and the proceeds received.
Note: Engagement teams should ensure that the cost,

accumulated depletion and related decommissioning
costs have been derecognized in calculating the gain /
loss on disposal. It is common for client’s to
inappropriately exclude the decommissioning liability
balance when calculating the gain / loss on disposal.
In cases where an entity disposes of assets that comprise

a partial depletion unit or CGU only, the entity will have
to first calculate the net book value of the assets disposed
of. Allocation of net book value for a depletion unit or
CGU to specific assets should be done on a systematic
basis, generally based on a pro-rata allocation using
reserve volumes or values (proved, or proved plus
probable) as a basis. Management should also consider
whether any assets without reserves are being disposed
of, such as facilities, which may still be included in the
CGU but not separately componentized, as the carrying
value of these assets will also have to be derecognized. As
most disposals will not coincide with reserve reporting
dates, adjustments to the reserve base for additions and
production throughout the year should be considered
when calculating the portion of the depletion unit or CGU
disposed of.
This will not generally be applicable for oil and gas

c) Consider whether the gain or loss recognized companies in regards to disposals of properties.
on the disposal of PP&E indicates that
revisions to existing useful lives may be However, when assets are derecognized or disposed of for
necessary. no proceeds, consideration should be made as to the
appropriateness of the useful life estimates. For example,
if an entity had a policy of depreciating boilers at their gas
plants on a straight line basis over 10 years, but recently
replaced a boiler after only 5 years of use; consideration
would need to be given as to whether or not the
replacement was a unique situation or whether the
original estimate of 10 years was overly optimistic and the
more appropriate estimate of useful life for such
equipment is only 5 years. If the latter, depreciation
would be adjusted on a prospective basis to reflect the
new useful life estimate.
These types of arrangements are not that common for oil

d) Identify whether the asset disposed of has and gas clients, but if such a circumstance arises,
been leased back by the entity. engagement teams should obtain a full understanding of
the nature of the transaction and the terms of the sale
agreement and subsequent lease agreement. For these
types of arrangements it may be that, in substance, a
disposal did not take place and no gain or loss on disposal
should be recognized. Further analysis of facts and
circumstances should be performed.
58
No specific templates have been created for this EGA as the required documentation may differ based on each
client’s accounting systems and operations.
59
EGA: Test capital accruals

Capital accruals are often material for most oil and gas companies due to the capital intensive nature of the
business. The accrual related to capital additions at the balance sheet date can be impacted by seasonality and
typical industry trends for procurement / cash management.
Significant drilling activity generally occurs in Q4 and Q1 (winter season) so the capital accrual will generally be
higher at the end of those periods. Spring break-up usually reduces the capital activity for Q2 as a result of the
ground thawing and the conditions making it often inaccessible to reach sites.
As the nature of the business is quite capital intensive, many companies manage cash carefully. As a result, oil and
gas companies tend to average between 45 – 90 days for paying most vendors; however certain key vendors may be
paid faster based on relationship and / or relative importance to operations.

The primary assertions addressed in this EGA in relation to PP&E are Completeness and Cut-off. This EGA also
addresses the Completeness assertion for accrued liabilities.
For many financial statement audits, engagement teams may choose not to rely on internal controls surrounding
capital accruals as audit comfort addressing this risk is more efficiently obtained through substantive testing.
However, for integrated audits, and in some financial statement audits, engagement teams may be able to perform
procedures to identify key controls that may be tested by PwC and relied upon to reduce the extent of substantive
testing required over capital accruals. The following are examples of controls that engagement teams should
consider when developing their audit strategy for capital accruals:
 Each month, the financial analyst prepares a capital accrual report that itemizes the accrual by capital
project or AFE type. The report is reviewed and approved by the Chief Operating Officer by comparing it
to their knowledge of the status of each project. As part of his review, the COO ensures the following:
(i) Any projects that may have costs incurred but no AFE in the capital asset system are included in
the report
(ii) actual costs per AFE are reasonable
(iii) total estimated cost by AFE and percentage of completeness per AFE (as of the end of the
reporting period) is accurate
(iv) Accrual amounts to be recorded are accurate.
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1. Obtain a detailed listing of capital accruals and

perform the following procedures:
a) Trace totals from the detailed listing of capital The first step in performing detailed testing of capital
accruals to the total per the lead sheet; accruals is to obtain a detailed listing of items making
up the accrual.
performed to obtain comfort over the completeness
and accuracy of the detailed listing from which the
sample is selected for testing.
It is important to ensure that the capital accrual
includes amounts for both operated and non-operated
properties. This should be incorporated within the
scope of understanding of the accruals process, in
order to ensure that the client has a thorough
understanding of the sources of accruals and how they
ensure completeness.
Engagement teams should also ensure that capital

accruals for both E&E and PP&E are tested within this
EGA.
b) Where there are significant reconciling items, If reconciling items exist, engagement teams are
select reconciling items for testing and trace reminded to obtain an understanding of why such
the items to supporting documentation; reconciling items exist and to consider whether they
are indicative of an internal control weakness.
c) Test, to an extent to obtain the desired degree None.

of assurance, the mathematical accuracy of the
detailed listing; and
d) Scan the detailed listing of capital accruals and None.

investigate significant or unusual items (e.g.
debit balances, large balances, old balances)
and significant adjustments.
2. Obtain and document an understanding of the The starting point for obtaining comfort is to obtain an
capital accrual process through discussion with understanding of the capital accruals process. Inquiry
appropriate management personnel. should be performed with the individual(s) at the client
Note – this may have been completed in that are responsible for calculating and recording the
conjunction with work performed over internal capital accrual.
controls.
The inquiry should focus on the inputs (What is source
data for the accrual? How does the client ensure this is
accurate and complete?); the process (Who is
responsible for preparing the accrual? Is the accrual
reviewed by someone involved in operations?); and the
recording of the accrual (Who reviews and approves
the journal entry to record the capital accrual).
61
Understanding how the client calculates the accrual is
critical to developing an appropriate testing approach.
3. Test, to obtain the desired level of assurance, the

determined value of the accruals by performing
the following audit procedures:
a) If authorizations for expenditures (AFE’s) are It is very common for AFE information to be used in
used in the calculation of the capital accrual or the calculation of the capital accrual (either the original
as support for audit testing, consider spend estimate or actual costs incurred to date by
performing the following to gain comfort on AFE). If so, engagement teams must obtain comfort
the accuracy and completeness of non- over AFE authorization and the completeness of the
financial data: AFE listing. Generally, the most efficient way to gain
comfort over this is through testing a client’s internal
 Validate the completeness of the AFE controls.
listing;
Note: Typically, AFE controls are tested as part of audit
 Test to ensure AFE’s are appropriate
work over PP&E additions. Engagement teams should
authorized in accordance with the client’s
review that testing to determine whether the testing
delegation of authority policies;
performed can be leveraged to provide comfort over
the accuracy and completeness of the AFE data used in
 Ensure supplemental AFE’s are
appropriately initiated and approved in the calculation of the capital accrual.
accordance with the client’s policies.
 Test client’s control relating to monitoring

of AFE’s (e.g. comparison of actual
expenditures to budget)
b) Test, to an extent based on materiality and Accept / Reject testing is generally the most efficient
inherent risk, the completeness of capital and effective method of testing completeness of AFE’s
accrual balances by obtaining a detailed listing used in the capital accrual process.
of significant open AFEs items at period end
and agreeing items to detailed capital accruals The primary assertion to test here is completeness;
listing. If the item is not included on the however for efficiency, testing can be performed two
detailed listing, obtain explanations for the ways to get comfort over existence as well; first by
omission.
tracing a sample of items from detailed listing of AFE’s
in the system to the capital accrual model
(Completeness); and then by tracing a sample of AFE’s
from the capital accrual model back to the detailed list
of AFE’s in the system (Existence).
c) Test, to an extent based on materiality and From a substantive perspective, it is often not practical
inherent risk, the existence and valuation of to utilize analytical procedures to gain comfort over
capital accruals by selecting a sample of capital capital accruals as the account balance can be
accruals from the detailed listing and agreeing unpredictable based on the extent and timing of capital
the balance to supporting documentation activities such that developing a meaningful
(such as authorisation for expenditure (AFEs), expectation is often not possible. If certain situations
drilling reports, engineering assessments exist where capital activity is relatively consistent from
(processing facilities), field system data, and
year to year, an analytical procedures (e.g. accrual as a
subsequently received invoices, if available).
% of capital spending or # wells x average cost) may be
sufficient.
For substantive tests of details, the most common

approach (assuming a large volume of outstanding
AFEs) is to apply both target and non-statistical
62
sampling to obtain comfort over the capital accrual
balance. Engagement teams should employ sampling
methodology in accordance with PwC Audit Guide
Section 7040 when performing this testing.
Comfort is obtained by tracing information in the
capital accrual model to supporting documentation
provided by the client’s operational personnel (note: as
invoices will not have been received, support may
include purchase orders, signed contracts for services,
emails, % completion reports from field staff, etc.).
Rights and Obligations

Comfort over Rights and Obligations is obtained
through testing of the AFE process (generally done in
conjunction with PP&E additions testing). AFE’s are
typically reviewed and approved by senior
management. For the capital accrual, the engagement
team must validate that the working interest
percentage used in the capital accrual model is
consistent with the working interest percentages tested
in the EGA “Test well ownership and working
interest”.
Cut-off
When examining supporting evidence, the engagement
team should focus on the description of services and
specifically the date when services were provided or
materials delivered and ensure that it occurred prior to
the balance sheet date.
Accuracy and Valuation

Comfort is obtained by agreeing the costs accrued to
supporting documentation and re-performing the
accrual calculation (difference between total costs
incurred less costs currently in the system on a net
working interest basis).
Due to the nature of the balance (relates to costs

incurred but not yet invoiced); in some cases, there
may not be explicit written documentation and
significant reliance will need to be placed on detailed
inquiry of senior operational personnel who are most
familiar with the operations in the field.
4. Conclude on the sufficiency and appropriateness Engagement teams should review the total evidence
of audit evidence obtained supporting to the obtained through tests of controls, substantive
completeness of capital accrual balances analytics and tests of details to ensure that sufficient
recognised by the entity. audit evidence has been obtained over the capital
accruals balance.
The risk associated with capital accruals is not

significant for many companies as an
overstatement/understatement of the balance impacts
63
the balance sheet only (PP&E and accrued liabilities)
and the impact on profit or loss and operating cash
flows is not significant. However, in situations where a
client has recognized significant impairment of its
PP&E at the balance sheet date, the risk associated
with completeness of capital accruals is increased as
additional amounts would lead to an increase in the
impairment charge.

64
EGA: Test capitalized general and administrative costs, and
overhead recoveries

Overhead Recoveries
For entities involved in joint operations, the operator traditionally charges non-operator partners for general and
administrative costs associated with capital and operating activities of the property. Administrative and overhead
costs are incurred at a corporate level and it can be difficult to establish a “fair value” for the costs directly
attributable to the property. To address this, industry guidelines have been agreed to and are written into joint
venture arrangements. Typical terms are described below:
Overhead – Capital
The overhead charged in relation to capital activities (e.g. drilling) is as follows:
Overhead recovery rates per the Petroleum Accountants Society of Canada

$0 - $50,000 $50,001 - $150,000 +$150,001
Drilling & recompletion (type 3, 7) 3% 2% 1%
Equipping & tie-in (type 5,6) 5% 3% 1%
Geological & geophysical (type 2) 5% 5% 5%
Completions (type 4) 1% 1% 1%
Clients may refer to the above as the “3/2/1” rule or the PASC rules, mainly when referring to drilling and
recompletions.
Overhead – Operating
Charges for overhead in relation to operating activities are also based on standard industry terms and are generally
based on a fixed cost per well. These charges are applied during the period a well is in production and up to three
months after the well is shut in. The calculation of the overhead is generally automated through the accounting
system using an overhead master rate table.
Capitalized general and administration expenses
Paragraphs 16-19 of IAS 16 indicate that costs that are directly attributable to the cost of an E&E or PP&E asset can
be capitalized; however the guidance does not specifically address which costs are directly attributable. This is an
area where there is divergence in practice with the two following approaches being the most common:
(1) All administration and overhead costs are initially recorded as an expense and then the operator will
capitalize a portion of overhead based on their share of the 3/2/1 allocation discussed above. No other
amounts are capitalized.
(2) Overhead and administration costs are reviewed and specific costs are identified for capitalization. Most
notably, employee benefit costs (salaries, bonuses and share based payments) for employees that work
directly on capital projects (E&E or PP&E) are capitalized. The amount of cost capitalized should be based
on the proportion of work performed that is directly related to capital activity (e.g. if an engineer works
50% on capital projects and 50% on producing assets; 50% of his total employee benefit expense could be
reclassified to E&E or PP&E).
65
The primary assertion being addressed in this EGA is Valuation of property, plant & equipment.
The risk that expenditures may not be recorded in accordance with GAAP or the Company’s accounting policy is
included within the Likely Sources of Possible Misstatement for property, plant & equipment. A screenshot of this
is shown below.
 Each month the Capitalized Overhead schedule is prepared by the Financial Analyst and reviewed by the
Controller who reviews the salaries and benefits in the schedule and the % attributed to capital activity
for reasonableness.
66
Overhead Recoveries
a) Obtain an understanding of the nature of overhead Refer to overview and background information section
recoveries recorded by the client (e.g. capital and above.
operating recoveries), both capitalized (client
working interest) and those recovered from joint Note: Testing in this EGA should include amounts
interest partners. capitalized to both E&E and PP&E.
a) Assess the reasonableness of overhead The 3/2/1 industry capitalization model discussed in the
capitalized based on contract terms or industry- overview and background information section above is
recognized methodology by comparing total generally considered to be a reasonable ‘proxy’ for the
overhead capitalized in the period to gross actual overhead costs that can be considered directly
general and administrative (“G&A”) attributable.
expenses. Significant overhead capitalized
compared to gross G&A may be an indication If the overhead recovery is so large as to substantially
that the capitalized amounts may not meet the
reduce total G&A to nil or a negative balance,
recognition criteria under IAS 16 (i.e. directly
engagement teams should consider revisiting both the
related to property, plant and equipment or
exploration and evaluation) and that further G&A capitalization rate and overhead recovery rates
analysis is required. with the client to ensure methodologies are appropriate
and have been applied accurately. An example of when
this might occur is when a small company is the operator
for a large multi-well capital program.
b) If overhead recoveries are material and are To the extent that the balance is material, engagement
considered to represent a classification risk, teams should consider whether the operating and capital
perform procedures to obtain sufficient overhead recoveries recorded against general and
evidence that the recovery balance is administrative expenses are reasonable. Based on the
reasonable. guidance above, an analytic is often sufficient to provide
comfort over accuracy, occurrence and completeness.
This will take some knowledge of the client’s operated
activities and non-operated activities and reliability of
information used in the analytic should be appropriately
assessed.
Capitalized G&A expenses
c) Obtain an understanding of the Company's Refer to Overview and background information above
policy with regards to capitalized G&A in and Overhead Recoveries for a discussion on IAS 16 and
addition to amounts capitalized based on IFRS 6 requirements.
contract terms or industry recognized
methodology (see a-c above).Determine if the
client’s capitalization policy is in accordance
with IFRS including IAS 16 (Developed and
Producing Assets, PPE) and IFRS 6
(Exploration for and Evaluation of Mineral
Resources).
d) Obtain the client's schedule for capitalized G&A

and perform the following:
67
i. Test schedule for mathematical accuracy; None
ii. Assess reasonableness of methodology Engagement teams need to consider the overall impact
used for capitalization through of the client’s overhead recovery and overhead
discussions with management, capitalization policies. If the total amount charged to
comparisons to the prior year, and partners or capitalized is so large as to substantially
comparison to industry standards; and reduce total G&A to nil or a negative balance,
engagement teams should consider revisiting both the
G&A capitalization rate and overhead recovery rates
with the client to ensure methodologies are appropriate
and have been applied accurately. An example of when
this might occur is when a small company is the operator
for a large multi-well capital program.
iii. Agree capitalized amounts above See above for discussion on capitalization of employee
threshold for investigation to supporting benefit costs. General administration and other general
documentation and assess whether overhead costs (e.g. legal fees, rent) are specifically
capitalization of the amount is excluded from the definition of cost under IAS 16 and
appropriate in accordance with IAS 16 should not be capitalized.
and IFRS 6.
For clients that use a specific identification
methodology, if significant, it will be necessary to
validate the capitalized G&A calculation. This will
include ensuring G&A costs agree to those tested in the
G&A section and ensuring the % applied is reasonable
based on supporting documentation or
discussion/corroboration with management.
e) Ensure treatment of share based compensation For clients that have a policy of capitalizing salaries of
expense and other benefits is consistent with specific individuals, any share-based payment expense
capitalized G&A policy. relating to those employees must also be capitalized as it
represents an element of remuneration as defined under
Note – Share based compensation expense forms
IAS 19.
part of employee benefit expense and should be
capitalized or expensed consistent with the client’s Note: For cash-settled share based payment plans,
accounting policies for other employee benefit compensation amounts may reverse in periods where
expenses (such as salaries and wages). market prices decline. In such instances, a portion of
the reversal may need to be recognized as a reduction of
PP&E.
f) Ensure the amount of capitalized G&A is Disclosure of the amount of capitalized G&A is not
disclosed in the PP&E note in the financial technically required under IFRS (as it was under
statements previous Canadian GAAP); however it is a common
disclosure and highly recommended. If the disclosure is
made, the engagement team should perform procedures
to ensure that the disclosed amounts are consistent with
the testing performed in procedures above.
68
69
EGA: Test depletion of oil and gas properties, related
equipment and facilities

This EGA should be used for testing unit of production (UOP) depletion of oil and gas properties, related
equipment and facilities. Unit of production depletion is calculated based on production and reserve data. A
separate EGA titled “Test depreciation expense” should be used for testing depreciation expense for other assets
where a straight-line or declining balance method of depreciation is applied.
IAS 16 requires that the depreciable amount of an asset be allocated on a systematic basis over its useful life and the
depletion method used shall reflect the pattern in which the asset’s future economic benefits are expected to be
consumed by the entity. However, IFRS does not prescribe what basis should be used for UOP depletion
calculations. The basis of UOP depletion is an accounting policy choice and should be applied consistently.
There is mixed practice with the following being the most common approaches used by oil and gas companies:
Reserve Basis Description

(Refer to page 79 for details)
Proved Developed Reserves Costs incurred to date to develop ‘proved reserves’ are depleted on a unit of production basis
over proved developed reserves only. Under this method, future development costs that will
be incurred to recover ‘proved – undeveloped’ reserves are excluded from the calculation.
This policy is generally consistent with Successful Efforts accounting under US GAAP.
Proved Reserves (1P) Costs incurred to date + an estimate of future development costs required to recover ‘proved
– undeveloped’ reserves are depleted on a unit of production basis over total proved
reserves. Under this method, an estimate of future development costs that will be incurred
to recover ‘proved – undeveloped’ reserves must be included in the calculation. This
method of depletion is most common with large oil and gas companies in Canada.
Proved + Probable Reserves (2P) Costs incurred to date + an estimate of future development costs to recover ‘proved –
undeveloped’ reserves and ‘probable’ reserves are depleted on a unit of production basis
over total proved + probable reserves. Under this method, an estimate of future
development costs that will be incurred to recover both ‘proved – undeveloped’ and
‘probable’ reserves must be included in the calculation. This is the most common method of
depletion amongst junior and intermediate oil and gas companies in Canada.
Under IFRS, the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if, it is
probable that economic benefits associated with the asset will flow to the entity. For many oil and gas assets, the
probable economic benefits expected to flow to an entity will include cash flows related to proved – undeveloped or
probable reserves. Accordingly, depletion based on 2P reserves is an acceptable depletion methodology under
IFRS. However, in such circumstances, the future development costs that must be incurred for the entity to realize
the future economic benefits from the proved – undeveloped or probable reserves must be added to the depreciable
amount when calculating depletion expense.
In evaluating the possible option of depleting assets based on ‘proved + probable’ reserves, management’s ability
and intention with respect to probable reserves should be considered. Specifically, consideration should be given to
the Company’s development plans (e.g. capital budgets, long-term forecasts) to determine whether management
intends to own the assets for a sufficient period of time to recover all proved and probable reserves. If not, using
‘proved + probable’ reserves as a basis for depletion may not be appropriate since IFRS requires that management’s
intention be a key factor in determining the useful life of an asset.
It would not generally be considered appropriate to include ‘possible’ reserves in depletion due the significant
uncertainty associated with the ultimate identification and recovery of these reserves. In most circumstances,
including possible reserves in the depletion estimate cannot reasonably be considered to best represent the pattern
in which the future economic benefits from existing PP&E are expected to be consumed by the entity.
70
The primary assertion being addressed in this EGA is Valuation of PP&E. The risk that depletion is calculated
incorrectly is included within the Likely Sources of Possible Misstatement for property, plant & equipment. A
screenshot of this is shown below.
 Each month, the Financial Analyst updates the depletion model and prepares the journal entry to record
depletion expense. The journal entry and supporting calculations are reviewed by the Controller.
71
Procedures Results of procedures performed, including
links to attachments or other EGAs
To an extent based on materiality and inherent risk,

obtain and test a calculation of the depletion of oil and
gas properties, related equipment and facilities and the
underlying supporting documentation.
Note - Depletion calculations are generally performed

on a quarterly basis. Therefore, in performing a
recalculation of depletion, to increase precision of the
procedure and associated level of assurance,
disaggregate the data by quarter.
Perform the following audit procedures in order to test
the depletion charges of oil and gas property, related
equipment and facilities:
i. Inquire of management whether the depletion Under IFRS, the unit-of-production method is
methods, residual values and useful life (estimated acceptable and is the most common method for
reserve base) assumptions are reviewed at least each depleting oil and gas assets. However, IAS 16 does not
financial year end and validate the responses (IAS prescribe a method of depreciation or a basis for the
16.51, 61). calculation. Accordingly, entities have a policy choice
and can adopt [e.g. proved (1P) or proved and probable
Note – IFRS does not prescribe what basis should be (2P) reserves] as their basis for depreciation.
used for unit of production (UOP) depletion
calculations and there is mixed practice with respect IFRS also provides for options for depreciating tangible
to the estimated reserve base used. For example: assets (e.g. pipelines, facilities, and midstream assets).
proved developed reserves, proved developed and
undeveloped and total proved and probable. The The engagement team should understand the depletion
estimated reserve basis for UOP depletion and depreciation methods used by the entity. IFRS also
calculations is an accounting policy choice and explicitly requires that the depletion method and useful
should be applied consistently. life estimate be reviewed annually to confirm that they
are still appropriate. The engagement team should at
least inquire with management as to the analysis that
was performed to confirm the accounting policy choice
is reasonable and applied consistently or updated
appropriately.
The depreciable amount is calculated as cost less

residual value. The residual value of an asset or
component is to be calculated by taking the price such
an asset would generate today, but assuming that it was
already in the condition it will be in at the end of its
useful life. Therefore IAS 16 contains an element of
continuous updating of one component of an asset’s
carrying value.
Many upstream oil and gas assets or components have

insignificant residual value because they are kept for
significantly all of their useful lives; however there are a
number of types of assets where this requirement could
have a significant effect on the depreciation charge.
Pipelines and facilities that could be used to process 3rd
party production are prime examples of this.
72
Refer to Overview and background information section
above for more information.
ii. If there is evidence management's previous The inputs to the depletion calculation are updated with
expectations on residual values and useful lives each external reserve report. Some oil and gas entities
(estimated reserve base) differ from actual have in-house engineers who also produce quarterly
experience assess the impact on the assumptions internal reserve reports with some assumptions updated
applied during the current period (IAS 8.32-38). (reserves, production, pricing or a combination) for
Note - Any revision to the depletion rate as a result internal use.
of change in the estimated reserve base is treated
prospectively as a change in estimate under IAS 8.
Previous CICA HB Part V Canadian GAAP required
depletion to be computed each time the financial
statements were issued (generally quarterly) and that
retroactive adjustments would not be made to reflect an
annual calculation. This guidance is still applicable
under IAS 8, unless the change is due to an error.
An entity should chose an accounting policy with

regards to updating its estimates and apply it
consistently within the financial statements, based on
operations and materiality. For example, whether the
depletion rate is calculated on an annual basis using the
external reserve report of the prior year end for each
quarter, updated with only material known revisions
(significant movements from E&E to PP&E or
acquisitions/disposals) or whether the prior year’s
reserve report is used for Q1 through Q3, and the new
external reserve report is used for Q4.
Updating inputs for new information should be applied

consistently. For example, if an entity is updating its
reserves, it should consider the impact on future
development costs. In addition, the entity should
consistently update these assumptions each period end.
Once a depletion method is selected it must be applied

consistently. An entity can only change to a different
basis (e.g. 1P to 2P) if there is a specific change in facts
and circumstances that would make the new method
more relevant and reliable (e.g. significant change in
Board approved development plans).
iii. Examine supporting documentation (e.g. Refer to Overview and background information section
independent reserve engineer reports and business above for more details.
plans, if available) in order to verify that the
depletion method used reflects the pattern in which
the assets' future economic benefits are expected to
be consumed by the entity (IAS 16.60, 62).
Note – Generally, for oil and gas properties the UOP

depletion method is the most appropriate
amortisation method because it reflects the pattern
of expected consumption of the reserves’ economic
benefits.
73
However, it may be appropriate to utilise different
depreciation or depletion methods for different
types of assets. For example, in instances where the
useful life of tangible equipment or facilities is not
closely linked to the reserve life of the oil and gas
property, it may be more appropriate to depreciate
those assets on a straight line basis.
iv. Inquire of management and evaluate whether the IAS 16 requires that depreciation be applied at the
determination of significant parts of the oil and gas component level which means that separate
properties and related assets (components) that are depreciation / depletion calculations will be required for
depleted separately (IAS 16.43-47) have changed each component identified unless grouping components
from prior periods. For components identified in the for depreciation would not result in a material
current period for the first time, assess, based on the difference in depletion (e.g. when components have
supporting documentation, whether management's similar useful lives).
identification is appropriate.
For upstream oil and gas properties, applying the
concept of componentization requires that depreciation
be calculated and recorded at a much lower level than
was required under full-cost accounting rules (e.g. at a
field, major property area level rather than by cost
centre). For tangible facilities (e.g. gathering systems)
or midstream assets, analysis will be required to
determine whether significant parts of an asset have
different useful lives than other parts of the asset. This
analysis should have been completed on transition to
IFRS and updated for changes each period, as required.
Note: The capital assets continuity schedule should be

reviewed to determine if there are significant tangible
asset additions in the year.
IFRS requires that the undepreciated value of an item of

PP&E be de-recognized when a component is replaced.
Therefore, tracking of costs and related accumulated
depletion / depreciation at an appropriately detailed
level is important under IFRS.
Considerations in determining the appropriate level of

componentization under IFRS include:
1. Cost/benefit – the IASB considers the balance

between benefit and cost to be a key characteristic of the
task; as such, the benefits derived from information
should be greater than the cost of providing it.
2. Materiality – under the IFRS Framework,

information is “material” if it can influence the
economic decisions of users. Materiality decisions
should consider the potential impact on the
depreciation charge in specific periods as well as the
potential impact that a gain or loss on de-recognition of
a component would have on the financial statements.
3. Useful economic life – parts are likely to be accounted

for separately if the part has a significantly different
economic life OR if the part is expected to be replaced
several times over the life of the asset itself.
74
Note: In practice, most conventional upstream oil and
gas assets (wells, batteries, etc.) depleted on a UOP
basis do not require componentization.
Componentization may be appropriate for tangible
facilities (e.g. gas plants, oil sands upgraders).
v. Verify with the calculation and the underlying The basic form of the calculation of depletion is:
documentation that depletion of oil and gas
properties and related equipment commences on
initial production (when the asset is available for Production x NBV at end of
use) and ends when assets are derecognised or Reserves at beginning period plus
classified as held-for-sale in accordance with IFRS 5 of period adjusted for estimated future
(IAS 16.55). major changes during development costs,
the period net of estimated
Agree the completeness of those items with audit
salvage values
work performed in the EGA Test transfers of
Engagement teams should obtain an understanding of
Exploration & Evaluation assets to Property, Plant
& Equipment. additions during the period to determine whether it is
appropriate to use ending NBV as the depletion base or
whether using the opening NBV adjusted for timing of
additions would be more appropriate.
vi. Obtain the client’s depletion schedule including the None.

following for each depletion unit:
 Schedule of production volumes for the period;

 Beginning of period and end of period balances
of oil and gas reserves depending on accounting
policy (proved, proved + probable);
 Cost and accumulated depletion balances;
 Future development costs to be included in
depletion base
Test the depletion calculation by performing the

following:
vii. Agree, for each quarter, the opening cost for each Costs / Accumulated Amortization
of the components subject to depletion testing either Both amounts should be able to be tied in to the PPE
with the previous year's working papers and/or with continuity schedule and lead sheet. The level of detail
EGA 'Test additions - Property, plant and required will depend on the client’s policy choice for
equipment'. depletion (e.g. by property, area, field, or CGU).
Engagement teams should ensure that additions for

the preceding quarter/s have been included in the
opening cost balance of the subsequent quarter/s i.e.
the Q2 opening cost balance should include any
additions recorded during Q1, plus the Q1 opening
cost balance.
75
viii.Agree, for each quarter, the opening
accumulated depreciation and impairment
for each of the components subject to depletion
testing either with the previous year's working
papers and/or prior quarter depletion charges.
Engagement teams should ensure that depletion
charges for the preceding quarter/s have been
included in the opening accumulated depletion and
impairment balance of the subsequent quarter/s i.e.
the Q2 opening accumulated depletion and
impairment balance should include any depletion
expense recorded during Q1, plus the Q1
accumulated depletion and impairment balance.
ix. Agree, for each quarter, the future development Future development costs (FDC’s)
costs included in the depletion cost base to the FDC’s need to be considered at the appropriate level
related independent reserve engineer report. based on the client’s accounting policy choice for
x. Consider whether significant development activities depletion (i.e. at the property, area, field, or CGU level).
during the preceding quarters should have reduced FDC balances should be agreed to the reserve report and
the amount of future development costs included in any differences should be investigated with
the depletion cost base. management.
Note – Future development costs should be
included in the depletion base ONLY if the entity Note: This step will not be required if the client is
uses something other than proved developed depleting based on PDP reserves as the reserves are
reserves. No future development costs should be already producing and do not require capital
included in the depletion cost base if the client is investment.
using proved developed reserves as their basis for
depletion. The engagement team should leverage the work
performed over the reserve report testing.
Note: If adjustments are made to FDCs at the quarters,

these should be validated to an audit level. As well, if
FDCs are reduced for costs incurred, these should be
compared to the capital additions listing to ensure the
expenditure is reasonable. Impact of expenditures on
reserves should also be considered.
xi. If applicable, agree the use of residual values with As noted, for most oil and gas companies, residual
prior year working papers or supporting values are not expected to be significant. If a material
documentation (e.g. the commitment of a third residual value is incorporated into the depletion
party to purchase the respective asset or observable calculation, the engagement team should obtain
prices of an active market), respectively (IAS 16.53- evidence to support management’s estimate of the
54). residual value (e.g. quotes for similar conditioned
assets, recent sale transactions, etc.).
Note – Residual values would typically be negligible
in oil and gas property assets as the assets are
generally retained for their entire useful life.
However, related equipment, pipelines or facilities
may have residual values associated.
xii. Test the estimated reserve base by performing the Reserve Balances
following procedures: Opening and closing reserve balances can be tied to the
xiii. Agree the opening estimated reserve base used independent reserve engineering reports. Engagement
for the first quarter depletion calculation with prior teams need to consider the client’s depletion policy to
year working papers and prior year independent determine which reserve category should be
reserve engineer report. Investigate any incorporated in the calculation (e.g. PDP, 1P or 2P)
inconsistencies.
76
xiv. Agree the opening estimated reserve balance used in Engagement teams should make sure to include
the second and third quarters with prior year references (links) to the evaluation of the expert, reserve
working papers and prior year independent reserve report testing and reliance on third party EGA’s.
engineer report, adjusted for reserve volumes
produced in the preceding quarters. Investigate any Engagement teams must ensure that the reserves can be
inconsistencies. agreed to the reserve report by component/depletion
xv. If the client’s accounting policy is to reflect year end unit.
reserve revisions to the fourth quarter, agree the
opening estimated reserve base used in the fourth Note: It is generally only acceptable for larger
quarter depletion calculation to the updated companies to elect a policy of not adjusting Q4
independent reserve report adjusted upward for depletion for the year end reserve report. This is based
reserve volumes produced in the fourth quarter. on materiality and the fact that their overall reserve
Investigate any inconsistencies; base does not change significantly from period to period
xvi. If the client’s accounting policy is to defer the (as production is offset by reserve additions each
revision of the reserve estimate to the next year, period). Engagement teams should document
agree the opening estimated reserve balance used in consideration of whether such a policy is reasonable
the second and third quarters with prior year based on testing of the current year’s reserve report and
working papers and prior year independent reserve review of the reserve reconciliation (i.e. whether a
engineer report, adjusted for reserve volumes significant change in reserves could give rise to a
produced in the preceding quarters. Investigate any material difference in depletion expense for Q4).
inconsistencies.
xvii. Note - Any revision to the depletion rate as a For most junior oil and gas companies, Q4 depletion
result of change in the estimated reserve base is should always be updated to reflect the year end reserve
treated prospectively as a change in estimate under report.
IAS 8.
xviii. Engagement teams should be aware that when
there are revisions which are considered a change in
estimate, prior to the release of financial statements.
it is an accounting policy choice as to whether the
reserve revision is reflected in the results at the
beginning of the fourth quarter or deferred until the
first quarter of the following year. However, it is not
generally appropriate to take the effect of the
revisions in earlier quarters.
xix.Agree, for each quarter, the production volumes Production

included in the calculation of the estimated reserves Production information needs to be considered at the
base to supporting documentation. appropriate level based on the client’s depletion policy
Ensure that production volumes are on the same (e.g. at the property, area, field, or CGU level).
basis as estimated reserve quantities (i.e. net of
royalties or gross). Engagement teams should be able to agree production
volumes for the period to lease operating statements
Engagement teams are reminded of the requirement from the client’s accounting system. Teams will have to
to consider the nature and extent of audit evidence document their consideration of the reliability of such
supporting the reliability of information used in reports (i.e. completeness and accuracy of production
testing of non-financial data i.e. system generated information). Typically, the engagement team can take
reports supporting sales volumes. Ensure comfort over volumes in the client’s system through
appropriate audit procedures have been planned testing of internal controls and/or through vouching of
and executed to support reliance on non-financial revenue transactions. Teams should document how
data and related reports. they obtained comfort over accuracy of volume
information by depletion unit or CGU.
The depletion calculation should be calculated on a

consistent basis of “gross” or “net” of royalties. This is
referring to royalties paid to the government, and not
royalty income, although royalty income production and
reserves should be included if depletion is calculated on
a “gross” basis.
77
xx. Test the mathematical accuracy of the depreciation None
calculation.
xxi.Agree depletion expense per the client’s schedule to None

the amount recorded in the accounting records and
the amount recognized in the statement of

GADM involvement is not likely appropriate for this EGA.
78
EGA: Reserve Report Testing
Reserves
In the oil and gas industry, “reserves” are estimated remaining quantities of oil and natural gas and related
substances anticipated to be recoverable from known accumulations, from a given date forward, based on:
(a) analysis of drilling, geological, geophysical, and engineering data;

(b) the use of established technology; and
(c) specified economic conditions, which are generally accepted as being reasonable and shall be disclosed.
Classification of Reserves
Reserves are classified according to the degree of certainty associated with the estimates.
Reserve Category Description
Those reserves that can be estimated with a high degree of certainty to be

Proved Reserves (1P) recoverable (>90%). It is likely that the actual remaining quantities
recovered will exceed the estimated proved reserves.
Those reserves that are expected to be recovered from completion in

intervals open at the time of the estimate. These reserves may be currently
Proved Developed Reserves producing or, if shut-in, they must have previously been on production, and
the date of resumption of production must be known with reasonable
certainty.
Those reserves that either have not been on production, or have previously
Developed Non-Producing
been on production, but are shut-in, and the date of resumption of
Reserves
production is unknown.
Those reserves expected to be recovered from known accumulations where

a significant expenditure (e.g., when compared to the cost of drilling a well)
is required to render them capable of production. They must fully meet the
requirements of proved reserve classification.
Proved Undeveloped Reserves In multi-well pools, it may be appropriate to allocate total pool reserves
(“PUD”) between the developed and undeveloped categories or to sub-divide the
developed reserves for the pool between developed producing and
developed non-producing. This allocation is based on the estimator's
assessment as to the reserves that will be recovered from specific wells,
facilities and completion intervals in the pool and their respective
development and production status.
Those additional reserves that are less certain to be recovered than proved
Probable Reserves
reserves.
These represent the combination of 1P and probable reserves (developed

Proved + Probable Reserves and undeveloped). It is equally likely that the actual remaining quantities
(2P) recovered will be greater or less than the sum of the estimated proved +
probable reserves (known as the ‘P50 case’).
79
The amount of reserves that can be extracted is heavily dependent on the characteristics of the reservoir and
limitations and/ or advancements in the extraction technologies. The ratio of producible reserves to total "in place
resources" is referred to as the recovery factor. The recovery factor varies greatly within and among fields (oil
specifically).
Canadian Reserves Standards
National Instrument 51-101, Standards for Disclosure of Oil and Gas Activities, provides the regulatory guidance
which listed companies in Canada must follow in regards to reserve reporting. A copy of the national instrument
can be obtained on the ACS’s website: www.albertasecurities.com.
NI 51-101 provides guidance to issuers and reserve engineers on the specific disclosures required and provides the
basis of the reserve report as management is required to publish certain tables from the reserve report annually. NI
51-101 uses the Canadian Oil and Gas Evaluation (COGE) Handbook, which is prepared jointly by the Society of
Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian Institute of Mining, Metallurgy & Petroleum
(Petroleum Society).
Impact of Reserves on Financial Statement Line Items (Depletion and Impairment)
Under IFRS, reliance will be placed on reserve information at a level below the “corporate total” level. Specifically,
impairment and depletion calculations are based on reserve information prepared at an area / CGU level. As such,
in most instances, it will not be sufficient to perform the procedures in part B of the EGA (see section 4 below) at
the “corporate total” level as is done under US GAAP (or previously for full-cost companies under old CGAAP).
The level at which testing should be performed is a matter of professional judgment. However, it is important to
remember that the purposes of our procedures over reserves is not to validate the “correctness” of the reserve
estimates which are technically developed forward looking estimates. Instead, the purpose of our procedures over
reserves is to assess the reasonableness of the output from the management expert to cover our responsibilities for
reliance thereon in accordance with CAS 500 – Audit Evidence (paragraph 8).
Generally it is expected that engagement teams will consider performing procedures on depletion units or CGU’s
where:
 there is goodwill allocated and therefore an impairment test is required to be performed;

 there are indicators of impairment of the CGU;
 there was an impairment recognized previously, and there is consideration for impairment reversal.
For example, if each CGU has a large cushion on its impairment test or no impairment indicators exist, then
performing limited detailed testing may be sufficient, such as testing one oil and one gas depletion unit or CGU.
However, if there are indicators of impairment, then the engagement team might want to consider performing
detailed procedures at the CGU level, for the specific CGU in question. It is not a requirement to test all depletion
units or CGU’s for which there are impairment indicators and the extent of testing should be determined using
judgment based on facts and circumstances, including materiality and susceptibility to error.
Interrelationship Note: Under IFRS, impairment should be determined on the basis of 2P reserves and therefore
reserve testing should be performed using 2P reserves. It is important to note that companies have the option to
deplete their PP&E assets using either 1P or 2P reserves. Some of the information required in performing the
depletion testing, will be sourced from the reserve report, including reserves, and associated future development
costs. Ensure that the appropriate class of reserves information is being used by the client and PwC during testing,
based on the client’s policy choice with respect to depletion. Additional procedures may be necessary at both the 1P
and 2P level.
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Reserves themselves are not a financial statement line item; however, they have a significant impact on depletion
and impairment calculations for property, plant and equipment for PP&E and goodwill, if applicable. Accordingly,
the primary assertion impacted is Valuation. The risk that impairment is not correctly identified or calculated is
summarized within the Likely Sources of Possible Misstatement for Reserves. A screenshot of this is shown below.
Reserves are typically an elevated or significant risk for most oil and gas audits. Accordingly, there is a requirement
to obtain an understanding of the client’s controls to address the risk. For non-integrated audits, formally testing
these controls is not explicitly required; however engagement teams are encouraged to consider testing certain key
controls over the reserve process to supplement the substantive procedures discussed below. The following are
examples of controls that engagement teams should consider when developing their audit strategy for reserves:
 The Reserve Committee appoints an independent qualified reserve evaluator (IQRE) to assess the client’s
reserves in accordance with relevant regulations (e.g. NI 51-101). The Reserve Committee meets with the
IQRE to review and approve the reserve report. As part of this meeting, the IQRE provides responses to a
detailed questionnaire issued by the Reserve Committee.
 The information sent to the IQRE is reviewed by a qualified individual (engineer) and the individual signs
a representation letter confirming that the information submitted is accurate and complete.
 The final reserve report prepared by the IQRE is reviewed and approved by senior management.
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Part A: Reserve Engineer Confirmation
 Send a confirmation to each independent qualified The IQRE confirmation template was last updated on
reserve engineer (“IQRE”) that prepares a report February 15, 2013.
relied upon by the client. Refer to Template
Manager under "Substantive Tests" and "Oil and The key items that the IQRE should be confirming are:
Gas" for template(s) that may be useful when
performing this EGA.  Acknowledging PwC’s intention to place reliance
on the report
 The IQRE has appropriate qualifications in
accordance with the requirements of NI 51-101.
 The IQRE is independent.
Acknowledgement of these items should be documented

in Aura.
The IQRE is also requested to complete the PwC IQRE

Questionnaire attached to the reserve confirmation. It is
expected that most reserve firms will complete this for
PwC; however there may be situations where the IQRE
does not wish to compete the questionnaire as part of
the confirmation. If unable to obtain the questionnaire,
the engagement team should consider alternative
sources to obtain answers to the questions (e.g.
attendance at the reserve committee meeting, obtaining
minutes from the reserve committee meeting and the
completed questionnaires from those meetings and
management’s representation letter to the IQRE).
Engagement teams should also request that the IQRE

include with the confirmation a copy of the final reserve
report (by property and corporate total) and a summary
of commodity price assumptions used in the valuation of
the reserves (i.e. price decks). These should both be
agreed to the reserve report used for testing in Part B.
Note that the template has the PricewaterhouseCoopers

LLP signature, which requires partner signature. If the
letter is not going to be signed by the partner, then this
should be removed.
 If reliance is to be placed on the work of an IQRE, When placing reliance on an IQRE, we should ensure
ensure that the appropriate EGA relating to that we consider the implications within planning and
"reliance on experts" has been imported in the gather evidence views in Aura. The following EGA’s are
audit file. The considerations in ISA 500 should be required for reliance on the work of a management’s
documented for each IQRE that PwC intends to expert:
place reliance on.
 Plan involvement of expert (2013 CAS General
– PIE and PIE related Aura library); and
 Use of Work of Experts risk is included in gather

evidence under the EGA’s “*(ISA 500,620)
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Evaluate the expert’s work” for audits under
Canadian Audit Standards or “* Use of the work
of an expert employed or engaged by
management” for integrated audits conducted
under the standards of the PCAOB.
 Meet with client and IQRE to obtain a detailed In 2012, the reserve engineer confirmation was modified
understanding of the IQRE’s engagement with the to include a questionnaire for the IQRE to complete,
client. Specific consideration should be given to the with similar questions which are already asked to the
availability of detailed reserve information by IQRE by the reserves committee for many clients. The
property or CGU and our intended reliance thereon purpose of the questionnaire is to provide the
for purposes of testing impairment and depletion engagement team with additional information regarding
calculations. the reserve process, and the estimate and related
assumptions to assist in scoping the tailored procedures
Ensure that the confirmation provided by the IQRE
required to support reliance on the management expert.
is consistent with the reserve report information
obtained from the client in Part B. If possible,
The questionnaire specifically addresses the scope of the
request that the IQRE provide a summary of
engagement and will provide insight as to whether there
reserves by property or CGU in their confirmation.
are any caveats in the reserve report that the
The PwC IQRE Questionnaire can be used as a tool engagement team needs to consider. Based on
to obtain information from the IQRE regarding experience, most Canadian clients have 100% of
their engagement with the client and the reserve properties evaluated, and at a minimum 80% of reserve
estimation process. Teams are encouraged to send value must be evaluated. If there are particular
this questionnaire in conjunction with the properties not evaluated by the IQRE, the engagement
standard confirmation noted in (a) above. The team will need to consider, based on materiality of the
questionnaire should be sent on client letterhead book values of the associated PP&E, whether additional
but should be sent by the engagement team with procedures need to be performed (e.g. testing
responses returned directly to the engagement assumptions for the specific CGU).
team (similar to other types of confirmations).
The factors considered and the conclusion reached
Note: In some instances, the final reports prepared
should be explicitly documented in this portion of the
by the IQRE may contain caveats indicating that
EGA.
their report is prepared for the client as a whole
and that reliance on reserve information on a
Note: This tailored procedure may be covered by the
property by property basis may not be appropriate.
Engagement Leader through attendance at the client’s
In such cases, perform detailed inquiry of the client
Reserve Committee meeting.
and IQRE to obtain an understanding of the
rationale behind the caveat and evaluate what
additional procedures, if any, are required in order
for us to place reliance on the detailed (by
property) reserve information within the report.
Part B: Reserve Report Testing
a) Obtain a copy of the reserve report prepared by the Engagement teams should be conscious as to whether
IQRE as at the period end date. the final report is being used for testing, or whether the
draft report is obtained. If the draft report is utilized,
Please Note: IQRE’s usually provide a summary report procedures should be performed to understand any
and a full version that is broken down by area, and differences from the draft to final report.
contains information at the well level. It is generally
necessary to obtain both. The full version is used for A copy of both the draft and final reserve report should
Well Ownership and Working Interest testing as well be retained in the aura file.
as to support impairment testing (by CGU) and
depletion testing.
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If a draft is obtained for testing purposes, ensure that a
final approved copy is obtained prior to finalization of
the audit and that the Final report is reconciled to the
Draft report and any significant changes are
understood. Update analysis if required.
b) Obtain or prepare a reconciliation of client’s The level of testing that will be performed i.e. by CGU or
reserve volumes from the prior year to the current by corporate total will be a decision made by the
year end. Ensure that changes are consistent with engagement team considering the risk involved with the
PwC expectations based on nature of client's significant estimate. Refer to the discussion under
operations as follows: Overview and Background Information above.
Note: Consideration should be given to the client’s

depletion and impairment policies when
determining which reserve scenarios to analyze.
Typically, proved + probable reserves (“2P”) will
form the basis for impairment calculations while
depletion calculations may be passed on proved
reserves (“1P”) or 2P reserves depending on the
client’s accounting policy.
i. Additions – Consider whether significant Engagement teams should be cognizant that additions to
additions noted in the reconciliations are reserves are consistent with our understanding of
consistent with work performed on PPE current year activities – drilling & completion activities
additions or acquisitions in the period which provide additional information about the reserves
on which the land is drilled on, and potentially adjacent
lands.
ii. Disposals – Consider whether significant If the client had significant asset disposals in the current
disposals noted in the reconciliation are period, the engagement teams should review the
consistent with work performed on PPE reconciliation to ensure that such dispositions have been
disposals in the period. reflected (i.e. reserves reduced) for the applicable
CGU’s.
iii. Production - Agree production per the reserve Engagement teams should review and conclude as to
reconciliation to production volumes utilized in whether the production information is consistent with
revenue testing. Obtain explanations for expectations from testing performed in other areas of
significant differences. the file (e.g. revenue testing).
Note: Small differences may exist as often the reserve

report is prepared using an ‘estimate’ of production for
the last month or two of the year.
iv. Revisions - Obtain an understanding for the For revisions, PwC should obtain an understanding of
reason for significant revisions (positive or why a revision has been made, and whether it is the
negative) as compared to the prior year. result of new information obtained in the current year,
or whether it was an error made in the prior year.
Note: The PwC IQRE Questionnaire includes
specific questions relating to revisions. Note: Significant downward revisions in reserves are a
potential indicator for impairment.
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c) Gain an understanding and document the client's The engagement team should include a discussion on
procedures regarding delivery of information to how the information is provided to the IQRE’s and how
IQRE, including operating cost, royalty future the client ensures information provided is complete and
capital cost and working interest information. accurate. Information is provided to the reserve
Document how the client obtains comfort that the engineers is at a point in time, and it is used by the
information provided to the IQRE is accurate and IQRE’s as a foundation for their estimates, but the final
complete. Specifically, consider whether sufficient reserve report will incorporate both historical and
evidence has been obtained with regards to well estimated future information based on the evaluation
listings, client's working interest and historical performed by the IQRE’s. IQRE’s use a number of
financial data. If sufficient comfort is obtained procedures to internally validate data provided by the
through controls, please reference to work client who may include a comparison of their previous
performed. Alternatively, it is expected that a records, other internal sources, and external public
separate EGA has been documented to test working information databanks.
interest. Review the work performed in that EGA to
ensure that testing performed included sample of We test the validity of the inputs of the reserve report by
items from the reserve report. performing detailed testing of the outputs of the reserve
report through the procedures below in (e) and
Note: The PwC IQRE Questionnaire includes specific obtaining responses to the IQRE questionnaire. These
questions relating to information provided to the procedures should provide sufficient evidence that
IQRE. further substantive tests of detail are not necessary.
d) If applicable, consider, based on risk and timing, It is not a requirement to attend the Reserve Committee
whether PwC representative should attend the meeting; however it is best practice for PwC partner or
Reserves Committee meeting at year end to gain an manager to attend when possible. If attendance is not
understanding over the client's process and practical, engagement teams should request the
controls over reserves. If attendance at Reserve information package provided to the committee
Committee meeting is not practicable, consider members as this often provides valuable information on
obtaining materials provided to the Reserve changes to reserve estimates, key areas of judgement,
Committee and review to update our etc. Often such packages will also include a
understanding of the process. questionnaire completed by the IQRE. Teams should
review the responses and compare to the responses
received in the PwC IQRE Questionnaire to ensure there
are no inconsistencies.
e) For a sample of properties within the reserve The level of testing that will be performed (i.e. by CGU
report, determined based on an assessment of or by corporate total) will be a decision made by the
materiality and risk, assess the reasonableness of engagement team considering the risk involved with the
key financial assumptions in the IQRE final report significant estimate. Refer to the discussion under
by performing the following: Overview and Background Information above.
There are a number of assumptions, technical /
operational and financial that impact the overall
reserve estimates. PwC relies on the expertise of
the IQRE in developing reserve estimates and a
separate EGA related to "reliance on experts" has
been imported in the audit file to address the
general requirements of ISA 500.
The purpose of the procedures below is not to re-

calculate or specifically validate whether the
estimate is correct as the information is forward-
looking and based on significant judgment and
estimate. Instead, the purpose of these procedures
is to assess the reasonableness of key financial
assumptions underlying the reserve estimates
prepared by the IQRE (by comparing to
85
established bench marks or actual historical
results) to enable us to conclude on the overall
reasonableness of the reserve estimates and our
reliance thereon.
It will generally not be sufficient to test the reserve

report at the corporate total level, as was done
previously under Canadian GAAP. Under IFRS,
impairment and depletion calculations require
reliance on reserve information at a lower level
(e.g. CGU or depletion unit); therefore
consideration of key assumption for specific CGU’s
or properties may be required.
The following procedures should be applied at an

appropriate level (corporate totals, by CGU,
depletion unit) based on materiality and
professional judgment. The extent to which
reserve assumptions should be tested is a matter of
professional judgment based on risk and
materiality and engagement teams should
explicitly document the rationale underlying their
testing approach.
Note: Consideration should be given to the client’s

depletion and impairment policies when
determining which reserve scenarios to analyze.
Typically, proved + probable reserves (“2P”) will
form the basis for impairment calculations while
depletion calculations may be passed on proved
reserves (“1P”) or 2P reserves depending on the
client’s accounting policy.
Price Each IQRE determines their price deck to value the

(i) Compare forecasted prices for benchmark reserves, and they may differ from the forward curve
commodity prices (AECO, WTI) per the and other reserve engineers. The purpose of our
reserve report to the forecast price decks analysis is to ensure that the price deck used is
from other IQRE’s (e.g. Sproule, GLJ) to reasonable and can be relied upon, as this is one of the
ensure price deck used is reasonable. Note: key drivers which will cause significant fluctuations in
Graphical presentation is often the most the net present value of reserves. The response to an
effective way to present this analysis. aggressive price deck being used compared to the
forward curves and other reserve engineers could be an
Note: There is no 'right answer' with respect to increase in the discount rate used in the impairment
commodity pricing as the estimation of prices analysis.
many years in the future requires significant
judgment and estimate. The purpose of PwC's Engagement teams will have to assess whether:
comparison to other pricing sources is not to
calculate a potential error, but rather to confirm (i) The summary of commodity price assumptions
our assumption that the client's IQRE is a reputable used in the valuation of the petroleum and
3rd party source and that reliance on the reserve natural gas reserves is reasonable compared to
report, including pricing assumptions, is other reserve engineer firms and the active
reasonable. market, and
(ii) Whether the benchmark commodity price

assumption has been appropriately adjusted for
86
(ii) If the client's products are typically sold at a quality and transportation differences and
discount / premium to benchmark prices; other relevant factors specific to the properties.
compare the expected 'client realized selling Other than evaluating the generic price forecast
price' per the independent reserve report to from the reserve engineers, engagement teams
the historical premium or discount from the will also have to consider whether the
current year. Obtain explanations if forecast appropriate differential has been considered in
differential is significantly different than the reserve report. Most reserve reports do not
historical trends. Note: Separate analysis separately disclose differentials, and it will have
should be prepared for gas and oil. to be calculated by dividing expected sales by
volumes of each commodity for a year. This
can then be compared to the reserve engineer
price deck.
For example, the reserve engineer may forecast

Edmonton Par prices for 2013 to be $95/bbl,
but the total revenue for oil CGU for 2013 is
$20,000,000 for 215,000 barrels, providing a
realized price of $93/bbl. This differential of $2
per barrel or 2% should be evaluated against
actual realization for the CGU as compared to
historical benchmark prices to determine
whether the actual price estimates used to
generate the cash flows for the CGU are
reasonable.
Note: PwC teams should understand the nature

of the differentials as they are typically related
to either quality or location (transportation).
Both types of differential are expected to
remain generally consistent over time; however
quality differentials may change over time with
composition of wells.
Royalties For traditional upstream properties in Canada, assessing

whether royalty expenses are reasonable is generally not
(i) Compare forecasted royalty expenses (as a
overly complex as royalty expense is a calculation based
% of revenue) for the next immediate year
on forecasted sales and commodity prices. Typically,
and for the total years per the reserve report
royalty as a % of revenue from the reserve report for
to historical results. Comparison can be to
future periods is compared to actual historical royalties
the average rate for the current year if no
as a % of revenue (from “Lease Operating Statements”)
significant changes in operations occurred.
to assess reasonableness. Generally, teams should
If changes occurred during the year,
expect royalty rates to increase over time if the royalty
comparison to 'exit' rate (e.g. month of
regime is a sliding scale with higher rates at higher
December) may be more appropriate.
commodity prices.
Obtain explanations for significant
differences in forecast trends as compared
Teams may encounter difficulties in some instances
to historical results. Note: If necessary,
trying to analyze royalties at a depletion unit or CGU
consider performing the analysis at a more
level as certain items that impact royalty expense (e.g.
disaggregated level (e.g. by product if
Gas Cost Allowance, Saskatchewan Mineral Taxes,
significant differences in royalty rates exist).
royalty holidays) may not be accounted for at such low
levels by the client or by the IQRE in preparing their
report. In such instances, further investigation may be
required to conclude on the reasonableness of the
reserve report information for a specific CGU.
87
See “Links to Templates and Best Practices” for
documentation template for a typical reserve report.
Note: If the royalty regime is more complex (e.g. oil

sands, east coast offshore, foreign countries); additional
factors may need to be considered in evaluating the
reasonableness of royalty estimates in the reserve
report. In some instances, it may be more efficient and
effective to obtain the detailed royalty calculation built
into the reserve report and compare this to our
understanding of the royalty regulations rather than
performing an analytic.
Note: Engagement teams should consider and

document how system reports (e.g. Lease Operating
Statements) used in the analysis can be relied on. Refer
to PwC Audit Guide 6026, Assessing the Reliability of
System Generated Information, Including Information
Used in Execution of a Control.
Operating Expenses Generally, assessing whether operating costs are

reasonable is generally not overly complex. Typically,
(i) Compare forecasted operating expenses (on
costs per boe from the reserve report for future periods
a per BOE basis) for the next immediate
is compared to actual historical costs per boe (from
year and for the total years per the reserve
“Lease Operating Statements”) to assess reasonableness.
report to historical operating expenses.
Generally, teams should expect operating costs per boe
Comparison can be to the average rate for
to increase over time as production declines due to the
the current year if no significant changes in
fact that there are often significant ‘fixed’ costs that are
operations occurred. If changes occurred
incurred regardless of production levels.
during the year, comparison to 'exit' rate
(e.g. month of December) may be more
Teams may encounter difficulties in some instances
appropriate. Obtain explanations for
trying to analyze operating costs at a CGU level as
significant differences in forecast trends as
certain items may not be accounted for at the CGU level
compared to historical results.
by the client or by the IQRE in preparing their report.
In such instances, further investigation may be required
to conclude on the reasonableness of the reserve report
information for a specific CGU.
See “Links to Templates and Best Practices” for

documentation template for a typical reserve report.
Engagement teams should consider and document how

system reports used in the analysis can be relied on.
Refer to PwC Audit Guide 6026, Assessing the
Reliability of System Generated Information, Including
Information Used in Execution of a Control.
Production Production estimates or future periods can be difficult

for PwC as auditors to evaluate as significant reliance
(i) Compare production forecast for the next
must be placed on the IQRE. Our procedures in this
year in the reserve report to the current
area are typically focused on:
year's production and obtain explanations
for significant differences. Note: If additions
a) Comparing forecast production for the upcoming year
were made during the current year,
to actual production from the current year or most
comparison to 'exit' rate (e.g. Q4 or
88
December month) may be more recent quarter (from Lease Operating Statements);
appropriate.
b) Comparing the “production type curve” for the CGU
in the current year’s reserve report to the same from the
prior year’s reserve report to determine whether there
were any significant changes in production estimates
year-on-year. If such changes are noted, engagement
teams should investigate through discussion with the
client and/or IQRE to understand the reasons for the
change in estimate (e.g. decreases consistent with
planned maintenance or increases consistent with
planned capital activity).
Typically the production curve is not presented as such

in the reserve report. Teams can generate a graphical
analysis by pulling the production numbers from the
reserve reports by year.
Engagement teams should consider and document how

system reports used in the analysis can be relied on.
Refer to PwC Audit Guide 6026, Assessing the
Reliability of System Generated Information, Including
Information Used in Execution of a Control.
Future Development Costs The future development capital (FDC) disclosed in the
reserve report is often a significant estimate, and can be
(i) Compare FDC estimates in the current
an estimate that the IQRE’s typically place more reliance
year's reserve report to the prior year's
on management and perform less independent
reserve report. Ensure that changes in
validation on. The engagement team should develop a
trends or magnitude of expected FDC's are
clear understanding as to how the FDC was generated
consistent with PwC understanding of
(e.g. based on budgets, based on a per well capital
changes in overall reserve portfolio.
spending either by area or by corporate total etc.,) and
(ii) Inquire of management or IQRE as to the ensure that the information is consistent with PwC’s
primary drivers of the FDC amount (e.g. are testing of capital spending.
they 'per well' costs or facilities). If costs
estimates are on a 'per well' basis, obtain Procedures that can be performed
support from management showing the # of
wells expected to be drilled and assess the - Compare per well capital spending per the
reasonableness of FDC balance based on reserve report to average capital spending per
our understanding of historical drilling well that can be calculated from PwC’s testing of
costs for the client. For significant FDC oil and gas assets.
amounts related to non-well costs, inquire - Compare the FDC estimated for the first year, or
of management to obtain an understanding first couple of years, of the reserve report to
of their process for estimating the FDC approved capital budgets. It wouldn’t be
amounts. expected that FDC per the reserve report is
larger than the capital budget. Is the estimated
FDC for current year in line with previous year’s
spending or other analysis performed in the file
(e.g. going concern)? Note that management’s
capital budget is not just for spending on proved
and probable reserves, but could also include
exploration & evaluation expenditure,
maintenance capital and decommissioning
expenditure.
89
- Compare the FDC trend each year over the life
of the reserve report in the current year’s
reserve report to the same trend in the prior
year to determine whether there have been
significant changes which should be
investigated.
- Compare the prior year’s reserve report estimate
of the current year’s FDC to the actual amount
spent by the client on its development and
completion activities to evaluate how accurate
prior year estimates have been and investigate
significant differences (i.e. change in the
company’s plans in timing, or change in actual
v. estimated costs).
The FVLCTS model for impairment requires

management’s best estimate of capital expenditures that
would be required to develop and maintain production
from the proved and probable reserves.
Future Abandonment and Reclamation Paragraph 43 of IAS 36 indicates that, to avoid double
counting, estimates of future cash flows should not
(i) Depending on whether future abandonment
include cash flows that relate to obligations that have
and reclamation costs are used in
been recognized as liabilities (for example provisions).
impairment testing, inquire of management
or IQRE as to the primary drivers of the
Based on this guidance, it can be argued that the
amount (e.g. are they 'per well' costs or
FVLCTS discounted cash flow model should exclude
facilities, what costs have been considered
costs related to abandonment and reclamation
(e.g. surface reclamation, down hole
altogether. If management has excluded
abandonment) and have they been
decommissioning liability from their impairment
considered for all properties. Compare
assessment, then no further work needs to be performed
future abandonment and reclamation costs
in reserve report testing.
to information obtained in the
decommissioning liability EGA.
If abandonment costs from the reserve report are used
by the client for impairment purposes the engagement
team will need to perform procedures to validate that
the estimates are reasonable.

Engagement teams are encouraged to utilize the documentation template titled “Reserve Report Testing
Template_FINAL.xls” available on Template Manager when completing this EGA. The template can be
modified to incorporate specific testing attributes that may be necessary to document based on client-specific
Historically, GADM has not been utilized in reserve report testing. As part of PwC’s ATP initiative thee is an
expectation that certain aspects of the testing in this EGA may be completed centrally and distributed to
engagement teams (e.g. price deck comparisons for various engineers). In the future, consideration may be given to
developing a “centre of excellence” for reserve report and impairment testing to maximize efficiency and
consistency amongst audit files.
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EGA: Plan involvement of expert

Paragraph 8 of ISA/CAS 500 provides guidance for engagement teams when considering the use of management’s
expert as part of the audit evidence obtained.
There are two required EGA’s to be completed when we plan to rely on an expert for purposes of reserves. In the
planning phase, the EGA – *Plan involvement of expert is located under the caption “Develop strategy and plan” in
the Planning Activities view in Aura when using the 2013 CAS General – PIE and related to a PIE tier 1
library.
This is where the engagement team should evaluate whether the reserve engineer is competent, has the appropriate
capabilities and is objective. It is also where the engagement team obtains an understanding of the work of the
reserve engineer.
A second EGA, *Evaluate the expert’s work should be included in the Aura file in the Gather Evidence view, under
the Use of Work of Experts audit risk. It is in this EGA where the engagement team will evaluate the
appropriateness of the reserve engineer’s work.

Refer to Reserve Report Testing EGA above.
See controls listed under EGA – Test Reserve Report for relevant controls considerations.

Management’s expert
1. If information to be used as audit evidence has been Competence relates to the nature and level of expertise of
prepared using the work of a management’s expert, the management's expert.
perform the following, to the extent necessary,
having regard to the significance of that expert’s Capability relates to the ability of the management's
work for our purposes (ISA 500.8). Evaluate the expert to exercise that competence in the circumstances.
competence, capabilities and objectivity of that Factors that influence capability may include, for
expert example, geographic location, and the availability of time
and resources.
Objectivity relates to the possible effects that bias,

conflict of interest or the influence of others may have on
the professional or business judgment of the
management's expert. - PwC A. 3111
In accordance with PwC Audit Guide 3111, the

engagement team should document that we obtained
comfort that the expert is:
91
- Independent, demonstrated from the
confirmation obtained from the reserve engineer in
EGA – Reserve Report Testing and should also be
explicitly noted in the reserve report in an
independence statement (note: often independence
statement will be in reference to NI51-101
requirements. Based on PwC understanding of
these regulations, such compliance is sufficient to
support objectivity).
- Has relevant expertise, demonstrated from the
confirmation obtained from the reserve engineer in
EGA – Reserve Report Testing. Qualifications of
most reserve engineers are also listed on the reserve
engineer’s website, and their bios are usually
attached in the reserve report and IQRE
Questionnaire.
- Engagement teams should be comfortable that the
expert’s expertise is relevant to the matter for which
that expert’s work will be used, including any areas
of specialty within that expert’s field. For example,
reserve engineers may have specialities in certain
geological formations or geographical locations, and
it is important to assess if their expertise is relevant
to the client. This information can generally be
obtained from the reserve engineer’s bio and/or the
reserve engineering firm’s website.
- Qualified, demonstrated by being in good standing
of membership of a professional body or industry
association, license to practice, or other forms of
external recognition. Most reserve engineers are
members of The Association of Professional
Engineers, Geologists, and Geophysicists of Alberta
(APEGGA) and statuses can be directly confirmed
on their website www.apegga.org under the
Membership Register. The reserve engineer firm
can also be checked to ensure that it is a legitimate
permit holder through the Permit Register section
of APEGGA.
If the engagement team has concerns regarding

competence or objectivity, it should discuss these
reservations with management and consider whether
sufficient appropriate audit evidence can be obtained.
(a) Obtain an understanding of the work of that The engagement team should assess that the objectives
expert. and scope of work is appropriate for the purpose of
reliance. The engagement team should ensure that they
obtain an appropriate understanding of the scope of the
expert’s engagement with the client to determine
whether all reserves (proved and probable) and
potentially resources are covered by the experts work
and to what extent the information is being
independently verified by the reserve engineer. This will
help to determine the scope of procedures to perform.
Refer to the EGA – Reserve Report Testing where results
of this assessment will be considered for audit
implications.
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The scope of the work is normally provided within the
Introduction section of the reserve report, or can be
obtained from the engagement letter between the reserve
engineer and the client.
Engagement teams should be aware of the following

items when assessing appropriateness of scope of an
expert’s work:
- The effective date of the reserve report – generally

the client’s year-end date. This can also be
confirmed in the reserve confirmation.
- The extent of the expert’s access to appropriate
records and files.
- For Canadian companies, that the report is prepared
for the purpose of evaluating the Company’s P&NG
reserves according to the Canadian Oil and Gas
Evaluation Handbook (COGEH) reserve definitions
that are consistent with the standards in National
Instrument 51-101. This can also be confirmed in the
reserve confirmation.
- The evaluation standards, and whether the
evaluation has been prepared within the Code of
Ethics of the Association of Professional Engineers,
Geologists, and Geophysicists of Alberta (APEGGA)
and that the report adheres to the best practices
recommended in the COGE Handbook.
- The evaluation procedures and results, which
generally defines how the reserve engineers
obtained their information and the results of those
procedures.
(b) If the work of an management’s expert is to be Engagement teams should bring in this FSLI and refer to
used, scope-in the non-FSLI Use of the work of the reference below.
Experts in Financial Statement view and add
the risk Use of the work of Experts in Audit
Risks view for each applicable FSLI

There is not a template for this EGA; however it is expected that standard documentation for this EGA will be
prepared centrally in the Calgary office for each of the most commonly used IQRE’s. This documentation will be
made available for all engagement teams to incorporate in their Aura files as appropriate.
Use of GADM is not likely appropriate for this EGA.
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EGA: Evaluate the expert’s work – [Reserve Evaluator]
a) Overview and background information

The EGA - *Evaluate the expert’s work should be included in the Aura file in the Gather Evidence view, under the
Use of Work of Experts audit risk when the engagement team plans to place reliance on an independent qualified
reserve evaluator (“IQRE”) engaged by management.
It is in this EGA where the engagement team will evaluate the appropriateness of the IQRE’s work.
b) Assertions and Likely Sources of Possible Misstatement

Refer to EGA – Reserve Report Testing above.
 The Reserve Committee appoints and independent qualified reserve evaluator (IQRE) to assess the
client’s reserves in accordance with relevant regulations (e.g. NI 51-101). The Reserve Committee meets
with the IQRE to review and approve the reserve report. As part of this meeting, the IQRE provides
responses to a detailed questionnaire issued by the Reserve Committee.

Management’s expert
1. Taking into account the matters included in EGA Engagement teams can check the boxes, as appropriate,
*Plan involvement of expert/’*Use of work of in this EGA and link to the work performed in the EGA –
experts’ for the nature, timing and extent of Reserve Report Testing where detailed procedures are
procedures to be performed, evaluate the performed to evaluate the IQRE report.
appropriateness of that expert’s work as audit
evidence for the relevant assertion.

None
Use of GADM is not likely appropriate for this EGA
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EGA: Consider whether indicators of impairment exist –
property, plant and equipment

Impairment considerations for all long-lived assets, except for E&E assets, are covered by IAS 36, Impairment of
Assets. E&E assets are subject to IFRS 6, Exploration for and Evaluation of Mineral Resources, and IAS 36.
The general principles in these standards require entities to assess at each reporting period whether there are any
indications that assets may be impaired. The existence of one or more indicators does not mean the assets are
impaired; however, it does require further testing to assess whether the assets are actually impaired.
Under IFRS, asset impairment testing is performed at the individual asset level, where practical, otherwise, the
impairment test is performed at a CGU level. IAS 36 requires that an asset be assessed for impairment if there is an
indication that impairment exists. The standard highlights the following indicators that should be considered:
 Significant decline in asset market value during the period more than that which would be expected with
passage of time;
 Significant negative technological, market or economic factors impacting the entity have occurred or are
expected to occur.
 Changes to market interest rates which might negatively impact the calculation of the recoverable amount
of the asset carrying amount of the net assets of the entity is more than its market capitalization.
The following indicators are specific to entities with oil and gas operations:
 Declines in future oil and gas commodity prices;
 Actual or expected future development costs are significantly more than previously anticipated for a CGU
(e.g., significant AFE overruns with no significant upward revisions in reserve estimates);
 Significant downward revisions to reserve estimates;
 Significant adverse change in legislative or regulatory climate (e.g., an unanticipated increase in royalty
rates).
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The primary assertion being addressed in this EGA is Valuation of PP&E. The risk that impairment is not
correctly identified or calculated is included within the LSPM for PP&E. A screenshot of the relevant sections of the
LSPM is shown below:
Generally, it is not expected that there will be significant reliance placed on key controls addressing potential
indicators of impairment for PP&E for most financial statement audits (comfort will be obtained from substantive
testing). For integrated audits, the key client controls addressing the assertions covered in this EGA would usually
be something like the following:
 Each quarter, the manager of financial reporting prepares an impairment indicator checklist for PP&E to
determine whether a quantitative impairment assessment should be performed. A memo is prepared
highlighting the potential indicators considered and the conclusion as to whether or not a quantitative
assessment is performed. The memo is reviewed and approved by the Controller.

Procedures Results of procedures performed, including
links to attachments or other EGAs
Consider whether indicators of impairment exist for

property, plant and equipment (PPE) items by
performing the following audit procedures:
a) Discuss and gain an understanding on how Management should prepare an analysis that addresses
management assesses impairment indicators to each of the potential indicators noted in the Overview
determine whether events or changes in section above. The analysis should be prepared for each
circumstances might have impacted the carrying CGU.
value of an asset. Document the client’s
assessment of the existence of the following In cases where management does prepare an
industry specific impairment indicators: appropriate impairment indicator memo, engagement
teams should review to ensure all potential indicators
 The passage of time due to unit-of- have been considered. It is important that engagement
production amortization, as properties
teams evidence their review of the memo and the
approach their economic limits;
reasonableness of the assumptions and conclusions
 Lower expected future oil and gas
therein (e.g. verifying price trends by comparing to third
prices;
party pricing informatin). The most efficient way to do
 Actual or expected future development
this is often to include audit ticks or other commentary
costs are significantly more than
previously anticipated for a CGU (e.g., directly in management’s memo prior to including it in
the file. PwC commentary should be clearly
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significant AFE overruns with no distinguishable on the version retained.
significant upward revisions in reserve
estimates); If management does not prepare a formal analysis,
 Significant downward revisions to engagement teams should document their own
reserve estimates; assessment of the potential indicators including:
 Significant adverse change in legislative
or regulatory climate (e.g., an Are declines in spot market prices of
unanticipated increase in royalty rates). commodities an indicator of impairment of
The above are provided only as examples of possible long-lived assets of oil and gas companies?
indicators of impairment for oil and gas producing
entities. Engagement teams should carefully consider A downward trend in commodity prices is not always a
the relevant facts and circumstances of the company, the triggering event for impairment testing. However, the
prevailing business environment and any other factors, underlying conditions contributing to the trend may
as appropriate. (IAS 36.9). well be indicators for many entities.
Commodity price movements can be volatile and move

between troughs and spikes. Downward price
movements can assume more significance if they are
expected to persist for longer periods. Forward price
curves may provide a reference point for future price
assumptions. If a decline in prices is expected to be
prolonged and for a significant proportion of the
remaining expected life of a resource property asset, this
is more likely to be an impairment indicator.
Short term market fluctuations may not be impairment

indicators if spot prices are expected to return to higher
levels within the near future. Such assessments can be
difficult to make, with price forecasts becoming difficult
when a longer view is taken.
Entities should approach this area with care. The

process of defining the level of spot price movements as
an indicator of impairment should, in particular,
consider the relevant cost base. Downward price
movements would be more significant for CGU’s which
have higher operating costs and/or future capital
expenditures.
Are significant declines in the market price of

an entity’s stock an indicator of impairment for
the entity’s PP&E?
Not automatically. IAS 36 includes as an indicator the
situation when the market capitalization is less than the
carrying value of the net assets of an entity. While a
company’s stock price may have decreased significantly,
the market capitalization may still exceed the net book
value of the company.
IAS 36 does not provide any guidance as to how market

capitalization is applied. PwC’s view is that entities may
consider market capitalization for a period before the
period-end date along with the market capitalization
trend and stock volatility to draw a balanced conclusion.
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For example, a weighted average market price for a
reasonable period of time may be appropriate to adjust
for any market anomalies. However, a downward trend
of consistent stock price declines during the period with
period-end prices being below the net book value per
share may indicate a possible impairment.
However, once the threshold is crossed at the period end

date, the entity would be required to conduct further
analysis of the impairment indicator. In some cases, a
company may have multiple assets, some of which may
be under water and others that may not. We do not
believe each asset would necessarily have to be
examined in detail. The entity should isolate the assets
that are exposed to impairment by considering factors
outlined below. If a company only has a single asset or
CGU, it would generally be expected that the recoverable
amount would be calculated to determine whether there
is an impairment of that asset.
What other impairment indicators may be

impacted by changes in commodity prices?
Changes in commodity prices may influence other
impairment indicators for long-lived assets. Some
examples of indicators that may be influenced by a
downward trend in commodity prices are noted below.
 Foreign exchange rate movements may result in

increasing costs, particularly in countries whose
economies are based on natural resources.
 Production of lower grade reserves may no longer
be economically feasible.
 Production from a property may be reduced as the
property may be placed under care and
maintenance due to decreased market demand for
the commodities.
 Forecasted growth rates may be lowered.
 Cost of capital may be increased.
 Actual or budgeted performance metrics (net cash
flows or operating results) may significantly
deteriorate.
Other Indicators
Higher than expected costs
If the engagement team is aware that operating costs

have risen significantly as compared to prior periods or
budget and are expected to remain at the higher levels,
this would likely be an indicator of impairment and an
impairment test should be re-run using the higher cost
estimates. Similarly, if capital costs incurred to develop
reserves are higher than originally forecast, this would
also be an indicator of impairment. Engagement teams
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should consider the results of testing performed in
other sections of the audit file (e.g. operating cost
analytics, capital additions testing) and perform inquiry
of management to determine whether any significant
negative cost trends exist that would indicate an
impairment test should be performed.
Negative Reserve Revisions
Engagement teams should review testing performed on

the reserve report in the separate EGA titled “Reserve
Report Testing”. If negative revisions were noted
(either economic or technical) the engagement team
should document its consideration of whether or not
such revisions are indicative of potential impairment.
Change in laws and regulations
Engagement teams should understand the laws and

regulations in the relevant jurisdictions for each CGU.
If significant changes have occurred since the last
impairment assessment, consideration as to whether or
not such changes are indicative of potential impairment
should be documented.
b) Evaluate the reasonableness of the impairment Engagement teams should explicitly document their
indicators used by management and the conclusion with respect to whether or not impairment
judgments and estimates made during their indicators exist such that a formal impairment test is
impairment evaluation process and assess required.
whether management’s conclusion regarding
whether an asset or CGU should be tested for Note: If the conclusion is that no indicators exist, it is
recoverability based on the existence of an very important that sufficient validation procedures
impairment indicator during the current period.
have been performed by PwC in (a) above to support the
conclusion. For example, if management’s indicator
analysis indicates that there has been no decline in
commodity prices, PwC engagement teams should be
validating this assertion by comparing pricing from
third party sources (e.g. reserve engineers, Bloomberg)
at the balance sheet date to the date of the last
assessment.
c) If impairment indicators exist, perform EGA Refer to the EGA titled “Test impairment assessment –
'Test impairment assessment - Property, plant property, plant and equipment” below for detailed
and equipment'. guidance on impairment testing under IFRS.
d) Assess whether there is any indication that an Engagement teams are reminded to explicitly document
impairment loss recognised in a prior period their consideration of whether indicators exist that an
should be reversed. IAS 36.110- 116. impairment recognized in prior periods should be
reversed. Generally, these indicators would be the same
as those discussed in (a) above, but based on opposite
trends (e.g. significant increase in commodity prices or a
change in legislation that reduces the royalty rate
applied to oil and gas revenues).
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client’s operations.
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EGA: Test impairment assessment – property, plant and
equipment

The general principles in IAS 36 require companies to assess at each reporting period whether there are any
indications that assets may be impaired. The existence of one or more indicators does not mean the assets are
impaired; however, it does require further testing to assess whether the assets are actually impairment. The testing
involves determining the recoverable amount of the assets which is the higher of the fair value of the assets less
the cost to sell those assets (“FVLCTS”) or the present value of cash flows from the continued use of the assets and
their disposal at the end of their useful life referred to as the value in use (“VIU”). If the recoverable amount is
below the carrying amount of the assets, then impairment exists and a loss is recognized. The general principles
also allow for a reversal of the impairment losses for all long-lived assets except goodwill.
Impairment testing is required at the individual asset level, where appropriate, or for each cash-generating unit
(CGU), with a CGU being the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows of other assets or groups of assets.
FVLCTS
FVLCTS is the amount obtainable from the sale of an asset or cash-generating unit in an arm's length transaction
between knowledgeable, willing parties, less the costs of disposal. Fair value is an external, market-based
measurement and relies on the fair value hierarchy, similar to US GAAP.
1. Prices in a binding sales agreement in an arm’s length transaction - Although this is the best
evidence of fair value, often this is not applicable.
2. Current bid prices, if an active market exists – There is no active market for oil and gas assets.
3. Prices of the most recent comparable transactions within the same industry – While there is
not an active market for oil and gas assets, there are a number of market transactions each year.
Information on these transactions is tracked by various sources (e.g. investment banks, Sayers Energy
Advisor Reports) and can be utilized as a source of evidence to support FVLCTS calculations. However, it
can be difficult to find truly comparable transactions when evaluating a specific asset or CGU. Accordingly,
market transaction data is often used as a “reasonableness check” on the calculation of FVLCTS prepared
by the client rather than a direct source of evidence.
4. Approximation using present value techniques – FVLCTS will typically need to be determined on
the best information available using a DCF model.
VIU
VIU is the present value of the net cash flows from the continued use of the asset and its disposal at the end of its
useful life. The VIU method is a specific application of a present value technique and IAS 36 prescribes use of
management’s best estimates with certain restrictions. When a discounted cash flow model is used to determine
FVLCTS, there may be many similarities with the model used for the VIU calculation. However, there can often be
some key differences that should not be overlooked. These differences include:
 The FVLCTS assumptions could include restructurings, reorganizations or future investments if rational
market participants would be expected to undertake these expenditures and activities in order to enhance
their return. IAS 36 mandates that the VIU model excludes the expenditures, cost savings and enhanced
revenues from uncommitted restructurings, reorganizations and future investments. Investments to
maintain the current condition of the asset are permitted under the VIU model. For oil and gas companies,
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this means that reserves included in a VIU model must be internally supportable. 2P (probable) reserves
can only be included in a VIU model to the extent the company has the ability and intention to develop the
reserves (e.g. if an entity cannot obtain financing to fund development of 2P reserves they should not be
included). 3P (possible) reserves may be included in a FVLCTS model but cannot be included in a VIU
model.
 In a VIU model, general and administrative expenses (G&A) must be allocated to all CGU’s. For FVLCTS,
only incremental G&A that may be incurred by a market participant purchasing the assets is required to be
considered.
 VIU is a pre-tax calculation and therefore a pre-tax discount rate must be applied in a VIU model
 FVLCTS incorporates a tax amortization benefit (“TAB”), which assigns value to the full tax basis (tax
shield) of the asset that would be attributed to a purchaser in an asset acquisition. VIU is a pre-tax
calculation.
 In some instances, it may be appropriate to incorporate possible (3P) reserves into a FVLCTS calculation if
it is reasonable to assume that a market participant would assign value to these when purchasing a cash
generating unit. Potential cash flows from 3P reserves cannot be included in a VIU calculation.

The primary assertion being addressed in this EGA is Valuation of property, plant & equipment and goodwill, if
applicable.
The risk that impairment is not correctly identified or calculated is included within the Likely Sources of Possible
Misstatement for property, plant & equipment. A screenshot of this is shown below.
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Impairment is typically an elevated or significant risk for most oil and gas audits. Accordingly, there is a
requirement to obtain an understanding of the client’s controls to address the risk. For non-integrated audits,
formally testing these controls is not explicitly required (comfort is usually obtained from substantive testing);
however engagement teams are encouraged to consider testing certain key controls over impairment to supplement
the substantive procedures discussed below. For integrated audits, the key client controls addressing the assertions
covered in this EGA would usually be something like the following:
 When indicators of impairment are determined to exist, a formal impairment calculation is performed.
The impairment calculation is prepared by the Financial Analyst based on information provided by the
business development, tax and treasury groups. The impairment calculation is reviewed and approved
by the Controller.
 The impairment model (excel spreadsheet) is located on a password-protected network drive and access
is restricted to the Financial Analysis. Key formula cells within the model are ‘locked’ to prevent
unauthorized changes.

2. Level of testing
Assess the level of impairment testing (asset or CGU)

by performing the following audit procedures:
a) Inquire of management and evaluate A client’s CGU’s would have been assessed and
management's identification of CGUs and defined as part of the transition to IFRS. However,
the supporting documentation. (IAS 36.66- CGU’s should be continually re-assessed at each
73). reporting period if any of the factors have changed,
considering changes in materiality, significant
b) If applicable, agree the identified CGUs with disposals/acquisitions, E&E assets moved into
prior year working papers and investigate PP&E, changes in marketing contracts, common
any inconsistencies (IAS 36.72). infrastructure.
Engagement teams should document their

consideration of potential factors that could give rise
to new or changed CGU’s based on work done in
other sections of the audit file (e.g. business
combinations, PP&E disposals) and conclude as to
whether or not the CGU determination at the current
balance sheet date is appropriate. Generally, it is
expected that CGU composition remains consistent
unless a change is justified by a change in underlying
facts and circumstances.
c) For CGUs identified in the current period for The most significant factors that should be
the first time, assess, based on the considered when assessing CGU’s are:
supporting documentation, whether
management's identification is appropriate  Geographical & geophysical characteristics –
and ensure that the entity has appropriately assets that share similar geological or
allocated the assets to the CGU including geographical characteristics such as reservoir
corporate assets (e.g. head office building, depth, reservoir type, product type and geological
EDP equipment or a research centre) (IAS formation are often grouped together due to the
36.100-102). fact that the cash flows generated from the assets
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are not independent of each other, and would
have common indicators of impairment as the
assets would have similar exposures to market
price fluctuations, royalty regimes, and operating
cost inflation.
 Shared infrastructure – shared infrastructure

(pipelines, major facilities, railways, refining
facilities) should be considered due to the
interdependency of cash flows. It is not
appropriate to aggregate if the shared
infrastructure is insignificant or if the individual
assets can sell their product without the use of
the shared infrastructure asset. It may be
appropriate to identify a shared infrastructure
asset as a separate CGU if that asset generates
significant cash flows from 3rd parties (i.e.
processing fees).
 Close proximity – geographic proximity is not a

definitive indicator of CGU on a stand-alone
basis; however assets within close proximity tend
to meet (1) and (2).
 Management decision making – although a

secondary consideration to those above, the
following factors should also be considered:
a. Extent to which material sourced from
across the group of properties is blended;
b. Manner in which management makes
decisions regarding the continuing or
discontinuing of individual wells and/or
fields;
c. Whether assets can be individually sold and
whether management is more likely to sell
assets individually or as part of a group of
assets. For example, a group of individual
wells tied-in to the same facility could
theoretically be sold individually; however it
may be more likely that they would be
operated as a group and divested at a group
level as well.
d. Extent to which a significant shared
characteristic drives operational decision-
making – product produced, transportation
costs, royalty structure etc.
e. Extent to which resources and assets are
shared.
f. Extent to which cash inflows are derived
from a single marketing arrangement
covering production from a portfolio of
assets
A field and its supporting infrastructure assets in an

upstream entity will often be identified as a CGU.
Although an entity might have information on cash
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inflows and outflows at a well level, investment
decisions are typically done at a field level as fields to
have shared infrastructure. In addition, marketing of
produced products is typically done at an aggregated
level (gas plant, battery, satellite, terminal etc.).
In practice, most companies used close proximity
and materiality to aggregate individual fields into
core areas for the assessment of CGU’s. In assessing
materiality, engagement teams should be considering
the total NBV of the aggregated CGU and the overall
risk that aggregating assets into a larger CGU could
give rise to a material impairment in one asset not
being recognized. Considerations should be made on
commodity price risk (gas, light oil, heavy oil),
operating structures (drilling techniques and
operating costs), development costs (different future
capital requirements), royalty regime (province).
Management commonly wants to group oil and gas

properties in the same field together; however,
engagement teams should consider whether this is
appropriate based on the criteria above.
3. Determination of the recoverable amount
Test management's determination of the recoverable Recoverable amount is determined by the higher of
amount for identified assets or the respective CGUs FVLCTS and VIU. It is not always necessary to
subject to an impairment test as the higher of the fair determine both an assets FVLCTS and VIU; if either
value less costs to sell and value in use (IAS 36.9, 18). exceeds the asset’s carrying amount, the asset is not
Perform the following audit procedures: impaired. It is expected that FVLCTS within the
North America oil gas industry will typically exceed
VIU for a number of reasons:
- IAS 36 includes specific restrictions when
calculating VIU for key assumptions including
growth rate on discounted cash flows which have
potential limitations on the inclusion of cash
flows from probable reserves which require
significant future development capital to
produce.
- FVLCTS is based on market participant
assumptions, including the effects of income
taxes incorporating the tax amortization benefit
(TAB) which assigns value to the full tax basis;
VIU would only consider the company’s existing
pools.
- In some instances 3P reserves may be
incorporated into FVLCTS if it is reasonable a
market participant would assign value which
cannot be included in a VIU calculation.
VIU is more common in situations where it is not
possible to determine FVLCTS (e.g. Midstream or
Downstream assets).
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a) Assess management’s or third parties For conventional upstream oil and gas properties, it
capabilities to determine the recoverable is expected that management will have sufficient
amount; knowledge and experience to perform the
impairment calculations as they have significant
knowledge and experience with reserve calculations
which form the basis for the impairment
calculations. Management is also generally familiar
with market conditions related to their assets.
For more complex impairment calculations (e.g.

international properties, midstream or downstream
assets, etc.) further consideration of the client’s
capabilities may be required. In such instances,
consultation with PwC VMD specialists may be
warranted.
b) Determine whether the engagement team See comments above with respect to management
has sufficient knowledge and experience to capabilities. Generally, we would expect the level of
review the valuations, including the involvement by PwC specialists to vary based on the
underlying methods and assumptions. risk associated with the asset or CGU subject to
Consider using a PwC specialist or impairment calculations.
internal/external expert to assist in
evaluating the entities or third party’s Generally, except in limited circumstances where the
valuation methodology and assumptions
impairment calculation is low risk (e.g. very high
used in the calculations.
cushions historically) or there is clear evidence of
Where use is made of the work of experts, FVLCTS (e.g. purchase and sale agreement); all
ensure that EGAs evaluating the use of their engagement teams are encouraged to utilize PwC
work in line with applicable GAAS VMD specialists in their documentation of
requirements (which can be added to the impairment to some extent. Generally, there are
plan by selecting the Risk ‘Use of the work of three levels of specialist involvement that can be
experts’ which is linked to the FSLI ‘Use of considered:
the work of experts’ in the Audit Risks view)
form part of the planned audit response. 1. Guidance on discount rates / Market
comparable transactions
Discount Rates
The discount rate applied should reflect the rate of
return that a market participant would require for
assets of similar nature and risk. Engagement teams
are reminded that an entity’s weighted average cost
of capital (“WACC”) would reflect the market’s view
of risk for the entity’s overall business and is a
function of the entity’s optimal capital structure,
market capitalization/size, and the risks associated
with its portfolio of assets. In many instances it is
not appropriate to assume an entity’s WACC is the
appropriate discount rate to apply to an individual
CGU.
On an annual basis, the VMD team will prepare the

Industry WACC Analysis, which is a survey of the
WACC’s of ~ 70 industry participants, including
some PwC clients. This analysis can be obtained
from VMD, and engagement teams can sort the data
to include only relevant peer comparisons (e.g.
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companies of similar size and asset composition) to
determine a range of ‘average industry WACC rates’
that can represent the return expected by a ‘typical
market participant’ and can be used as a basis for
evaluating the discount rate applied in the DCF
model prepared by the client. Teams can consult
with client management to determine the most
relevant ‘peer’ companies to use in the analysis.
Even if using the WACC analysis, engagement teams

are encouraged to have informal consultations with
VMD specialists on all engagements to get a general
understanding of what a reasonable range of
discount rates might be for their client’s CGU’s. If
the client’s analysis uses a discount rate that is
outside this range, further consultation is likely
required.
Market comparable transactions

On a quarterly basis, the VMD team will prepare a
summary of purchase and sale transactions for oil
and gas properties based on information available
from public sources including many investment
analysts and quarterly Sayers Energy Advisor
reports. The summary is provided in excel format
and the data can be sorted by engagement teams to
identify the most relevant transactions (e.g. by size,
oil or gas weighting, etc.).
The summary provides information for each

transaction on various metrics including the amount
paid per 2P reserve volume and the amount paid per
flowing barrel of production. Engagement teams can
recalculate these metrics for the client’s CGU’s based
on the FVLCTS calculated using the client’s DCF
model and compare to the metrics implicit in recent
market transactions.
It is important to note that there is often a large

range for the metrics implicit in the market
transactions. Engagement teams should explicitly
consider this when preparing documentation and
consider preparing sensitivity analysis using
different discount rates to see where the client’s
FVLCTS falls within the range. A FVLCTS estimate
that falls within the middle of the range using
reasonable discount rates would generally be
considered supportable. If the FVLCTS is a the high
end of the range and would fall outside the range
with a small change in discount rate, engagement
teams should consider consulting with the VMD
team before concluding on the impairment
assessment.
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2. Limited Scope Formal Assessment
In some instances where AAG may not have the
expertise to fully perform the analysis, engagement
teams may want to engage the VMD team to provide
a limited scope formal assessment. This will help
strengthen the overall assessment of FVLCTS.
Involving VMD in a limited scope capacity may be
appropriate when there is a material impairment
recognized within the financial statements, or there
is significant uncertainty in the valuation and
sensitivity of the analysis performed.
Typically, VMD procedures in this situation would

include discussions with AAG, preliminary review of
the analysis prepared by management, and high level
assessment of the recovery amount of identified
CGU’s prepared by management. In these situations,
VMD will typically provide the AAG team with a
limited scope memo or email communication for
inclusion in the audit file.
It is important to note that VMD will not perform

procedures over completeness / accuracy of data and
will rely on the AAG team to validate the carrying
value of each CGU as well as the reasonableness of
the cash flows incorporated into the client’s model
(i.e. testing the reserve report).
3. Full Formal Impairment Assessment

In situations where the risk of impairment is high
and the determination of FVLCTS is complex such
that the AAG team does not have the expertise to
fully perform the analysis, engagement teams may
want to engage the VMD team to provide a full scope
formal assessment. This will help strengthen the
overall assessment of FVLCTS.
In this situation, the VMD team will prepare an

independent FVLCTS analysis and will perform
certain procedures to validate the reasonableness of
assumptions used in the valuation (e.g. prices). VMD
will typically provide the AAG team with a detailed
memo and valuation checklist for inclusion in the
audit file.
It is important to note that even in this situation,

VMD will not generally perform procedures over
completeness / accuracy of data and will still rely on
the AAG team to validate the carrying value of each
CGU as well as the reasonableness of the cash flows
incorporated into the FVLCTS model (i.e. testing the
reserve report).
108
AAG teams are reminded to review memos received
from VMD carefully to ensure that the facts and
circumstances are accurately reported and that the
items requiring AAG validation / follow up (note:
these are generally summarized in the memo in the
conclusion section) have been addressed and
explicitly documented in the audit file.
Engagement teams are encouraged to consider their

requirements for VMD consultation early in the audit
process. Formal consultations can take significant
time and there are often tight deadlines for numerous
clients at the same time so proper coordination is
critical.
c) In order to test the determined fair value

less costs to sell:
Note: Fair value less costs to sell (FVLCTS) is the

amount that a market participant would pay for
the asset or CGU, less the costs of sale.
The use of discounted cash flows (DCF) for

FVLCTS is permitted where there is no readily
available market price for the asset or where
there are no recent market transactions for the
fair value to be determined through comparison
between the asset being tested for impairment
and a recent market transaction.
This can often be the case in the Oil and Gas

industry and in certain circumstances
management will determine FVLCTS with
reference to a DCF model.
i. examine if there is a binding sale If a binding sale agreement is signed before the
agreement in an arm's length transaction balance sheet date or in the period subsequent to the
(see Reference) and confirm the agreed balance sheet date and prior to the release of the
price (IAS 36.25); or, if not available, financial statements, the value implicit in the
purchase and sale agreement should be used as
FVLCTS as it is the best evidence of fair value.
ii. inquire of management whether an No active market for oil and gas properties exists.
active market exists, where the asset is This will not be applicable.
traded regularly and validate the
obtained information. Agree the current
bid price, if available, or the price of the
most recent transaction with external
knowledge sources (IAS 36.26); or, if no
active market exists:
iii. Obtain and test management’s Generally, for upstream oil and gas assets, the cash
discounted cash flow analysis and assess flows utilized in the FVLCTS model should be
that the cash flow projections are based derived from the third party reserves report prepared
on reasonable and supportable in accordance with NI 51-101.
109
assumptions that represent Please refer to the section “Further Considerations
management's best estimate of the range for Evaluating a DCF model” below the tailored
of likely outcomes and verify they are procedures for further guidance on the key elements
based on the most recent financial of a cash flow model that engagement teams should
budgets or forecasts approved by consider when completing this section of the EGA.
management.
For oil and gas properties, cash flows generally

should be consistent with those used in the
independent reserve engineer report (obtain
explanations if significant differences from the
reserve report are noted):
iv. Consider, based on materiality and As discussed above under tailored procedure 3(b);
inherent risk, and if available, obtaining there is publicly data available on market
relevant comparable market transaction transactions from various sources that can be used
data, (e.g., details of recent property to assess whether a client’s FVLCTS calculation
acquisitions, price received from recent based on a DCF model is reasonable. The key
farm outs or disposals of working metrics that should be considered include $ per
interests in the same or similar flowing barrel (boe/d) of production and $ per 2P
reserve volumes ($/boe).
properties) and compare DCF model
assumptions to the key transaction
The PwC VMD group prepares a summary of these
metrics ($ per reserves, $/flowing barrel transactions each quarter that teams can use in their
etc.). assessment. Engagement teams are reminded that
for such an assessment to be meaningful, it is
Note: It is often difficult to obtain directly important to ensure that the transactions selected
comparable market transaction data when for comparison are relevant. This is accomplished
valuing oil and gas properties. Accordingly, it by comparing to transactions that relate to
will be most appropriate to compare a range of properties or entities that are similar to the client.
relevant market transactions (e.g. same Specifically, consideration should be given to size of
product, location) to the client’s calculation of operations, geographic location, commodity (oil or
FVLCTS based on a discounted cash flow gas weighted) and quality of the commodity
model to assess reasonableness (i.e. falls within produced (e.g. light oil versus heavy oil) among
the range). others.
There is often a wide range of market comparable

transactions and finding directly comparable
transactions can be very challenging. Accordingly,
this comparison is typically utilized more as a ‘sense
check’ to validate the FVLCTS determined by the
client’s DCF model rather than as a direct source of
evidence of a specific property’s FVLCTS.
As discussed in 3(b) above, PwC’s VMD group has

significant experience with market comparable
transactions and can be engaged to provide
assistance in this regard.
v. Verify the correct composition of the Generally, for upstream oil and gas assets, the cash
cash flows. flows utilized in the FVLCTS model should be
derived from the third party reserves report prepared
Note: The assumptions and inputs used in accordance with NI 51-101.
in a DCF model for FVLCTS should
incorporate observable market inputs as Please refer to the section “Further Considerations
much as possible. The assumptions for Evaluating a DCF model” below the tailored
110
should be both realistic and consistent procedures for further guidance on the key elements
with what a typical market participant of a cash flow model that engagement teams should
would assume. Items to note for consider when completing this section of the EGA.
engagement team consideration:
- Cash flow assumptions that are Should a FVLCTS calculation include income taxes?
dependent on company specific A FVLTCS calculation should incorporate the impact
synergies that would not be available of income taxes on future cash flow estimates
to a typical market participant because a typical market participant would take tax
should be excluded from the model; impacts into consideration when determining the
- Cash flow assumptions relating to value they would be willing to pay to purchase the
forecast capital expenditure assets. IAS 36 includes the concept of “highest and
intended to enhance the productive best use” which implies that the FVLCTS should be
capacity of a CGU are eligible for determined assuming the type of transaction that
inclusion in the model but only to would give rise to the highest proceeds on sale of an
the extent that a typical market asset or CGU. For Canadian companies, this would
participant would take a consistent generally be in a sale of assets rather than a
view. corporate sale because a purchaser is entitled to
- Cash flows should be calculated on additional tax basis equal to the amount paid.
an after-tax basis and the tax
amortisation benefits (TAB) should Note: It is important for teams to understand the tax
be considered in the model. rules in foreign jurisdictions that a client operates in
as the same rules may not apply. Specifically, in
some jurisdictions (e.g. United States, UK), there is
not a ‘step up’ in tax basis on acquisition of assets
(i.e. the historical tax basis simply transfers to the
purchaser). In these situations, there may be no
difference in the amount a purchaser would pay
between an asset sale and a corporate sale. AAG
engagement teams should consult with PwC tax team
on specific engagements to ensure that tax rules and
regulations in foreign jurisdictions are properly
incorporated into the FVLCTS model.
How to determine after-tax cash flows

Third party reserve reports are prepared on a pre-tax
basis at the property or CGU level and on both a pre-
tax and post-tax basis at a corporate level for most
clients. In practice, the level of detail provided for
‘after-tax’ cash flows varies in practice and depends
on the accuracy of tax pools provided to the reserve
engineers and the assumptions they use in terms of
amortization of tax pools within their models. As
FVLCTS is based on market participant assumptions,
the seller’s actual tax pools (and the resulting
deferred income tax asset or liability recorded on the
balance sheet) are typically not relevant to the
calculation of FVLCTS.
Accordingly, it is generally not appropriate to utilize

after-tax information from a client’s third party
reserve report. Instead, pre-tax cash flows from the
third party reserve report should be used as a basis
for calculating after-tax cash flows. The PwC FVLCTS
impairment model (excel format included within the
template referenced below) can be utilized to
appropriately calculate after-tax cash flows at a CGU
111
level using the pre-tax information from third party
reserve report.
Engagement teams can input information from the

reserve report into the model. The model works as
follows:
 Operating cash flows are calculated as revenues

less royalties and operating expenses, and the net
amount is multiplied by the applicable tax rate in
each future periods to arrive at “after-tax
operating cash flows”;
 Future capital expenditures are deducted from

after-tax operating cash flows to determine total
after-tax cash flows for each period. However,
future capital spending will generate tax pools for
purchaser and therefore these amounts must be
factored into the after-tax cash flow analysis at
the applicable deduction rates as follows:
- Canadian Oil and Gas Property Expense
(COGPE) – 10% deduction rate each year –
rate applicable for acquisition cost of oil and
gas Canadian resource properties
- Canadian Development Expense (CDE) –
30% deduction rate each year – intangible
drilling and completion expenses which are
not CEE
- Canadian Exploration Expense (CEE) –
100% deduction rate each year – intangible
drilling and completion expenses which lead
to the discovery of a new reservoir; however,
as the impairment analysis is on 2P reserves,
there should be no CEE pools generated
from capital spending
- CCA (Class 41) – 25% deduction rate each
year, half-rate rule applicable – tangible oil
and gas equipment
These calculations are all built into the PwC FVLCTS

model. Engagement teams should review the model
and ensure that the client’s calculation appropriately
incorporates all of the elements of income taxes
discussed above.
To better understand Canadian taxes, refer to PwC

Publication “Oil and gas taxation in Canada”.
Incorporating the Tax Amortization Benefit(“TAB”)

In many jurisdictions (including Canada), all things
being equal, a willing purchaser will pay more for an
asset in order to benefit from the ‘step-up’ in the tax
basis. Specifically, the tax basis for a purchaser will
be equal to the acquisition purchase price which will
result in higher COGPE and CCA deductions in
112
future years. The TAB represents the present value
of the tax shield an acquirer would obtain.
The model determines the TAB for the CGU however,

it is the engagement team’s responsibility to ensure
an appropriate tax rate is entered in the model for
each CGU (e.g. 27% should be used for CGUs in SK
as opposed to 25% used for CGUs in AB).
vi. Verify that the discount rate used is a Please refer to tailored procedure 3(b) above for
post-tax market rate based on the rate of discussion on discount rates and support available
return that a typical market participant from PwC’s VMD team.
would require for assets of similar nature
and risk to those of the CGU being tested Sensitivity Analysis
(note: an weighted average cost of capital The determination of FVLCTS requires significant
for peer group companies is often judgments and estimates and therefore it may often
appropriate). The discount rate utilized be the case that there is a range of reasonably
should incorporate those risks not possible discount rates that can be used in the
reflected in the cash flow, e.g. country analysis.
risk etc.
As part of the audit procedures over impairment,
vii. Consider, to an extent based on engagement teams should obtain an understanding
materiality and risk, performing a of the sensitivity of the FVLCTS calculation to
sensitivity analysis to assess the impact changes in major assumptions, including discount
of changes in the discount rate on the fair rates applied.
value less costs to sell calculation. Assess
the impact of the sensitivity analysis on The PwC FVLCTS model includes functionality for
risk of material misstatement and engagement teams to perform sensitivity analysis
perform additional procedures, if over key assumptions. Engagement teams need to
considered necessary. consider which assumptions the FVLCTS is most
sensitive too (e.g. a change in discount rate) and how
a reasonably possible change in such assumptions
impacts the impairment calculations. This
understanding will be critical to determining
whether further audit evidence is required (e.g.
formal involvement of PwC VMD specialists); or if
specific communications to management and the
audit committee or enhanced financial statement
disclosures are required.
Note: Paragraphs 125-133 of IAS 1 require an entity

to disclose assumptions made about the future and
other sources of material uncertainty which have a
significant risk of a material adjustment to the
carrying amount of assets within the next financial
year. Paragraph 132 of IAS 36 requires disclosure on
estimates when goodwill is included in the carrying
amount.
viii. Consider consultation with PwC Please refer to tailored procedure 3(b) above for
valuation specialists if considered discussion on support available from PwC’s VMD
necessary based on assessment of team.
materiality and risk.
113
d) Test the determined value in use (which As noted above, it is not a requirement to calculate
involves estimating the future cash flows to both FVLCTS and VIU as the recoverable amount is
be derived from the continuing use of the based on the higher of these two amounts. If the
asset and from its ultimate disposal and FVLCTS exceeds the carrying amount, no further
discounting those future cash flows using an work is required.
appropriate rate) and perform the following
procedures: If the FVLCTS calculated is lower than the carrying
amount, engagement teams need to document their
STOP: There are some cases when it is not consideration of VIU and whether or not it could give
necessary to determine both FVLCTS and a higher amount than FVLCTS.
VIU, for example when either of these
amounts exceeds the carrying amount, As outlined above under tailored procedure 3 in this
suggesting that the asset is not impaired. EGA, we would generally not expect VIU to exceed
Consider whether this is the case, and tailor FVLCTS for Canadian oil and gas properties due to
work plan accordingly. the restrictions impacting the VIU calculation.
Note - Within the North American oil and

gas industry the FVLCTS will often be However, there may be limited situations where this
greater than the VIU. There are a number of may not be the case. An example would be when an
reasons for this including: entity has significant infrastructure in an area that
allows it to gain significant synergies that would not
 IAS 36 includes specific restrictions with be available to another market participant.
respect to key assumptions that can be
incorporated into a VIU calculation
(growth rates, potential limitations on
the inclusion of probable reserves etc.).
 FVLCTS incorporates a tax amortization

benefit (“TAB”), which assigns value to
the full tax basis (tax shield) of the asset
that would be attributed to a purchaser
in an asset acquisition. A VIU
calculation would only consider the value
of the company’s existing tax pools. In
some instances, it may be appropriate to
incorporate possible (3P) reserves into a
FVLCTS calculation if it is reasonable to
assume that a market participant would
assign value to these when purchasing a
cash generating unit. Potential cash
flows from 3P reserves cannot be
included in a VIU calculation.
i. assess that the cash flow projections are See comments under “Overview and Background
based on reasonable and supportable Information” above for differences between VIU and
assumptions that represent FVLCTS calculations.
management's best estimate of the range
of likely outcome and verify they are
based on the most recent financial
budgets or forecasts approved by
management;
ii. verify that price escalation utilized in the

cash flows does not extend beyond five
years (note: inflationary growth beyond
114
this period is acceptable);
iii. verify the correct composition of the

cash flows (see Reference for items to be
included in and to be excluded from the
cash flows);
iv. verify that the discount rate used is a In accordance with IAS 36.55 the discount rate used
risk-free pre tax rate and that it for VIU is always pre-tax and applied to pre-tax cash
incorporates those risks not reflected in flows. This is often the most difficult element of the
the cash flow, e.g. country risk, etc. impairment test, as pre-tax rates are not available in
(Refer to IAS 36.56 and Appendix A17- the market place (e.g. WACC rates are “after-tax” as
A18 for guidance on the determination of are most published bond rates).
the discount rate) (IAS 36.30-57, 74);
and The pretax discount rate is not obtained by simply
grossing up the post-tax discount rate by a standard
rate of tax because the pre-tax rate needs to take
account of the asset or cash generating unit’s tax
rate, the post-tax discount rate, the timing of the
future cash flows, and the useful life of the asset or
cash generating unit. Accordingly, arriving at the
correct pre-tax rate is a complex mathematical
exercise.
In practice, VIU calculations are effectively run on an

after-tax basis and then an implicit pre-tax discount
rate is derived using post-tax data as follows:
Step 1: How to calculate value in use using a post-

tax discount rate
 From pre-tax cash flow projections, expected tax
cash payments are calculated on an ungeared
basis to arrive at post-tax cash flows (as
described above for the PwC FVLCTS model).
 These after-tax cash flows are discounted at an
appropriate post tax discount rate that’s based on
information which is freely available on the
capital markets.
Following these steps will generate the asset or cash

generating unit’s VIU.
Step 2: How to determine the pretax discount rate

 From the pre-tax cash flow projections the entity
should ‘solve’ for the discount rate, which would
give the same VIU determined in Step 1 when
applied to the pretax cash flows.
This rate is the pretax discount rate, which should be

disclosed in the financial statements.
v. Consider consultation with PwC Please refer to tailored procedure 3(b) above for
valuation specialists if considered discussion on support available from PwC’s VMD
necessary based on assessment of team.
materiality and risk.
115
e) Document important judgments and Engagement teams should explicitly document the
conclusion. Documentation should reflect: conclusions reached in regards to impairment based
i. evaluation of management's process and on the procedures above; including reference to any
the reasonableness of assumptions used key assumptions made in reaching the conclusions
in the determination of the recoverable and the rationale supporting the conclusions made.
amount by either management or a third
party,
ii. underlying rationale used in reaching
well-reasoned judgments,
iii. consideration of alternative conclusions
(by management and the auditor); and
iv. conclusion regarding the reasonableness
of management’s estimates.
4. Determination of the impairment charge
Test the determination of the impairment charge by

performing the following audit procedures:
a) Obtain a detailed analysis of the carrying IAS 36 indicates that the carrying amount of a CGU
value of the asset or CGU and agree the should be determined on a consistent basis with the
balances to the general ledger or supporting recoverable amount.
documentation. Assess the reasonableness of
the calculation of asset or CGU carrying Decommissioning Provisions
amount, by considering the guidance in IAS There is a policy choice in regards to how
36.75 to IAS 36.79 and ensure the carrying decommissioning provisions are considered in
amount has been determined on a basis impairment analysis but the key requirement is that
consistent with the recoverable amount. they be treated consistently. Entities can chose to
either:
Note:
 Decommissioning provisions and the  Exclude cash outflows relating to settlement of
associated cash flows can be either included decommissioning provisions from the DCF
or excluded from the impairment test, model used to determine the recoverable amount
provided the carrying amount of the asset and exclude decommissioning provisions from
and the cash flows are treated consistently. If the carrying amount of the CGU; or
the carrying amount of the decommissioning
liability is included in the carrying amount of  Include cash outflows relating to settlement of
the CGU, the estimated future cash outflows decommissioning provisions in the DCF model
are included in the DCF model used to used to determine the recoverable amount and
determine recoverable amount. However, if include the decommissioning provision as a
the carrying amount is excluded, the cash reduction to the carrying amount of the CGU
flows should also be excluded.
Note: The second approach reduces both the
 If a FVLCTS calculation has been used to recoverable amount and the carrying amount;
determine recoverable amount, ensure that however the two amounts may not completely offset
deferred tax balances have been allocated to as the discount rate applied to cash flows in the
the carrying value on a rationale and impairment model may differ from the discount rate
consistent basis. Allocating deferred tax used to value the decommissioning provision on the
balances to specific CGU’s in Canada requires balance sheet. The difference will be most
judgement. An allocation methodology pronounced when an entity elects to value
should be selected by management and decommissioning provisions using a risk-free
applied consistently. Note also, that clients discount rate.
may perform an analysis of recoverable
amount to carrying value without allocation
their deferred tax amounts. If the recoverable
116
amount exceeds the carrying value of the Deferred income taxes
asset or CGU, then no further work is VIU is a pre-tax calculation. Therefore, if VIU is used
necessary. However, if the recoverable as the recoverable amount, the carrying amount of
amount is less than carrying amount, then a the CGU would not include any deferred tax asset or
deferred tax allocation should be prepared to liability.
determine the amount of impairment, if any,
to record. However, FVLCTS is an after-tax calculation.
Accordingly, if FVLCTS is used to determine the
recoverable amount, the carrying amount of the CGU
must include related deferred tax balances. This is
explicitly highlighted in PwC’s Manual of
Accounting, Chapter 18 – Impairment of Assets:
18.225.9 Tax balances are not allocated for a

value in use calculation, because the discounted
cash flow forecasts are prepared on a pre-tax
basis. In contrast in a fair value less costs to sell
calculation current and deferred tax balances and
their associated cash flows are taken into account.
It is important that engagement teams understand

the composition of deferred tax liability / asset
balances as not all components of this balance are
incorporated into the impairment assessment.
Instead, the carrying value of a CGU is adjusted only
for deferred tax balances related specifically to
PP&E. Other components such as non-capital losses,
share issue costs, etc., are not relevant to the
impairment calculation. Deferred tax amounts
relating to decommissioning provisions are only
included if the client chooses to include
decommissioning provisions in their impairment
calculations.
In Canada, tax pools are not tracked by asset or CGU.

Accordingly, deferred tax balances need to be
‘allocated’ to CGU’s. There are a number of possible
allocation methodologies, but the three that PwC
considers acceptable are:
 Allocation based on each CGU’s proportionate

share of ‘net book value’;
share of ‘original cost’; or
share of reserves
The allocation of deferred tax balances can be a

complex exercise. Engagement teams should
coordinate with the tax group to validate tax pool
information incorporated into the analysis.
117
Note: The deferred tax liability used in the
impairment analysis should be the balance before
any impairment recorded by the client.
b) Recalculate the impairment loss by As noted above, if impairment is recognized under

comparing the recoverable amount with the FVLCTS, this is an after-tax calculation. As such, the
carrying value of the asset as of the same impairment amount to be recognized is actually
date (IAS 36.59). If the underlying asset is grossed up using an ‘iterative bump’ calculation as
recorded at cost, verify with the entity's follows:
records that the PPE item is reduced to its
recoverable amount and trace the amount of Impairment calculated using FVLCTS model x (1 / (1
impairment loss recognized in profit or loss. – tax rate)) = impairment to be recognized.
If the impairment is based on FVLCTS
determined on an after-tax basis, ensure that The rationale for this “gross up” is that when
the impairment charge is appropriately impairment is recorded on PP&E, the carrying value
“grossed up” (multiply by 1/ (1-tax rate) to of PPE is reduced but there is no change in the tax
ensure the net book value of the CGU after basis associated with PP&E resulting in a reduction
the impairment equals the FVLCTS as of the taxable temporary difference and by extension,
calculated. the deferred tax liability associated with PP&E and
the ‘net carrying value’ immediately after the
impairment will actually exceed the recoverable
amount determined using the FVLCTS model. This is
illustrated with the following example:
Example: Assume PP&E before impairment

assessment of $100 with a nil tax basis so the
deferred tax liability is $25 (25% x $100) and the net
carrying value of the CGU is $75 ($100- $25).
If the recoverable amount using FVLCTS is

determined to be $60, the initial impairment before
‘gross up’ would be $15 based on a carrying value of
$75. If no gross up were recognized, PP&E post
impairment would be $85 ($100 - $15) and the
revised deferred tax liability would be $21.25 ($85 -
$0 = $85 * 25%) and the net carrying amount of the
CGU post impairment would be $63.75 ($85 -
$21.25) which exceeds the calculated recoverable
amount of $60.
If the gross up is applied, the impairment to record

would be $20 [$15 * 1 / (1 – 25%)] rather than $15.
This results in a post-impairment PP&E value of $80
($100 - $20), deferred tax liability of $20 (25% x
$80) and a net carrying amount of the CGU of $60
($80 - $20) which is consistent with the recoverable
amount calculated using the FVLCTS model.
c) Where the impairment is assessed at the See discussion above.

CGU level, compare the recoverable amount
of the CGU to the carrying value of the CGU
as of the same date and recalculate the
impairment loss (IAS 36.74-76). Verify with
the entity's records that the carrying amount
of the CGU has been reduced to the
118
recoverable amount by allocating the loss in
the following order (IAS 36.104):
i. to the carrying amount of any
goodwill allocated to the CGU; and
ii. to the other assets of the CGU pro
rata based on their carrying
amounts.
d) Verify that the carrying amount of the asset None

after impairment is not reduced below the
highest of:
i. its fair value less costs to sell (if
determinable)
ii. its value in use (if determinable)
iii. zero. (IAS36.105)
Further considerations for evaluating a DCF model

The table below provides further guidance to engagement teams in regards to evaluating whether the assumptions
underlying a client’s FVLCTS discounted cash flow model for impairment are reasonable.
119
Factor Considerations Audit Evidence
Source
Volumes • Generally based on 1P and 2P volumes. • 3rd party reserve
• In some instances, 3P volumes may also be appropriate if a typical market participant would assign value engineer reports
to these volumes. (Note: 3P reserves are typically internally generated and are not evaluated by the IQRE.
Therefore, additional validation procedures may be required.
Pricing • Forecast prices should be used. In practice, the reserve engineer price deck continues to be used as • 3rd party reserve
comparisons show that the price deck for the first 3 – 5 years mirrors the forward curve. However, this engineer reports
should be evaluated and judgment should be applied if the price deck is overly aggressive, an adjustment • Bloomberg forward
to the discount rate might be required (“alpha” factor). price curves
• In many instances, the prices used by external reserve engineers for the first three to five year periods are
based on their best estimate of future oil and gas prices and do not correlate directly to the forward prices
available in an active market. Therefore, if active market prices are significantly different from those used
by the IQRE when producing the reserve report, it may be necessary for the entity or engagement team to
perform an analysis to determine whether such differences would give rise to a significant difference in the
recoverable amount.
• It would generally be considered appropriate to utilize the forecast prices from the reserve engineer
reports in the FVLCTS discounted cash flow model for the period for which active forward market pricing
is not available (e.g. beyond year three or five) to the extent such prices reflect the market information
available.
• Engagement teams should also consider whether certain fixed price contracts have been included in the
reserve report price estimates. If the contracts would not be transferred to a typical market participant
purchasing the assets, it would not be appropriate to include these in the FVLCTS model
• Benchmark prices should be adjusted as appropriate for quality differences, transportation and other
relevant factors in determining the price that is received by the CGU.
• Exclude derivative contracts as these are marked-to-market for accounting purposes
OPEX & • Based on management’s best estimate of future costs • 3rd party reserve
Royalties • Should exclude any “synergies” that would not be available to a typical market participants (note: these are engineer reports
rare for most oil and gas clients) • Lease op reports
Future Capital • Based on management’s best estimate of future costs • 3rd party reserve
engineer reports
Future • Recommended that clients exclude abandonment and reclamation costs from both the recoverable amount • 3rd party reserve
Abandonment (DCF) and the carrying amount engineer reports
• If these costs are included in the recoverable amount DCF model, it is important that engagement teams • ARO schedule
realize it is not appropriate to just use the abandonment costs shown in the reserve report. Instead, costs
from the client’s decommissioning provision model are more appropriate. This is due to the following:
- Reserve report costs typically only include down hole abandonment, and do not consider surface or
other reclamation activities
- Reserve report amounts tend to be the reserve engineer’s judgment whereas the provision model is
management’s best estimate which is consistent with requirements of IAS 36
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Factor Considerations Audit Evidence
Source
- Provision on financial statements represents developed resources, compared to reserve report which
would represent decommissioning required for all 2P reserves (i.e. includes amounts for wells not yet
drilled
Discount • Rate that reflects current market assessments of the time value of money and the risks specific to the asset. • Bloomberg (WACC)
Rates Engagement teams are reminded that an entity’s WACC would reflect the market’s view of risk for the • PwC Internal
entity’s overall business and is a function of the entity’s optimal capital structure, market WACC Analysis by
capitalization/size, and the risks associated with its portfolio of assets. In many instances it is not Valuations,
appropriate to assume an entity’s WACC is the appropriate discount rate to apply to the individual CGU. Forensics &
• Consideration of client’s WACC and peer group WACC. The WACC Analysis provided by PwC’s VMD team Disputes (VMD)
will provide information on overall entity WACC rates for a number of oil and gas companies. However,
the rates shown are before consideration of any entity-specific adjustments (referred to as “alpha factor”)
which must be considered for individual CGU’s. Examples of factors engagement teams should consider
when determining appropriate “alpha” adjustments to the WACC rate include:
- Nature and quality of commodity produced (e.g. a lower discount rate may be appropriate for a light
oil property in a time of high oil prices);
- If reserve estimates are based on a price deck that is considered aggressive, a higher discount rate may
be appropriate;
- For assets with a longer reserve life (cash flows extend for a longer period of time) the volatility and
risk associated with the cash flows may be higher indicating a higher discount rate is appropriate;
- The composition of reserves impacts the discount rate. If there are a higher proportion of 1P reserves
as compared to 2P reserves, a lower discount rate may be warranted than if the reverse applies as there
is more development risk associated with 2P reserves.
- The discount rate should be adjusted to reflect political or other risks specific to foreign jurisdictions.
The reserve estimates prepared under NI 51-101 explicitly exclude consideration of political risk.
• Discount rates are an area of significant judgment. In the first year of adoption of IFRS, after-tax discount
rates from 6% - 16% were used to value Canadian oil and gas assets.
• Engagement teams should document their consideration of the discount rate applied to each CGU and
whether or not different rates should be applied for each CGU.
Costs to Sell • Best estimate of the costs that would be incurred to facilitate a sale of the assets / CGU • Best estimate
• Common estimates range from 0.5% - 5% of fair value • Past transactions
• Includes transaction cost for external advisors, costs for removing, transferring assets/CGU’s, or carve-out
costs, costs to bring the asset/CGU into the condition to be sold
Income taxes • FVLCTS must be calculated on an “after-tax” basis, although most companies may not be in a taxable • Tax provision
position. working papers
• Tax Amortization Benefit (“TAB”) should be included – a specific formula which is included in the PwC (applicable rates,
FVLCTS impairment model (see calculation below). temporary
differences related
• Carrying amount of CGU should include an allocation of deferred tax liability related to PP&E to PP&E)
121
An example documentation template titled “Impairment Testing Template Example_FINAL.xls” is
available on Template Manager for teams to utilize when completing this EGA. The template can be modified to
incorporate specific testing attributes that may be necessary to document based on client-specific accounting
systems or operations.
Historically, GADM has not been utilized in impairment testing. As part of PwC’s ATP initiative, in the future,
consideration may be given to developing a “centre of excellence” for reserve report and impairment testing to
maximize efficiency and consistency amongst audit files
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4. Decommissioning provisions
The final phase in the oil and gas value chain is “closure” and relates to expenditures incurred to abandon and
reclaim / remediate oil and gas assets at the end of their useful lives (e.g. when production ceases). Abandonment
costs are those associated with plugging a well in accordance with regulatory requirements as well as costs to
recover equipment. Reclamation costs are associated with repairing, reshaping and contouring the land to its
original condition as required by law or regulation.
Under IFRS, and consistent with U.S. GAAP and previously CICA HB Part V Canadian GAAP, entities are required
to estimate future abandonment and reclamation costs on the date an asset is acquired or constructed and record a
decommissioning provision at that time with an offsetting debit to E&E or PP&E. The decommissioning provision
estimate is updated in future periods as new information becomes available. Actual costs incurred in future periods
are recorded against the provision.
This phase of oil and gas activity is most commonly referred to as decommissioning provisions under IFRS (also
known as asset retirement obligations - ARO).
Audit EGA’s
Due to the significance of decommissioning provision balances for most oil and gas companies, an industry-specific
EGA has been developed. This EGA can be utilized in Aura by selecting the tier 3 library titled “Canada Energy
Industry Supplement”. This chapter of the handbook provides supplemental guidance to assist engagement teams
in the preparation and review of the decommissioning provision EGA.
Note: There is a global EGA on Asset Retirement Obligations within the 2012 Int’l IFRS Audit Supplement;
however engagement teams are encouraged to use the industry-specific EGA created by PwC Calgary noted above.
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EGA: Test decommissioning provisions

IFRS does not have a standard devoted to asset retirement obligations; however IAS 37 - Provisions, contingent
liabilities and contingent assets (“IAS 37”) captures abandonment and reclamation provisions called
“decommissioning” and “restoration” under IFRS. IAS 1 does not mandate what these provisions are called,
however the common terminology under IFRS is “decommissioning liabilities”. This term is used interchangeably
with ARO by a number of entities in the oil and gas industry.
IAS 37 sets out the procedures that an entity should follow to properly account for and disclose decommissioning
liabilities. There are several accounting issues associated with the estimate of decommissioning liabilities under
IFRS including:
 Recognition and de-recognition of decommissioning assets and liabilities;

 Determination of discount rate to be used in the estimate
 Re-evaluation of decommissioning liabilities each period at current interest rates;
 Determination of costs to be used in the estimate; and
 Subsequent measurement of the decommissioning liability
 Presentation of decommissioning expenditures in the Statement of Cash Flows
Initial Recognition
Under IFRS, a decommissioning liability is a present legal or constructive obligation arising from a past event, the
settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
for which the entity has no realistic ability to avoid. A constructive obligation exists if an entity were to
demonstrate a history of discharging liabilities in the absence of an explicit regulatory obligation.
In Canada, there is a legal obligation for oil and gas companies to perform abandonment and reclamation activities
when the assets reach the end of their useful life. Such legal obligations also exist in many foreign jurisdictions;
however in some jurisdictions the legal framework is not as advanced and there is not a specific legal obligation to
perform these activities. In such instances, consideration needs to be given as to whether or not an entity has a
‘constructive’ obligation which is defined in IAS 37 as follows:
Constructive obligation an obligation that derives from an entity’s actions where by an established
pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept certain
responsibilities; and as a result, the entity has created a valid expectation on the
part of those other parties that it will discharge those responsibilities.
Decommissioning provisions are recorded as a debit to PP&E with a corresponding credit to the decommissioning
liability based on guidance in IAS 16 (dismantling and restoring costs are to be included in the cost of PP&E).
IAS 37 indicates that a decommissioning provision shall be recognized when:
a) an entity has a present obligation (legal or constructive) as a result of a past event;

b) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
c) a reliable estimate can be made of the amount of the obligation.
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For practical purposes, decommissioning liabilities should be initially recognized when a well is “spud” (time of
first ground breaking in setting up the drilling rig), or ground has been broken for construction of a facility or
pipeline.
Initial Measurement
IAS 37 requires that the best estimate of the expenditure required to settle the present obligation be used to
determine the provision. IAS 37 requires that the “expected value” method be used for determining the expected
cash flows for a large population of items (e.g. # of wells) due to the necessity to consider obligations arising from a
group of transactions together. When a range of possible outcomes exists and each point in the range has an equal
probability of being correct, the mid-point of the range should be used.
IAS 37 requires that where the effect of the time value of money is material, the amount of a provision shall be the
present value of the expenditures. Due to the long-term nature of most oil and gas assets (most assets useful life is
greater than one year), the time value of money is material and thus, the decommissioning provision estimate
should include a discount factor.
IAS 37 requires that the discount rate used be a rate that reflects current market assessments of the time value of
money and the risk specific to the liability. The rate is not to reflect risks for which future cash flow estimates have
already been adjusted. Accordingly, the choices made with respect to cash flow estimates will have a direct impact
on the discount rate that should be applied under IFRS. Options available are summarized in the table below:
Nominal Rate Real Rate

(Not adjusted for inflation) (Adjusted for inflation)
Risk Free Rate Cash flows should be adjusted to reflect Cash flows should be adjusted to reflect
risks (e.g. price risk) associated with the risks associated with the liability. Cash
liability. Cash flows should reflect an flows are based on current prices with no
estimate of future prices to settle the inflation adjustment as the real interest
obligation (i.e. cash flow estimates based rate incorporates inflation.
on current pricing should be ‘inflated’ to
estimate the cash outflows in future
periods as the discount rate does not
incorporate inflation.
Risk Adjusted Rate Cash flows would be a single estimate of Cash flows would be a single estimate of
future cash outflows (inflated) that is not outflows based on current pricing (no
adjusted for risk. Instead, the nominal inflation) that are not adjusted for risk.
discount rate would be adjusted to reflect Instead, the real discount rate would be
specific risks related to the liability. Risk- adjusted to reflect specific risks related to
adjusting the discount rate should result the liability. Risk-adjusting the discount
in the use of a discount rate that is lower rate should result in the use of a discount
than the risk free rate (note: this has the rate that is lower than the risk free rate.
opposite effect as compared to the ‘credit
adjustment’ to discount rates required
under Canadian GAAP).
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Overall, the present value of the liability should be the same on initial recognition regardless of the rate and cost
combination selected; however the model and thereby the accounting may be more complicated if a real rate is
selected. That is, if a real rate is selected, part of the adjustment of the decommissioning liability due to the passage
of time would be to finance costs (accretion expense) and part would be to the decommissioning asset (PP&E). This
is because the future costs are not adjusted for inflation on recognition and therefore, the decommissioning asset
would need to be adjusted for inflation in the future. Consequently, it is significantly more difficult to track
subsequent allocations between the decommissioning asset and borrowing costs if a real rate is used. If a nominal
rate is used (and therefore inflated future costs are used), the decommissioning asset is already adjusted for
inflation and the adjustment due to the passage of time is recorded entirely as finance costs.
In practice, the majority of Canadian oil and gas companies use a nominal interest rate for measuring
decommissioning provisions.
IAS 37 is unclear as to whether or not an entity’s own credit risk is required to be incorporated into the
measurement of decommissioning provisions. The issue has been debated at the IDG committee of the CICA and
was put forward to the International Financial Reporting Interpretation Committee (“IFRIC”) for consideration.
The issue was debated in 2010 and 2011; however the IFRIC ultimately rejected the staff recommendation to add
this issue to its agenda. The final rejection stated their belief that “predominant practice is to use the risk-free
rate”.
In Canada, there is mixed practice. As the guidance within IAS 37 is unclear, PwC accepts that entities can make a
policy choice to use either a risk-free rate or a credit-adjusted rate for discounting decommissioning provisions.
The policy choice should be applied consistently.
Subsequent Measurement
IFRS requires that decommissioning provisions be reviewed at the end of each reporting period, which for most
entities would be quarterly. Under IFRS, decommissioning provisions are adjusted to reflect the current cost
estimates and discount rates each reporting period. Accordingly, under IFRS, a change in the discount rate would
change the provision even if there was no change in the estimated cash flows.
Changes in decommissioning provisions relating to cost estimates or changes in discount rates should be recorded
as adjustments to PP&E and decommissioning provisions prospectively. Under IFRS, amounts deducted from the
cost of the assets should not exceed the carrying value of the asset. If a decrease is greater than the carrying value,
the excess would be recognized in the P&L immediately.
Changes in the liability due to the passage of time (unwinding of the discount) should be recorded directly to the
statement of comprehensive income. Under IFRS, such changes must be reflected as finance costs rather than as
accretion expense included in DD&A. It is important to note that although this expense is classified as a borrowing
cost under IFRS, the expense does not meet the criteria required for capitalization under IAS 23.
Settlement of provision (decommissioning expenditures)
When decommissioning expenditures are incurred they are applied to reduce the provision. As a general principle,
any difference between the actual expenditures incurred and the amount provided for would represent a gain or
loss that would be recognized in the statement of comprehensive income.
In practice, many entities do not manage decommissioning provisions on an individual asset basis. Gains or losses
on settlement of decommissioning provisions for individual wells are not recognized when the field or area (other
wells and related infrastructure) is still producing. Instead, differences are treated as a change in estimate and
recorded against the provision until the entire field or area are cease to produce. In this instance, consideration
should be given to whether the remaining liability is representative of management’s best estimate of future costs.
Any differences arising from settlement of the final provision are recorded as gains or losses in the statement of
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Amounts capitalized to E&E or PP&E (decommissioning assets)
The amounts capitalized to E&E or PP&E on initial recognition and subsequent re-measurement are grouped in
with the other costs to construct the asset (i.e. well, facility, or pipeline) and are not amortized separately. Instead,
the decommissioning assets are depleted or depreciated in accordance with the entity’s accounting policy for the
related asset. Decommissioning assets related to E&E are held at carrying amount and are either transferred to
PPE and subsequently depleted or assessed for impairment and written off as required.
It is also important to ensure that decommissioning assets are appropriately allocated to respective depletion units
and/or CGU’s as they impact the depletion and impairment calculations for PP&E.
Example Journal Entries for Decommissioning Provisions
Example: A well is spud on January 1. The cost estimate is $100 to be settled 20 years from today’s date. Inflation
is expected to be 2% over the next 20 years and the risk-free discount rate is 3.5%.
Initial Recognition
Dr Capitalized Decommissioning Costs $74.68

Cr Decommissioning Provisions $74.68
Recording Accretion Expense
Accretion is calculated based on the opening balance.
Dr Accretion Expense $2.61

Cr Decommissioning Provision $2.61
Settlement of the liability
Dr Decommissioning Provision $148.59

Dr Loss on settlement (I/S) $ 11.41
Cr Cash $160
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For ARO the following assertions are most relevant: Completeness, Valuation, Existence / Occurrence, Cut-off,
Accuracy, Rights and Obligations, Presentation and Disclosure.
Sum m ary of Likely Sources of Potential Misstatem ent

ARO
Indicate the class(es) of transactions and related account balance(s) addressed in this summary :
Describe likely sources of pot ential misst atement Indicate t he relevant

(LSPM) that , individually or in combinat ion wit h assert ions ("X")
Provide references t o point s in t he process
ot her misst atements, could be mat erial
where such
mis-st atements could arise
E/O
C/O
R/O
P/D
A/V
Note: A practice aid to as s is t w ith identifying LSPM is available
C
in U. S. Tem plate Manager.
ARO m odel does not contain prov isions for all wells,
ARO liability m ay not be com plete facilities that the Com pany has either constructiv e
X
or legal obligations to reclaim .
Cost estim ates are inaccurate or incom plete
X
Unreasonable discount rate is used to calculate
X
present v alue of ARO obligation.
Unreasonable inflation rate is used to calculate
X
expected expenditures in future periods.
ARO liability m ay not be calculated correctly ARO calculation m ay not be perform ed correctly
X
(i.e. error in m odel)
Estim ated abandondonm ent dates are unreasonable
X
Accretion expense m ay be not be correctly
X
calculated
The Com pany has incurred expenditures that are
X
not reflected in the ARO m odel
ARO asset and liability m ay not be properly allocated to CGU Liability additions hav e not been reflected in correct
X
/ depletion units CGU/depletion unit
Journal entry to record changes to ARO liability X
X
ARO journal entries m ay not be correctly reflected in G/L m ay not be correctly entered or posted.
and financial statem ents Liability recorded in the financial statem ents m ay
X
be incorrect. X
ARO disclosures m ay not be correct ARO disclosures m ay be incom plete
X
ARO disclosures m ay not be accurate
X
within this EGA for many financial statements audits. For integrated audits, the key client control addressing the
assertions covered in this EGA would usually be something like the following:
 Each month, the Financial Analyst updates the ARO model and prepares the journal entry to update the
provision balance and record accretion expense. The journal entry and supporting calculations are
reviewed by the Controller.
 ARO estimates are reviewed by the Cost engineer to ensure the estimates are complete and reasonable
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1. Inquire with management as to the existing legal, Refer to the Overview and background information
contractual and/or constructive obligations to meet section above for further information on
the costs of decommissioning and dismantling decommissioning provisions.
assets at the end of their production life, in
addition to restoring the site. Evaluate the Engagement teams should ensure that they obtain an
completeness of management’s response understanding of the laws and regulations in each
considering information obtained through other jurisdiction that the client operates in order to be able
audit procedures and understanding of the
to consider the completeness of the decommissioning
business operations and developments.
provision at a high-level.
Note: In some foreign jurisdictions, obligations for

decommissioning are based on contractual terms (e.g.
clause in a Production Sharing Agreement) as opposed
to existing laws or regulations.
Generally, obligations incurred upon acquisition,

construction, or development of an asset would be
determined value of the decommissioning
recognized when the cost of the long-lived asset is
provision (i.e. the best estimate of the expenditure
required to settle the present obligation at the initially recognized. For oil and gas operations,
balance sheet date) (IAS 37.36-37). For this decommissioning provisions should be recognized
purpose, perform the following audit procedures: when a well is “spud” (time of first ground breaking in
setting up the drilling rig), or ground has been broken
for construction of a facility or pipeline
Obligations incurred during the operating life of the

asset would be recognized over the life of the asset,
concurrent with the events that give rise to the
obligations
Obligations incurred (a) upon a change in law, statute

or contract provisions, or (b) because an entity
otherwise assumed a duty or responsibility to another
entity (or several other entities), would be recognized
when the obligating event occurs.
When examining supporting evidence, the engagement

team should focus on the description of services and
specifically the date when the well was spud, the
facility construction began, or the entity acquired
assets to ensure that it occurred prior to the balance
sheet date if a decommissioning provision has been
recorded.
a) Evaluate the accuracy, completeness and

relevance of the data and assumptions used to
develop the expected future cash flows. For
this purpose obtain management’s calculation
and perform the following:
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 Evaluate the completeness of well and facility As with all liabilities, Completeness is a key assertion
information included in the calculation by that must be addressed when testing decommissioning
obtaining a well/facility listing and trace a provisions. Key information for preparation of the
sample of items to the well/facility listing decommissioning provision generally comes from
included in the decommissioning provision. operational personnel at our clients and may include
Follow up any inconsistencies. the following:
 Drilling summary report – A chronological listing
Note – Well listings can be obtained from a of all wells drilled.
number of sources (for example: independent
 Detailed AFE listing – Listing of all AFEs created
reserve engineer reports, the prior year file or
that can generally be sorted based on approval
internal engineering personnel or land
reporting). date. This listing will include both wells drilled as
well as additions to facilities or other assets.
Engagement teams should consider audit work  Facility / Pipeline Summary Report – For
performed in the prior year over well listings companies with significant facilities infrastructure,
as a potential source of audit evidence and the a summary of all such assets may be maintained.
impact on the level of work required over the
current year well listing (i.e. agreeing the Similar to testing the capital accrual (see EGA – Test
listing to the prior year testing and performing Capital Accrual above), Accept / Reject testing is
audit procedures over current year well generally the most efficient and effective method of
additions and well de-recognitions may be testing completeness of the decommissioning
sufficient in a number of cases). provision.
Engagement teams are reminded of the The primary assertion to test is completeness, however
requirement to document consideration of the for efficiency, testing can be performed two ways to
nature and extent of audit evidence supporting obtain comfort over existence as well; first by tracing a
the reliability of information used in testing of
sample of items from detailed AFE Listing, Drilling
non-financial data. If required, ensure
Summary Report or Facility / Pipeline Summary
appropriate audit procedures have been
planned, executed and documented to support Report, or their equivalents, to the decommissioning
reliance on non-financial data (e.g. well provision model (Completeness); and then by tracing a
listings). sample of items from the decommissioning provision
model back to these same reports, as applicable
(Existence).
Accept/reject is considered an appropriate testing

methodology as engagement teams are seeking comfort
over a specific attribute (that an activity has occurred
that give rise to a decommissioning provision) and not
testing valuation.
Engagement teams should also consider the following

to corroborate completeness including:
 Information obtained from reviewing minutes of
Board and Sub-committees – Have major
expenditures (e.g. acquisitions) been
appropriately considered in the decommissioning
provision model?
 Detailed inquiry of operational management (e.g.
VP of Operations).
 Evaluate the reasonability of the estimated For substantive tests of details, the most common
amount of cash outflows by examining internal approach (assuming a large volume of items giving rise
data (such as cost information associated with to decommissioning provision) is to apply both target
historical decommissioning activities, cost and non-statistical sampling to obtain comfort over the
estimates prepared by internal engineers) and decommissioning provision balance. Engagement
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external data (such as industry-produced teams should employ sampling methodology in
costing information) to evaluate data and accordance with PwC Audit Guide Section 7040 when
assumptions. performing this testing.
Accuracy and Valuation

Valuation is a key assertion for decommissioning
provisions due to the significant judgment required to
estimate the costs that will be incurred a number of
years in the future.
Comfort can be obtained by comparing the estimated

costs to supporting documentation and re-performing
the provision calculation, including testing the
decommissioning liability for mathematical accuracy.
Supporting documentation for may take the form of
quotations from contractors for similar work or
invoices for past reclamation work in similar areas.
For operations in Western Canada, there are guidelines

available from provincial regulators (e.g. Directive 11
from ERCB in Alberta) that provide “average cost”
estimates for abandonment and reclamation activities
for wells and facilities. These directives can be used by
engagement teams to assess reasonability; however it
is important to remember that these are “average cost”
estimates. If a client has operations in locations with
restricted access or where actual abandonment and
reclamation will be complex, cost estimates may need
to be increased above the average cost estimates for
certain assets. Additionally, the client may be able to
realize cost efficiencies due to economies of scale.
These assumptions should also be considered in the
analysis.
The British Columbia, Alberta, and Saskatchewan

government have all established programs in place to
ensure fiscal responsibility related to oil and gas
operations, and to ensure that operators can meet
abandonment and reclamation obligations. The
programs establish provide for a specific calculation
based on a company’s assets and liabilities. If the
government identifies any fiscal risks, they will either
require security deposits to be paid (treated as a
deposit) or a letter of credit to be issued (disclosure
required). However, the majority of companies do not
require any form of security to be posted. The formula
is not based on financial statements, but is a specific
calculation prescribed by the governments. Deemed
assets are calculated based on volumes, netbacks etc.
To establish a ‘deemed liability’ the governments had
to set expected costs to abandon and reclaim wells and
facilities, and have published these directives. The
guidance is intended to provide estimated costs of well
abandonment, including down-hole plugging of
required zones, cut and cap work, evacuation and
dismantling of all equipment, purging and cutting and
131
capping of pipeline, transporting scrap materials, and
reclaiming the site to remediate contaminates.
Guidance within these materials is often used by clients

as a source material to estimate the decommissioning
obligation, and should provide for a starting point in
determining cost estimates. However, it is important
that engagement teams also consider specific client
circumstances before concluding that the use of such
estimates is reasonable.
Alberta Manuals:
 Directive 006 (March 2013) provides guidance
on the program:
 Directive 011 (March 2013) provides guidance
on costs:
British Columbia Manual (June 2013):

 LMR Program Manual
Saskatchewan Manual (September 2013):

 LLR Program
In practice, many entities do not have significant

historical experience with abandonment and
reclamation to use those as a basis for estimating
future costs. In addition, for many companies, these
activities will take place a number of years in the
future. As a result, in many cases, there may not be
explicit written documentation to support the cost
estimates and significant reliance will need to be
placed on detailed inquiry of senior operational
personnel who are most familiar with the operations in
the field and required reclamation activities. In these
instances, engagement teams should explicitly
document the results of these discussions and obtain
whatever supporting evidence may be available to
support management’s best estimate.
Note: Reserve reports prepared in accordance with

National Instrument 51-101 are required to include
“abandonment costs” in determining the net future
cash flows associated with reserves. However,
engagement teams are cautioned that in most
instances, using the amount from the reserve report as
the cost estimate for the decommissioning liability is
not appropriate because:
a) Abandonment costs are not a primary focus for
the independent reserve engineers and they
generally do not necessarily perform detailed
procedures to assess the reasonableness of these
assumptions. It is also common for them to
include a caveat in relation to abandonment costs
within their introduction to the reserve report.
132
b) The costs included in the reserve report only
represent expenditures for abandonment and do
not include estimates for surface reclamation
which must be included in the decommissioning
liability estimate and can be significant depending
on the well location, age, etc. Teams should also
be aware that reserve report amounts may also not
take into account the costs to abandon facilities.
c) The costs of abandonment in the reserve report
are based on developing all reserves; therefore the
abandonment costs under the “proved” or “proved
and probable” reserve scenarios will include costs
associated with wells that have not yet been drilled
or facilities that have not yet been constructed.
Perhaps more importantly, the reserve report will
generally only include costs associated with wells
that have reserves assigned. Wells that are no
longer producing, but have not yet been
abandoned may not be included within the
abandonment cost estimate in the reserve report
but must be included in the decommissioning
liability calculation.
d) Timing of abandonment per the reserve report
may not reflect management’s best estimates of
when abandonment will take place.
There are organizations in Canada which provide

estimates of abandonment and reclamation expenses.
Typically, clients do not tend to engage outside experts
to analyse abandonment and reclamation cost
estimates to support the financial statements; however,
such analysis are commonly prepared as part of due
diligence work on acquisitions. If such analyses exist,
engagement teams should obtain and review and
ensure that the decommissioning liability estimate is
consistent with the results of the third party analysis.
(Note: the third party analysis may be prepared for a
specific purpose and may not align directly with the
requirements of IFRS for decommissioning liabilities;
however management should be able to reconcile any
significant differences between the analysis and their
estimate for financial statement purposes).
 Evaluate the reasonableness of estimated Reclamation activities are performed at the end of an
timing of future cash outflows by inquiring asset’s useful life. For wells, reclamation activities are
with internal management specialists performed after the wells are suspended (cease
(engineers) and examining internal data (such production). The specific requirements will vary by
as business plans, engineering reports) and jurisdiction, but typically operators are required to
external data (such as independent reserve perform well abandonment and reclamation within a
reports). reasonable time period. Delays in actually performing
full abandonment and reclamation work may occur if
there is a possibility that technology advances or
changing price environments may extend the economic
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life of the well.
As a general rule, however, the timing of well

abandonment in decommissioning provision models
for most oil and gas companies ranges from Reserve
Life (date of last production per the reserve report) and
Reserve Life plus 10 years.
For facilities, pipelines and other related

infrastructure, it is common for the timing of
abandonment and reclamation to be based on the
Reserve Life for the longest duration wells related to
the infrastructure plus a reasonable period up to 10
years.
Note: It is important to understand the specific

abandonment rules in the jurisdiction the client
operates in as the timelines may be different in
different jurisdictions. (timelines above generally apply
for Canadian operations)
Engagement teams can test the reasonableness of

timing assumptions using an Accept / Reject testing
approach by comparing the proposed abandonment
date in the decommissioning provision model to the
Reserve Life from the most recent third party reserve
report. Alternatively, similar testing can be performed
using a target testing or non-stat sampling approach.
Note: Teams should generally not expect to see

abandonment dates prior to date of last reserves. If this
is the case, further investigation should be performed.
When concluding on the reasonableness of

assumptions, engagement teams should consider an
entity’s historical reclamation activity. Specifically, if
all abandonment dates are set well in the future, but
each year the entity incurs significant abandonment
expenditures, engagement teams should obtain an
understanding of the support for management’s
assumptions.
Engagement teams should also understand whether

management has developed a timing estimate for each
well / facility, or if they have made a single estimate for
an entire area or CGU. In the latter circumstance, it is
very important to understand management’s actual
reclamation plans as this approach may lead to a
timing estimate that extends to the last date of
production for the area or CGU even though there may
be many wells within that area or CGU that have
already been suspended. In these situations, it may not
be reasonable to assume that the abandonment and
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reclamation of all wells in the area will be delayed until
the entire area or CGU ends production.
 Evaluate the reasonability of inflation Decommissioning provisions represent an estimate of

assumptions (e.g. by comparing to government the costs that will be incurred in future periods to
statistics, such as future inflation rates). abandon and reclaim oil and gas assets. As such, it is
often appropriate to include an inflation factor in the
calculation.
The decision to inflate cash flows, and which inflation

rate to use should reflect management’s best estimate
of how future costs will compared to today’s estimates.
This will vary by type of asset and by jurisdiction.
For conventional assets in Canada, the most common

inflation assumption is the Canadian government’s
long-term inflation target of 2-3%. Engagement teams
can corroborate this assumption by referencing the
Bank of Canada website.
For non-conventional assets (e.g. oil sands) where the

duration of the provision may extent many years in the
future and/or assets are located in specific locations
with historically high inflation, the general Bank of
Canada inflation target may not be appropriate.
Similarly, if the assets are located in foreign
jurisdictions, use of the Bank of Canada inflation target
would not be appropriate.
Foreign Operations
As a general rule, for foreign operations, the inflation
rate used in calculating the decommissioning provision
should be consistent with the foreign currency rate and
discount rate assumptions used.
For example, if contracts to perform reclamation

activity are traditionally denominated in local currency
and will be funded from operating cash flows for the
subsidiary, then decommissioning provision should be
calculated in the functional currency of the local
subsidiary and inflation rates and discount rates used
in the calculation should be those applicable to the
local jurisdiction.
Alternatively, if the contracts to perform the work are

denominated in USD or CAD, will be financed by the
parent company and are not likely to be subject to the
local rates of inflation, it would be more appropriate to
calculate the decommissioning provision in USD or
CAD and incorporate an inflation and discount rate
more closely linked to those currencies.
In order to assess the reasonableness of a client’s

decommissioning calculation, engagement teams need
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to obtain an understanding of the nature of the work to
be performed and typical contracting arrangements in
foreign jurisdictions. This can be done through inquiry
of operational personnel.
b) Evaluate whether the time value of money has

been accurately considered by performing
following steps:
i. Ensure that the discount rate used is a pre-tax Decommissioning provisions are measured as the
rate that is based on either a risk-free rate or a present value of future cash flows. The discount rate
credit adjusted risk free rate (based on entity’s takes into account the time value of money (the idea
accounting policy) which reflects the current that money available now is worth more than the same
market assessment of time value of money and amount of money available in the future because it
is properly adjusted to reflect the risk specific could be earning interest) and the risk or uncertainty of
to the provision by comparing it to external the anticipated future cash flows.
sources (such as government risk free bond
rates with maturities that align with expected
Please refer to the Overview and background
timing of decommissioning expenditures if the
client has elected a risk free discount rate; or to information section above for detailed discussion on
the company’s borrowing rate or a competitor alternative discount rates that can be applied in a
portfolio of borrowing rates, if the client has decommissioning provision model.
elected a credit adjusted risk free rate).
Oil and gas companies must make a policy choice
Note – Use of a risk free or credit adjusted whether to use a ‘real’ rate (cash flows not adjusted for
risk-free as a basis for discounting is an inflation) or a ‘nominal rate’ (cash flows are adjusted
accounting policy choice that should be applied for inflation). There is also a policy choice as to
consistently from period to period. whether or not the entity’s own credit risk should be
incorporated into the discount rate.
In Canada, most entity’s choose to calculate their

decommissioning provisions using inflated cash flows
and a nominal discount rate (note: there are a limited
number of entities that apply a real rate). With respect
to credit risk adjustments, practice is mixed. Nominal
risk-free discount rates can be found on the Bank of
Canada website.
A risk-free discount rate has been the policy of choice

for most junior and intermediate oil and gas companies
while a number of the larger producers and entities
with oil sands operations have chosen to use a credit-
adjusted risk free rate. Both are acceptable policy
choices under IFRS but the policy must be applied
consistently.
Engagement teams can evaluate the reasonableness of

a risk-free discount rate by comparing to a zero-coupon
government bond for a similar duration (e.g. use a 10
year bond for decommissioning provision expected to
occur in 10 years from the balance sheet date).
If a credit-adjusted discount rate is used, engagement

teams will need to explicitly evaluate the
reasonableness of the ‘credit spread’ implicit in the
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discount rate (difference between risk-free and credit-
adjusted rates) by comparing to terms of existing debt
facilities for the entity as well as current pricing terms
for credit default swaps involving the entity or a basket
of assets with similar credit ratings.
Foreign Operations
See discussion under 2(d) above. As a general rule, for
foreign operations, the discount rate used in
calculating the decommissioning provision should be
consistent with the foreign currency rate and inflation
rate assumptions.
c) Consider the reasonableness of assumptions in In practice, many entities do not have significant
light of actual results in prior periods, the historical experience with abandonment and
consistency with those used for other reclamation to use those as a basis for estimating
accounting estimates and with management's future costs. However, engagement teams should not
plans (IAS 37.36-50). ignore actual costs incurred when assessing the
reasonableness of estimated costs in the
decommissioning provision model.
For example, if the entity has estimated well

abandonment and reclamation for a CGU to be
$50,000 per well; but in the prior year it incurred
$1,000,000 to abandon and reclaim 5 wells (average of
$200,000 per well); this would represent contradictory
evidence that the engagement team would need to
explicitly address in its testing documentation. An
adjustment may not be required, however further
investigation is required to understand and document
why historical results are not considered by
management to be indicative of future obligations and
why management’s estimate for the future is
reasonable.
d) Test the mathematical accuracy of the None

calculation prepared by management.
e) Identify changes in the measurement of asset IFRS requires that decommissioning provisions be
retirement obligations and ensure application reviewed at the end of each reporting period, which for
of the proper accounting in accordance with most entities would be quarterly. Under IFRS,
IFRIC 1. decommissioning provisions are adjusted to reflect the
current cost estimates and discount rates each
Note – Changes in decommissioning reporting period. Accordingly, under IFRS, a change in
provisions are added to or deducted from the the discount rate would change the provision even if
cost of the related asset in accordance with there was no change in the estimated cash flows.
IFRIC 1. Engagement team should perform
procedures to ensure changes in Changes in the liability due to the passage of time
decommissioning liabilities have been applied (unwinding of the discount) should be recorded
to the correct depletion unit and CGU as this directly to the statement of comprehensive income.
classification will have an impact on the
Under IFRS, such changes must be reflected as finance
carrying amount used in depletion and
costs rather than as accretion expense included in
impairment testing.
DD&A. It is important to note that although this
expense is classified as a borrowing cost under IFRS,
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the expense does not meet the criteria required for
capitalization under IAS 23.
Changes in decommissioning provisions relating to

updated cost estimates or changes in discount rates
should be recorded as adjustments to PP&E and
decommissioning provisions prospectively. Under
IFRS, amounts deducted from the cost of the assets
should not exceed the carrying value of the asset. If a
decrease is greater than the carrying value, the excess
would be recognized in the P&L immediately.
If there are significant changes in cost estimates during

the current year, engagement teams should investigate
to understand the reason that cost estimates have been
updated to verify that prospective adjustment as a
change in estimate (as compared to correction of an
error) is appropriate. For example, changes may be
due to new information becoming available (e.g. due to
recent settlements that have provided additional
information on the costs) or a change in regulatory
requirements which would support prospective
adjustment.

determined value of accretion expense by obtaining
management’s calculation and performing the
following:
Note - Accretion expense is calculated by

multiplying the opening balance of the recorded
provision by the entity’s discount rate, and
represents the amortization of the present value
discount recorded on measurement of
decommissioning provision.
a) Depending on the level of audit evidence In most instances, accretion expense can be tested
required and the complexity of the calculation, effectively through use of substantive analytical
perform substantive analytical procedures or procedures.
tests of detail (recalculation of accretion
expense for the period. Simplistically, an expectation of accretion expense can
Note – Management may have used multiple be set by taking the opening decommissioning
discount rates on different wells and facilities provision balance and multiplying by the applicable
due to differences in the expected timing of
discount rate.
cash outflows or other associated risks.
Engagement teams may have to disaggregate
the opening balance of the provision by The analytic will need to be more refined if the client
discount rate and time (quarter) in order to applies different discount rates to different categories
ensure an adequate level of precision in the re- of assets as a result of different reserve lives or
calculation. jurisdiction. In addition, if there are significant
additions or disposals during the year that impact the
decommissioning provision, the impact of such
transactions will need to be incorporated into the
expectation with specific consideration being given to
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when the additions /disposals took place throughout
the year.
b) Ensure that accretion expense per the entity’s None

financial records is appropriately recognized as
finance expense in the statement of
4. Test the presentation and disclosure of Decommissioning provisions are commonly shown as a
decommissioning provisions/asset retirement separate line item on the balance sheet of many oil and
obligations by performing the following gas companies. An alternative presentation is to
procedures: include the balance within a more generic line item
called “provisions”. In both cases, significant note
a) Verify that provision balances are disclosure is required to provide information to users
appropriately presented on the face of the
on the changes in the balance during the period and
statement of financial position (IAS 1.54(k)).
the key assumptions used in measuring the provision.
b) If relevant, review and test classification of the Engagement teams need to consider whether a portion
balance between current and non-current for of the decommissioning provision should be classified
appropriate presentation in the financial as “current” on the balance sheet. If management’s
statements (IAS 1.60-65). plans include abandonment and reclamation
expenditures in the next 12 months then it would be
c) Determine whether appropriate information appropriate to classify a portion of the balance as
has been obtained for required disclosure in current.
the financial statements by reference to the
latest IFRS disclosure checklist.
Note- Disclosure requirements for

decommissioning provisions are set out in IAS
37.84 to IAS 37.92.
d) Verify accuracy of the information by

comparing to the information we have audited
or audit the information if not previously
audited (tailor audit program to add the
additional procedures performed, as
applicable).

client’s operations.
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5. Acquisitions
Merger and acquisition transactions are quite common in the oil and gas industry. These transactions can be
structured as the purchase and sale of specific assets or as an agreement to purchase shares in another entity. For
accounting purposes, the substance of the transaction, rather than its legal form dictates the appropriate
accounting treatment for an acquisition. Accordingly, engagement teams must assess each Purchase & Sales
Agreement (“PSA”) entered into by the client to determine whether the acquisition is in substance an asset
acquisition under IAS 16 or whether it represents a business combination under IFRS 3R.
Audit EGA’s
Acquisition transactions are often significant and can have a pervasive impact on the financial statements for many
oil and gas companies. As a result, an an industry-specific EGA has been developed. This EGA can be utilized in
Aura by selecting the tier 3 library titled “Canada Energy Industry Supplement”. This chapter of the handbook
provides supplemental guidance to assist engagement teams in the preparation and review of the EGA – Test
acquisition transactions.
Note: There are a number of global EGA’s for business combinations within the 2012 Int’l IFRS Audit Supplement;
however the EGA – Test acquisition transactions in the Canada Energy Industry Supplement combines the
relevant procedures from the various EGA’s in the general library into one concise EGA and therefore engagement
teams are encouraged to use the industry-specific EGA created by PwC Calgary noted above.
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EGA: Test Acquisition Transactions
Business Combinations
IFRS 3R defines a business as "an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits
directly to investors or other owners, members, or participants” (Appendix A, Defined terms). Previous Canadian
GAAP defined a business as a “self-sustaining set of activities and assets conducted for the purpose of providing a
return to investors”.
To be considered a business under IFRS 3R, a set of activities and assets only needs inputs and processes applied to
the inputs that have the ability to create outputs. Administrative systems such as accounting, billing and payroll
typically are not processes used to create outputs. Although businesses usually have outputs, outputs are no longer
required in determining whether an acquired entity or group of assets constitutes a business. That is, under IFRS,
the set of activities need not be self-sustaining to qualify as a business as it did under previous Canadian GAAP.
IFRS 3R also clarifies that not all inputs and processes necessary to create outputs are needed if the market
participant is capable of continuing to produce outputs. For example, if a market participant can integrate the
acquired inputs and processes with other inputs and processes that already exist in its operations, then the acquired
set of activities and assets would meet the definition of a business. Additionally, under IFRS 3R, if goodwill is
present in the acquired group, it is presumed that a business exists. Evidence to the contrary would be needed to
overcome this presumption.
Overall, the assessment of whether an acquired entity or group of assets constitutes a business should consider
whether a market participant is capable of conducting and managing the integrated set of activities and assets as a
business "for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits
directly to investors or other owners, members, or participants".
Judgment will need to be applied to determine whether a set of inputs and processes is capable of being conducted
as a business, and as there are no “bright lines”, the facts and circumstances of each transaction will need to be
evaluated carefully. Producing oil and gas assets or development assets with proved and/or probable
reserves assigned are generally considered to meet the definition of a business and therefore would
be considered within the scope of IFRS 3R. In contrast, assets without production or assigned reserves (e.g.
E&E assets) would generally not qualify as a business, and are most appropriately accounted for as an asset
acquisition under IFRS 6 or IAS 16. If the acquisition transaction includes the purchase of both E&E and producing
properties, professional judgment should be applied to determine whether or not the transaction is a business
combination under IFRS 3R.
Note: The Alberta Securities Commission and other Canadian Regulators have expressed a firm view that the
acquisition of undivided working interests in oil and gas assets with production or assigned reserves represent a
business combination under IFRS 3R, and should be accounted for and disclosed as such. The IASB currently has a
project to clarify this treatment is required under IFRS 11.
Paragraph 3 of IFRS 3R stipulates that, “if the assets acquired are not a business, the reporting entity shall account
for the transaction as an asset acquisition” – in other words, apply IAS 16 (see guidance on asset acquisition
accounting below).
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Asset Acquisition Accounting
In instances where the PSA relates to a group of assets which do not meet the definition of a business under IFRS
3R, the transaction should be accounted for in accordance with IAS 16. To account for an asset acquisition under
IAS 16, the cost of assets acquired (PP&E or E&E) should be equal to the cash price equivalent at the recognition
date. The PSA should clearly outline what has been acquired by the purchaser. For most oil and gas transactions,
the purchase will assume responsibility for any decommissioning obligations associated with the assets acquired.
In most Canadian asset acquisition transactions, the purchaser’s tax basis will be equal to the amount paid for the
asset. As such, there will be no deferred income tax asset/liability to recognize. For example, if an entity pays cash
of $100 to acquire assets and the associated decommissioning obligation is $20; the following entry would be
recognized:
Dr PP&E $120
Cr Cash $100
Cr Decommissioning obligation $20
There are cases where the purchaser’s tax basis may not be equal to the cash consideration paid (this is not that
common for asset purchases in Canada but can occur and also occurs in foreign jurisdictions where the tax laws do
not give rise to a ‘bump’ in the purchaser’s tax basis when transactions occur). Under previous Canadian GAAP, this
fact pattern would require recognition of a deferred tax liability with a corresponding ‘iterative bump’ to the asset
value. However, under IFRS, IAS 12 prevents the recognition of deferred tax in transactions that are not business
combinations. This may result in an “unrecognized difference” that will need to be tracked and separately
recognized through profit and loss on a systematic basis.
The following table outlines key differences in the accounting treatment of asset acquisitions and business
combinations:
Asset Acquisitions Business Combinations

Transaction Transaction costs for asset acquisitions are capitalized as part Transaction costs for business
Costs of the acquisition. The cost of PP&E includes any costs combinations are expensed in the period
directly attributable to bringing the asset to the location and incurred. Costs of equity or debt issuance
condition necessary for it to be capable of operating in the should be accounted for in accordance
manner intended by management. Further guidance is with IAS 32 and IAS 39.
provided within IAS 16.
Deferred taxes Any difference between the book and tax basis which gives Deferred taxes are recognized if there is a
rise to deferred taxes is not recognized due to the initial difference between the fair value assigned
recognition exemption within IAS 12 paragraphs 15 and 24. to the assets acquired and their tax basis.
Deferred taxes that result from asset acquisitions are
recognized on a systematic basis post-acquisition accounting.
Goodwill There is no goodwill recognized for asset acquisitions. Goodwill is recognized if the consideration
No bargain purchase ‘gains’ are recognized for asset paid exceeds the fair value of the assets
acquisitions acquired.
A bargain purchase gain is recognized in
profit & loss if the fair value of assets
acquired exceeds the consideration paid.
Asset retirement Any asset retirement obligation acquired as part of an asset The asset retirement obligation should be
obligation acquisition would be accounted for under IAS 37 using the measured using the credit-adjusted risk-
entity’s policy of measurement to discount the obligation at free rate, as this would be more consistent
either the credit-adjusted risk free rate or the risk free rate. with fair value as required by IFRS 3R
than would a risk-free rate (used by many
companies for subsequent measurement
of ARO under IFRS). This is prescribed in
IFRS 13 para B35(d).
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Business combinations often have a pervasive impact on the financial statements and therefore all assertions are
impacted. The most significant assertion with business combinations is Valuation, specifically the fair value of
assets acquired and liabilities assumed.
The risk that business combinations are not appropriately identified and valued is included in the Likely Sources of
Possible Misstatement for business combinations. A screenshot of this is shown below.
143
144
If the engagement team has considered accounting for business combinations as a significant risk, then auditing
standards require the engagement team to understand and evaluate the controls management has in place over the
significant risk. This does not mean the engagement team needs to place reliance on the controls. The following are
examples of controls that engagement teams may identify:
 Significant and unusual transactions are approved by senior management.
 An accounting memo is prepared for a significant and unusual transactions outlining the key terms of the
arrangement and relevant accounting guidance. The Controller and Chief Financial Officer review and
approve the memo, including journal entries and supporting documentation.
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Procedures: Results of procedures performed, including links

to attachments or other EGAs:
1. Accounting Estimates
a) Determine whether accounting estimates If the acquisition is considered to give rise to accounting
made by management in this area represent a estimates that represents a risk of material misstatement,
risk of material misstatement. teams should add the EGA '*Substantive procedures -
Accounting estimates'- Business Combinations to the
Gather Evidence view.
Note: If the acquisition is material and considered to be
an area of significant audit risk, engagement teams
should consider whether the use of PwC specialists (e.g.
VMD) is appropriate and if this is the case, ensure that
appropriate reliance on specialists EGA’s are included in
the Aura file.
2. Obtain an understanding of the acquisition transaction:
a) Obtain the final signed purchase agreement. Engagement teams should obtain the final signed copy of
the PSA to ensure that the appropriate parties from the
acquirer and the acquiree have agreed to the terms of the
acquisition.
Teams should verify that the signor(s) of the acquirer
have the appropriate authorization to enter into the
transaction, by considering the client’s policies for major
transactions, prior board approvals, materiality of the
transaction, etc.
b) Assess whether the transaction represents a Refer to Overview and Background Information for the
business combination in accordance with discussion as to whether a purchase constitutes a
IFRS 3, Business Combinations. business combination versus an asset acquisition.
Refer to IFRS 3.3: The transaction does not meet the
definition of a business combination if:
1. A joint venture is formed* (refer to IFRS 11), (*
working interest transactions may be accounted
for as business combinations if they meet the
definition of a business)
2. The acquisition of an asset or group of assets
doesn’t constitute a business (refer to IAS 16),
and
3. The acquisition relates to a combination of
entities that are under common control (refer to
IFRS 3 Appendix B1-B4).
Further guidance on the definition of a business can be
found under IFRS 3 Appendix B5-B12.
Judgment will need to be applied to determine whether a
set of inputs and processes is capable of being conducted
as a business, and as there are no “bright lines”, the facts
146
and circumstances of each transaction will need to be
evaluated carefully. Generally, producing oil and gas
assets or development assets with proved and/or
probable reserves assigned are generally considered to
meet the definition of a business and therefore would be
considered within the scope of IFRS 3R. In contrast,
assets without production or assigned reserves (e.g. E&E
assets) would generally not qualify as a business, and are
most appropriately accounted for as an asset acquisition
under IFRS 6 or IAS 16 (see EGA – Test Additions). If
the acquisition transaction include the purchase of both
E&E and producing properties, professional judgment
should be applied to determine whether or not the
transaction is in substance a business combination under
IFRS 3R.
When an investor does not acquire 100% of a business, it
is important to determine what type of relationship the
investor has with the investee. IFRS 10 –Consolidated
Financial Statements provides the relevant guidance for
the assessment of control. If an investor is acquiring an
interest in an arrangement that is jointly controlled, IFRS
11, Joint Arrangements should be used to determine
whether there is joint control (and therefore it is a joint
operation or joint venture).
Common control transactions are complex, and require
careful analysis. Refer to the guidance with the PwC
Manual of Accounting, and consider consultation.
c) Determine if the acquirer has been Under IFRS 3.6-7, one of the entities involved in the
appropriately identified. transaction must be identified as the acquirer. This is the
entity that obtains control of the acquiree.
If it is not clear who has obtained control, teams should
apply the guidance in IFRS 3 Appendix B13-B18 to
determine the acquirer.
In some cases, a reverse acquisition or de-facto reverse
acquisition may occur. A reverse acquisition occurs when
the entity that issues securities (the legal acquirer) is
identified as the acquiree for accounting purposes on the
basis of the guidance in paragraphs B13–B18 (as
referenced above).
Further application guidance on a reverse acquisition can
be found in IFRS 3 Appendix B19-B27.
Identifying the acquirer:

Appendix B14-B18 provides the following guidance for
engagement teams to consider:
 B14 In a business combination effected primarily
by transferring cash or other assets or by
incurring liabilities, the acquirer is usually the
entity that transfers the cash or other assets or
incurs the liabilities.
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 B15 In a business combination effected primarily
by exchanging equity interests, the acquirer is
usually the entity that issues its equity interests.
However, in some business combinations,
commonly called 'reverse acquisitions', the
issuing entity is the acquiree. Paragraphs B19–
B27 provide guidance on accounting for reverse
acquisitions. Other pertinent facts and
circumstances shall also be considered in
identifying the acquirer in a business
combination effected by exchanging equity
interests.(see Appendix B15 for additional
factors)
 B16 The acquirer is usually the combining entity
whose relative size (measured in, for example,
assets, revenues or profit) is significantly greater
than that of the other combining entity or entities
 B17 In a business combination involving more
than two entities, determining the acquirer shall
include a consideration of, among other things,
which of the combining entities initiated the
combination, as well as the relative size of the
combining entities.
 B18 A new entity formed to effect a business
combination is not necessarily the acquirer. If a
new entity is formed to issue equity interests to
effect a business combination, one of the
combining entities that existed before the
business combination shall be identified as the
acquirer by applying the guidance in paragraphs
B13–B17. In contrast, a new entity that transfers
cash or other assets or incurs liabilities as
consideration may be the acquirer.
d) Determine whether the acquirer and acquiree Certain entities may have relationships that existed
have a pre-existing relationship or whether before the business combination. For example, the
other arrangements were entered into during acquirer may be acquiring one of its customers with a
the acquisition that are separate to the long-term fixed price supply arrangement in place or may
business combination. Where such be acquiring a company with an existing borrowing or
relationships or arrangements exist, lending arrangement, or with a pending lawsuit. A
determine the impact on the acquisition. business combination may be a deemed settlement of
such relationships.
Other arrangements may be negotiated between the
acquirer and acquiree during the business combination
process (e.g. certain employee compensation
arrangements). If these arrangements are separate from
the business combination, they should be excluded from
the amounts exchanged and accounted for in the business
combination.
Engagement teams should review the PSA to identify
these types of relationships or separate transactions.
IFRS 3 provides examples and application guidance to
account for separate transactions (see examples below).
Refer to Appendix B51-B62 for further guidance.
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(a) a transaction that in effect settles pre-existing
relationships between the acquirer and acquiree;
(for example, a lawsuit)
(b) a transaction that remunerates employees or
former owners of the acquiree for future services;
and (for example, contingent payments to
employees or selling shareholder)
(c) a transaction that reimburses the acquiree or its
former owners for paying the acquirer's
acquisition-related costs.
e) Determine the acquisition date (i.e., the date The PSA should specify the acquisition date, which is the
on which the acquirer obtains control of the date of close and when the assets and associated
acquiree) and verify the transaction has been liabilities are transferred. This is not the same as the
recorded at that date. effective date of the agreement. The engagement teams
should be conscious of the following dates:
- Effective date – Date agreed upon by the parties
when all revenue, expenditures and obligations
from ownership and operation of the assets
incurred and/or accrued from are transferred to
the purchaser. This date is generally the date
closest to when the parties have completed
negotiations on the purchase price, and is to
“make whole” the purchaser to the closing date.
This is not the date where the purchaser will start
recognizing revenues/expenses as control has not
been transferred at this date. Typically, any net
amount received / paid during the period from
the effective date to the closing date will be
settled as a closing adjustment impacting the
final value of the acquisition.
- PSA date – date the acquisition agreement was
entered into; not relevant for financial statement
purposes but will be important to understand
how the statements of adjustments are agreed
upon.
- Closing date – the acquisition date for financial
statement purposes, and date when title of the
assets and risks and rewards of ownership passes
to the acquirer. Revenues/expenses incurred
subsequent to the closing date will be recognized
by the purchaser.
- Interim and Final Accounting date – date where
all accruals should be settled, and a final
settlement in cash delivered to either the
purchaser or seller. Engagement teams should
be conscious of items pre-close and post-close
and whether the acquisition cost is affected, or
other G/L accounts.
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3. Test the cost of the business combination:
a) Obtain detailed analysis of the consideration, Typically, management prepares a schedule, which shows
assess completeness and test mathematical the consideration to be paid. Teams need to review this
accuracy. analysis to ensure that it is mathematically accurate and
complete.
Teams can perform the following procedures to
determine if the consideration is complete:
 Examine PSA and related agreements in place,
which normally provide explicitly the form and
amount of consideration to be transferred.
 Consider the results of the examination of
minutes. For acquisitions, the Board of Directors
will normally provide approval of the transaction,
and approval of the form and amount of
consideration to be transferred.
 Consider the results of the search for unrecorded
liabilities, which may indicate significant
payments made which might relate to the
business acquisition (either as part of
consideration paid or payment for related
transaction costs).
 Examine circular/prospectus documents, if
applicable, which should explicitly outline form
and amount of consideration.
 Examine legal correspondence which might
discuss the acquisition and provide further
evidence of the terms of the arrangement.
b) Identify the components of consideration. IFRS 3.37-40 provides guidance on the general
measurement of consideration transferred.
Consideration can take on many forms, which teams
should be aware of. Refer to some of the common
examples below:
 Cash consideration
 Equity or similar consideration (e.g., preferred
stock or convertible bonds)
 Deferred consideration
 Contingent consideration
IFRS 13 provides additional guidance on determining fair
values.
The definition of consideration in the context of the
business combination is an asset given up, liability
incurred or equity interest transferred in exchange for the
acquiree. For this procedure, teams should ensure that
they have appropriately identified each type of
consideration that will be transferred in the business
combination.
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c) Agree cash consideration to supporting Cash is a common form of consideration. In order to
documentation to verify it has been accounted validate the cash consideration, agree the cash paid to
for appropriately. bank statements, cheques or wire transfer documentation
and ensure payment was appropriately authorized.
d) Test the fair value of non-cash consideration Shares are also a common form of consideration. If
to verify it has been accounted for shares are used as consideration, the shares transferred
appropriately. as consideration should be valued using the share price
on the closing date of the acquisition.
Note: Clients have a tendency to use a five or ten-day
weighted average to value the share consideration;
however, this generally would not be acceptable under
IFRS. Shares issued can be agreed to the share
certificates issued, or confirmed as part of the share
confirmation.
If shares are subject to restrictions by their terms (such
as restriction on resale as a legend on the share
certificate), there may be differences in fair value
compared to the quoted market price. Where shares do
not contain a legend restriction but there is a separate
agreement to restrict the holder transacting (e.g. a
shareholder’s agreement or escrow agreement) this
contract may need to be separately valued. IFRS 13
dictates the measurement of the share consideration and
other contracts. Where dealing with a significant
restriction consultation with ACS is recommended.
e) For deferred consideration based on a fixed Deferred consideration is not common in most oil and
value (cash or variable equity), verify that the gas transactions, although should be considered. Refer to
amounts have been appropriately discounted FV techniques under IFRS 13 and obtain supporting
and classified as a financial liability. For documentation and inputs for management’s FV if there
deferred equity consideration based on a fixed is a significant deferred consideration component
number of shares, verify that the amounts associated with the transaction.
have been accounted for at fair value and
classified as equity.
f) Verify that acquisition related costs are Acquisition-related costs are costs the acquirer incurs to
expensed in the period in which the costs are effect a business combination (refer to IFRS 3.53). Those
incurred and the services are received. costs include:
 Finder's fees
 Advisory,
 Legal,
 Accounting,
 Valuation and other professional or consulting
fees;
 General administrative costs, including the costs
of maintaining an internal acquisitions
department; and
 Costs of registering and issuing debt and equity
securities.
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The acquirer shall account for acquisition-related costs as
expenses in the periods in which the costs are incurred
and the services are received, with one exception. The
costs to issue debt or equity securities shall be recognized
in accordance with IAS 32 and IAS 39.
Transactions primarily benefiting the acquirer should be
measured as a separate transaction in the acquirer’s
financial statements from the business combination
(IFRS 3R para 52 – 53). Most entities either classify
these transaction costs as a separate expense, or within
G&A expenses. The main types of transactions
potentially benefitting an acquirer in connection with the
business combination are as follows:
1. employee compensation agreements,
2. reimbursement provided to the acquiree for
paying the acquirer’s acquisition costs, and
3. acquiree’s transaction costs.
There is significant guidance within the Global Business
Combination Guide with respect to transaction costs, and
whether costs incurred as part of the acquisition should
be part of the acquirer’s books (expensed in the period
incurred), or acquiree’s books (expensed in the acquiree’s
financial statements prior to acquisition, although the
acquirer might acquire the obligation through the
acquisition of accounts payable).
The transfer of consideration may be accompanied by
other transactions in a business combination. A
transaction is likely to be recognised and accounted for
separately from a business combination if it is entered
into by or on behalf of the acquirer, and is primarily for
the benefit of the acquirer or the combined entity rather
than that of the acquiree or its former owners.
Identifying those transactions that should be accounted
for separately from the acquisition can require significant
judgment and analysis. Three factors that should be
considered are:
1. The reason for the transaction - For example, if
the transaction is arranged primarily for the benefit
of the acquirer or combined entity rather than the
acquiree, that portion of the transaction price paid is
less likely to be part of the exchange and should be
accounted for separately.
2. Who initiated the transaction - For example, a
transaction or other event that is initiated by the
acquirer may be entered into for the purpose of
providing future economic benefits to the acquirer
or combined entity, with little benefit received by the
acquiree. However, a transaction or arrangement
initiated by the acquiree is less likely to benefit the
acquirer or combined entity and is more likely to be
a part of the business combination transaction.
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3. The timing of the transaction - A transaction
between the acquirer and acquiree that takes place
during negotiations may have been entered into in
contemplation of the business combination to
provide future economic benefits to the acquirer or
combined entity.
Employee Compensation Agreements
 Retention agreements may represent compensation
for post-combination services and should be
accounted for in the acquirer’s financial statements.
Existing employment agreements may have ‘change
of control’ clauses such as a golden parachute
arrangement. Most agreements for key executives
provide that upon a change of control, a non-
discretionary payment of a specific dollar of
severance will be provided. As these are built into
employment agreements prior to contemplation of a
specific transaction and are non-discretionary, these
are recognized in the acquiree’s books. However, if
the payments are discretionary (i.e. the acquirer
decides to terminate an employee and will pay them
severance but not contractually required), these are a
separate transaction from the business combination
and recognized in the books of the acquirer as an
expense. Employment agreements may have ‘dual
trigger’ clauses which require payment upon a
change of control and termination of employment
within a specific time period. Although the
agreement is pre-business combination, since a
decision to terminate would be the acquirer’s, the
payment would be an expense of the acquirer in the
period after the business combination.
 Replacement share-based payment awards should be
measured at the acquisition date. If the acquirer is
obligated to replace the awards, generally a portion is
attributed to pre-combination services, and a portion
is attributed to post-combination services and is
accounted for within the acquirer’s financial
statements. The entire fair value of the replacement
award is recognized in the post-combination financial
statements if the acquirer chooses (but is not
required) to replace the awards.
 Vested share-based awards that are used to replace
unvested awards (or where there is accelerated
vesting) should be analysed to determine if the
vesting is due to a change in control clause previously
established (and therefore is the acquiree’s cost).
Absent an automatic change in control clause, the
acquirer would recognize additional compensation
cost in the post-combination financial statements.
 Contingent payment arrangements may represent
consideration transferred for the acquiree or
compensation for post-combination services.
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Reimbursement Agreements
Consideration transferred by the acquirer that includes
amounts to reimburse the acquiree for payments made
on behalf of the acquirer for its acquisition-related costs
should be recognised separately from the business
combination. In contrast, costs incurred by an acquiree to
sell a business are not acquisition-related costs.
Consideration transferred by the acquirer that includes
amounts to reimburse the acquiree for the acquiree’s
costs incurred to sell the business generally would be
accounted for by the acquirer as part of the consideration
transferred (i.e. expensed in the acquiree’s books).
Acquiree’s Transaction Costs
Similar to acquisition costs incurred by the acquirer, the
acquiree will generally have the same costs incurred
(lawyer, consulting and advisory fees). If the services are
performed in connection with the specific business
combination, they are generally considered costs of the
acquirer as they are primarily for the benefit of the
acquirer and on-going entity. However, if the agreements
are entered into prior to the identification of the specific
transaction (e.g. where the acquiree is considering
strategic alternatives) and would be incurred regardless
of whether a specific business combination closes, these
are normally costs of the acquiree.
Auditing Procedures
Procedures that can be performed to verify transaction
costs:
 Scan the general ledger of the acquiree for the
period prior to acquisition for unusual expenses
which might need to be considered by the
acquirer.
 Obtain supporting agreements or contractual
arrangements and assess whether the terms to
these agreements benefit the acquirer or
acquiree.
 For transaction costs recognized by acquiree,
vouch a sample to supporting contracts/invoices;
consider whether expenses should be share-
issuance costs.
 For share-issuance costs recognized, confirm
these meet the criteria or whether the costs
should be expensed. Costs of issuing equity are
within the scope of IAS 32, and paragraphs 35
and 37 require that “transaction costs of an
equity transaction shall be accounted for as a
deduction from equity. An entity typically incurs
various costs in issuing or acquiring its own
equity instruments. Those costs might include
registration and other regulatory fees, amounts
paid to legal, accounting and other professional
advisers, printing costs and stamp duties. The
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transaction costs of an equity transaction are
accounted for as a deduction from equity to the
extent that they are incremental costs directly
attributable to the equity transaction that
otherwise would have been avoided. The costs of
an equity transaction that is abandoned are
recognised as an expense.”
 If transaction costs are material and relate to
both entities, engagement teams should consider
consulting with ACS to determine whether or not
the accounting is appropriate.
4. Test fair value measurements of assets and liabilities acquired
a) Obtain detailed listings of the acquiree's Typically, management will prepare a schedule which
identifiable assets, liabilities and contingent outlines the fair values for all assets acquired and
liabilities at the acquisition date, assess liabilities assumed. Generally, this schedule is presented
completeness and test mathematical accuracy. by FSLI (e.g.: E&E, PPE, ARO, etc.). Teams should
ensure that the schedule from management is
mathematically accurate (by verifying formulas,
recalculating, etc.).
In order to assess the completeness of the schedule and
to understand the fair values assigned to each asset/
liability, the engagement teams will require a breakdown
of management’s schedule by asset/ liability.
To assess the completeness of management’s schedule,
teams should perform some or all of the following
procedures (as applicable):
 Inquire with management.
 Examine the acquiree's financial records prior to
the acquisition and make sure that the assets and
liabilities have been considered as part of the
acquisition accounting. The financial records
might also provide indication of previous
employment or equity based arrangements which
may need to be settled prior to the acquisition,
and could potentially be a post-combination
transaction cost of the acquisition, or form part
of the consideration transferred.
 Consider due diligence reports, which may
provide for obligations which need to be
measured.
 Consider the existence of intangible assets such
as brand names, patents or customer
relationships that were not recognized by the
acquiree.
 Consider the results of the examination of
minutes if matters are discussed which may need
to be accounted for (i.e. employment or
compensation agreements, obligations or other
contractual arrangements).
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 Examine PSA and related agreements in place.
The purchase and sales agreement will typically
outline the assets, liabilities and contracts which
are part of the agreement. Contracts should be
analyzed to determine if they are favorable (i.e.
potential intangible asset) or unfavorable (i.e.
onerous contract) such as building lease
contracts at non market rates.
 Considered bank and loan confirmations for
items such as guarantees or other liabilities.
 Considered the results of the search for
unrecorded liabilities, and if there are large
payments made which should form part of the
arrangement (either transaction costs,
consideration paid, or payment of liabilities
acquired).
 Examine legal correspondence which might
discuss the acquisition and provide further
evidence of the terms of the arrangement.
b) Update our understanding of the entity's Management is required to determine the fair values of
policies and process, methods and each asset and liability that will be acquired during the
assumptions used to determine fair value business combination (IFRS 3.18).
measurements.
Teams should discuss the process, methods and
assumptions used to determine the fair values of the
assets acquired and the liabilities assumed. This
documentation can be combined with the testing over the
asset and liability fair value. For example, in testing the
fair value assigned to E&E, engagement teams can
document the approach, assumptions and techniques
used by management to determine the value of E&E. This
will allow teams to show their understanding, as well as
critique/ assess management’s approach.
As of January 1, 2013, IFRS 13 – Fair Value
Measurement, provides guidance on determining fair
values for assets and liabilities.
Additional application guidance can be found in the PwC
Manual of Accounting: IFRS Manual of accounting -
Chapter 5 - Applying IFRS 13 to business combinations.
It should also be noted that the following specific
recognition and measurement principles exist for certain
assets and liabilities. Refer to the following IFRS
guidance if the following are transferred during a
business combination:
 Intangible assets - IAS 38.33-41
 Contingent liabilities - IFRS 3.22-23
 Income taxes - IFRS 3.24-25
 Employee benefits - IFRS 3.26
 Indemnification assets - IFRS 3.27-28
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 Reacquired rights - IFRS 3.29
 Share based payments - IFRS 3.30
 Assets held for sale - IFRS 3.31
 Lease or insurance contracts - IFRS 3.17
c) Agree book values of acquired assets and Clients may account for the acquisition by taking the
liabilities to supporting documentation. acquiree’s book values, then adding a ‘fair value bump’,
or making the assumption that carrying value
approximates fair value. As part of assessing
completeness of the transaction and fair value the assets
and liabilities, engagement teams should be able to agree
the assets and liabilities acquired back to the original
book values of the acquiree, and understand the
differences (if any) between the book values prior to
acquisition, and new fair values.
d) Obtain and test the determined fair values of Refer to below guidance.
identifiable assets, liabilities and contingent
liabilities acquired, taking into consideration
items for which specific guidance on
recognition and measurement exists, and
verify they have been classified appropriately.
i. Test the fair value of PP&E For all business combinations (including those previously
accounted for as asset acquisitions under Canadian GAAP
Part V) the fair value of PP&E acquired must be
considered, and may not be equal to the cash paid net of
decommissioning obligation as demonstrated above. The
engagement team should appropriately assess fair value
of PP&E, which may require the use of internal PwC VMD
specialists (refer to EGA - Test impairment assessment –
property, plant & equipment).
The engagement team should obtain an understanding of
the assets acquired (leases, facilities, processing
agreements, wells, pipelines, seismic, royalty agreements)
to ensure that the acquisition-date fair values are
appropriately measured. The PSA should clearly outline
what has been acquired by the purchaser.
The appropriate model for determining the fair value of
PP&E should be considered (market or income
approach). Generally, the valuation would be based on
either an income (discounted cash flow) or market based
(comparable transactions) approach. Where the
discounted cash flow approach is determined to be most
appropriate, it should align with the fair value
methodology later used for impairment testing under
FVLCTS. Note that VIU is not a fair value measure, and
only FVLCTS is applicable for measurement of business
combinations. Refer to EGA - Test impairment
assessment – property, plant and equipment for
guidance on how to measure FVLCTS and auditing
specific assumptions used in a discounted cash flow
analysis.
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Note for purposes of determining fair value of PP&E
generally a full tax basis would be assumed from the
buyer’s perspective as the most value could be gained
from selling the property in a taxable transaction.
Although most acquisitions have been paid using cash
consideration, this is not necessarily representative of the
fair value of the PP&E acquired, as there may be other
assets or liabilities included in the total cash
consideration or the consideration could give rise to
goodwill or a bargain purchase option. Therefore the
engagement team should consider, based on materiality
and inherent risk, obtaining the full discounted cash flow
analysis, industry metrics or other information
supporting the value of PP&E.
For business combinations, it is rare when an acquisition
will take place which has a corresponding reserve report,
or where we have previously tested the reserve report to
conclude that we can place reliance on the report. As
such, when a third party reserve report is used for fair
value measurement using a discounted cash flow
analysis, engagement teams will have to perform
procedures to be able to place reliance on the underlying
data.
1. Obtain the most recent external third party
reserve report. Send a confirmation to the IQRE
to verify accuracy and completeness, and for
their awareness of our use of the report. Refer to
procedures under Reserve Report Testing / Use
of Expert for procedures to perform.
2. Reconcile the most recent reserve report to the
reserves acquired, to the client’s year-end reserve
report and investigate significant differences.
Production should be able to be agreed to the
client’s lease operating reports for the specific
properties, and annualized for the period in
question.
3. Review key assumptions in the reserve report
compared to the client’s year-end reserve report
for similar / same properties and investigate
significant discrepancies, including royalty rates,
operating costs, and future development costs.
Prices will clearly be different over each period,
but it is not expected that there would be
significant changes to the other assumptions.
Price decks used in the reserve report should be
as at, or reasonably close to, the acquisition date.
If the reserve report is at a different date then the
acquisition, rollback or roll-forward procedures
will need to be performed based on materiality
and time difference, including an assessment of
prices, reserve changes from production, and
future development costs for spending in the
interim period.
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Other than reserve report inputs, the discount rate will be
a significant judgment used in the measurement of fair
value, and may be an area where PwC VMD specialists
should be consulted. The AAG team can generally put
together the FVLCTS model and evaluate the reserve
report; however involvement of PwC VMD specialists
should be considered and the conclusion and rationale
documented as this is a critical area of judgment. It is
recommended that consultation is done early with the
AAG engagement leader / manager and PwC VMD
specialists to assess the extent and timing of work.
Overall this is a similar analysis performed for assessing
fair value for impairment. Engagement teams should be
conscious of management using similar assumptions
throughout each of their fair value measurements
(consistent discount rates for similar properties and time
periods, business combinations/impairments, and
provide justifications for changes with specific reasons).
Generally there will be a range of acceptable fair values

for a particular property. The client should determine a
range and we should asses it. The client’s rationale for a
choice of a point within an acceptable range should be
documented and considered for bias.
In some instances (usually for very material transactions)
the client may engage an outside valuation firm to assist
them in determining the fair values of assets and
liabilities acquired (e.g. another Big 4 accounting firm).
If an external expert is being used as the primary support
for the valuation, procedures should be followed to rely
on management’s expert including bring in the EGA –
evaluate the experts work to determine whether or not
reliance is warranted. PwC VMD specialists can also be
engaged to review the work of the other firm and provide
an independent assessment of their methodology and
approach.
Note: It is generally not sufficient to document that an

informal discussion was held with VMD. If formal VMD
involvement is not considered necessary, engagement
teams must document the rationale for this decision (e.g.
non-complex valuation) and ensure that the audit file
includes sufficient documentation to support key
assumptions where VMD involvement may normally be
seen. For example, when evaluating the discount rate for
reasonableness, a high-level range based on a non-
specific discussion with VMD is not in itself sufficient.
Inclusion of the WACC analysis template (available from
VMD) and explicit documentation of the engagement
team’s consideration of the property specific factors that
can impact the discount rate should be included in the
Aura file.
ii. Test the fair value of E&E E&E assets acquired generally consist of undeveloped
land and seismic. The first thing that should be
considered is the E&E accounting policy of the
predecessor company – whether the policy of E&E to
PP&E was based on 2P or 1P reserves, successful efforts
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v. full cost, and ensure that management has made the
appropriate adjustments to align the policies and ensure
E&E is appropriately allocated on the purchase.
Companies generally have good records for undeveloped

land (i.e. land that has not been developed with wells),
but this may not necessary correspond to the amount
which should be allocated to E&E (i.e. those properties
without proved or probable reserves, depending on the
company’s policy). Engagement teams will have to
exercise judgment if additional audit procedures are
required to verify whether E&E assessed by management
is appropriate classified.
Acquired land can generally be valued on a $/acre basis
using published land reports. Alberta, British Columbia
and Saskatchewan all publish periodic land reports of
recent sales in different areas of the province. The
engagement team should hold discussions with the
client’s land personnel to assess where the acquired lands
are located and the procedures they performed to value,
with reference to external third party support.
There are a number of land evaluators operating in
Western Canada, including Seaton Jordon and
Independent Land Evaluators, which may be engaged by
the client to assess land valuation. If an external expert is
being used as the primary support for the valuation,
procedures should be followed to rely on management’s
expert including bring in the EGA – evaluate the experts
work to determine whether or not reliance is warranted.
PwC VMD specialists can also be engaged to provide
historical market transaction information that can be
used to support the value assigned to E&E assets.
For purchased seismic, management should be able to
provide evidence of similar seismic available on similar
locations to assess a reasonable fair market value. PwC
VMD can also provide market comparable information to
support the value assigned to seismic data.
For exploratory wells acquired classified within E&E that
is consistent with the client’s accounting policy, generally
the carrying value should approximate fair value unless
there are test results from the well which indicate that it
is likely dry/to be abandoned and shouldn’t have value.
Discussions with the VP Engineering will help assess
whether value should be placed on the well, depending on
the materiality and significance.
iii. Test the fair value of working capital Teams should approach the work like a miniature balance
sheet audit. Many of the carrying values for the current
assets/ current liabilities will approximate their
corresponding FVs due to the short term nature of the
financial items. Therefore, many of the procedures that
can be used in a normal balance sheet audit of these
accounts (e.g.: Cash, AR, Inventory, AP and accruals) are
appropriate for testing the working capital items.
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For example, in order to verify the FV of AR at the date of
acquisition, teams can perform subsequent receipt
testing or AR confirmation testing if appropriate. In the
same way, a search for unrecorded liabilities (from the
date of acquisition on) would be an appropriate method
to determine whether the liabilities assumed in the
acquisition were complete and recorded in the correct
period.
Procedures to confirm the existence, completeness and
accuracy of working capital should be performed to a
reasonable level of assurance. The more time that has
passed between the acquisition date and the audit date
makes it easier to perform these procedures.
The following are the minimum recommended (based on
materiality and assessed normal risk):
 Balances per the purchase price allocation should
be reconciled back to the acquiree’s trial balance,
with significant reconciling items assessed. For
example, management may have recorded
additional accruals within the acquiree’s
subledger which may need to be paid, but no
expense is recognized within the acquirer’s
general ledger, such as transaction costs
(management compensation/bonus, legal costs
and other costs of the acquisition). These should
be evaluated by the engagement team as to
whether they are actually costs that should be
incurred by the acquirer and recognized as such.
Refer to the discussion on transaction costs
above.
 Using audit sampling techniques, the
engagement teach should verify
accuracy/existence of receivables, payables, and
prepaids with reference to supporting third party
documentation, and subsequent payment or
receipt.
 A search for unrecorded liabilities and
subsequent receipt testing should be performed
around acquisition date to test completeness.
When performing this testing, it will be necessary
to review whether the sample pertains to pre or
post-acquisition costs/receipts and whether it
has been appropriately accounted for in the PPA
or excluded.
 As part of year end testing, the engagement team
should be performing procedures to ensure that
receivables and payables acquired have been
appropriately collected / paid. For those
significant and long-outstanding may indicate
they should not have been part of the original
purchase price allocation.
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 Support for accruals to actual should be obtained
to ensure there are no subsequent adjustments
required to those estimates, such as the capital
accrual acquired. Evidence may be able to be
obtained if there is an interim or final statement
of adjustment, depending on how the acquisition
was structured.
 If debt is acquired, the engagement team will
need to confirm that it has been recorded at fair
value in the purchase equation, and send a bank
confirmation to confirm the obligation. If the
debt is short-term and has a floating market rate,
likely the carrying value will approximate fair
value. However, if the debt has a fixed market
rate of interest or is long-term, the fair value
might not be equal to the carrying value and
additional work may be required to support the
fair value of the debt acquired (PwC FRM
specialists can assist with this). Debt agreement
should be obtained to also ensure there are no
other terms which might be an embedded
derivative.
iv. Test the fair value of decommissioning The decommissioning obligation should be measured
obligations using the credit-adjusted risk-free rate, as this is most
consistent with fair value as required under IFRS 3R than
would a risk-free rate (used by many companies for
subsequent measurement of ARO under IFRS).
This is prescribed in IFRS 13 para B35(d):
Decommissioning liability assumed in a
business combination. A Level 3 input would be
a current estimate using the entity's own data
about the future cash outflows to be paid to fulfil
the obligation (including market participants'
expectations about the costs of fulfilling the
obligation and the compensation that a market
participant would require for taking on the
obligation to dismantle the asset) if there is no
reasonably available information that indicates
that market participants would use different
assumptions. That Level 3 input would be used
in a present value technique together with other
inputs, e.g. a current risk-free interest rate or a
credit-adjusted risk-free rate if the effect of the
entity's credit standing on the fair value of the
liability is reflected in the discount rate rather
than in the estimate of future cash outflows.
However, valuation using a credit-adjusted risk free rate
may not correspond with the entity’s ARO policy, as there
is a policy choice between credit-adjusted risk free rate
and the risk-free rate. This will create a “day-one”
adjustment under IFRIC 1 to increase the
decommissioning obligation and associated PP&E assets
when moving from the credit-adjusted risk free rate to
the risk-free rate. Generally, it will be acceptable to book
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this day 1 adjustment as an increase to PP&E without
detailed consideration of impairment as there is a range
of acceptable fair values provided in the determination of
the fair value of PP&E. However, engagement teams
should document their consideration of the impact of
such an adjustment.
5. Test the calculation and allocation of goodwill or bargain purchase
a) Obtain the calculation and allocation of Goodwill is determined as the excess of:
goodwill or bargain purchase for the business
a) the aggregate of
combination.
i) FV of Consideration transferred
ii) the amount of any non-controlling interest in the
acquiree
iii) the acquisition-date fair value of the acquirer's
previously held equity interest in the acquiree (in the
case of a business combination achieved in stages)
over
b) the FV of the assets acquired and liabilities assumed in
the business combination (i.e.: FV net assets acquired).
To simplify, in a case where there are no controlling
interests and the business combination is not achieved in
stages, the goodwill would be determined as:
(Total consideration – FV of net assets acquired)
= Goodwill
b) Verify that non-controlling interests have been If the investor has not acquired 100% of the investee,
appropriately valued. then non-controlling interest will need to be considered.
This can potentially be a complex area of accounting, and
reference should be made to the PwC Manual of
Accounting and Global Business guide on business
combinations.
The first step would be to consider whether non-

controlling interest qualifies as equity under IAS 32
based on its terms. In the remainder of this section we
assume the non-controlling interest qualifies as equity.
For each business combination, the acquirer shall

measure at the acquisition date components of non-
controlling interests in the acquiree that are present
ownership interests and entitle their holders to a
proportionate share of the entity's net assets in the event
of liquidation at either
a) Fair value or
b) The present ownership instruments’
proportionate share in the recognized amounts of
the acquiree’s identifiable net assets
All other components of non-controlling interests shall be
measured at their acquisition-date fair values, unless
another measurement basis is required by IFRSs.
163
Refer to IFRS 3 Appendix B44-B45 for further guidance
on valuing the non-controlling interests in the acquiree.
c) Test the calculation of goodwill recognized. The formula for determining goodwill has been noted
above in a).
Teams should perform following procedures prior to
testing the goodwill calculation:
 Test FV of consideration
 Verify the value of non-controlling interest
 Verify previous interests in acquiree (in business
combination achieved in stages)
 Test the FV of assets acquired and liabilities
assumed
Once these areas have been audited, the goodwill
calculation is merely testing the mathematical accuracy of
management’s calculation.
d) Where a bargain purchase (i.e., fair value of Occasionally, an acquirer will make a bargain purchase,
assets and liabilities acquired exceeds which is a business combination in which the fair value of
consideration) is identified, reassess whether the net assets acquired exceeds the aggregate
the consideration, assets acquired and consideration. Before recognizing a gain on bargain
liabilities assumed, any non-controlling purchase (often referred to as “negative goodwill”), the
interest and any previously held interest have acquirer must first reassess whether all assets acquired
been appropriately identified and measured. have been identified and measured appropriately. If so, a
gain in the financial statements should be recognized,
along with additional disclosure.
Management should be able to provide the specific
reasons for the gain before booking within the P&L.
There is generally a high threshold for booking a bargain
purchase option, and it is required in the standard that
one re-examines fair value assessments in the acquisition
accounting before booking a gain in the P&L. If the
outcome of valuing the property is an acceptable range of
fair values, the value within the acceptable range to
minimize a bargain purchase gain should be chosen.
Note: It is more likely that a bargain purchase is
appropriate in share deals as fluctuations in the share
price between announcement date and the closing date
can change the value of consideration significantly.
Once goodwill has been determined, the engagement
e) Obtain and assess the allocation of goodwill to
team is responsible for determining whether the
CGUs:
allocation of the goodwill is appropriate.
i. Assess whether the CGUs identified are
appropriate. The first step is to identify whether or not the CGUs
identified are appropriate. IAS 36.80 indicates that for
ii. Assess the basis of allocation of goodwill business combinations, goodwill shall be allocated to
across the CGUs. each of the acquirer’s cash generating units or groups of
iii. Verify that goodwill has been units, which are expected to benefit from the business
appropriately allocated. combination. The allocation is performed without
considering if those CGUs or groups of CGUs have also
been allocated assets/ liabilities acquired.
164
For example, consider a company that has identified 6
CGUs which have been allocated goodwill in the past.
Also consider that all of the assets and liabilities acquired
in the business combination have been allocated to 3 of
the 6 CGUs. If it is determined that 4 of the CGUs that
would benefit from the business combination, each of the
4 CGUs would be allocated goodwill, regardless of
whether or not the 4th CGU was allocated any of the
assets/ liabilities acquired.
IAS 36.80 further indicates that each unit or group of
units to which the goodwill is so allocated shall:
a) represent the lowest level within the entity at
which the goodwill is monitored for internal
management purposes; and
b) not be larger than an operating segment (as
defined by paragraph 5 of IFRS 8 Operating
Segments) before aggregation
This represents the smallest and largest limits for
determining a CGU for allocating the goodwill from a
business combination.
Once the CGUs or groups of CGUs have been determined,
the second step is to gain an understanding of how
management has actually allocated the goodwill to each
of the units. As noted above, this allocation does not need
to correspond with where the assets/ liabilities have been
allocated. However, management should be able to
provide an explanation and support for how they have
allocated the goodwill. This support would also include
an analysis of why the applicable CGUs or groups of
CGUs would benefit from the acquisition.
Finally, the third step is to verify management’s
calculation for allocation. The goodwill allocation will be
used as the basis to perform the goodwill impairment
analysis at year end and in future periods.
Note, the standard allows for allocation of goodwill up to
the operating segment level unless it is monitored at a
lower level. If the operating segment level is used,
goodwill would not need to be allocated on acquisition to
individual CGUs within the operating segment.
6. Test business combinations achieved in stages
If the acquirer held an equity interest in the acquiree This will be left as a separate EGA and brought into the
immediately before the acquisition date and obtains gather evidence view if it is applicable to the engagement
control of the acquiree at the acquisition date, bring in team’s transaction. See “Bring in the following step if
the EGA: applicable” below
“Test business combinations achieved in stages”
165
7. Test contingent liabilities and contingent assets - Business combinations
If the engagement team determines that contingent This will be left as a separate EGA and brought into the
liabilities and contingent assets have been included in gather evidence view if it is applicable to the engagement
the purchase price allocation, bring in the EGA: team’s transaction. See “Bring in the following step if
applicable” below
“Test contingent liabilities and contingent assets -
Business combinations”
8. Test adjustments made to provisionally determined balances in business combinations
a) Obtain an understanding of the retrospective Per IFRS 3.45, the acquirer has a “measurement period”
adjustments made to provisional amounts and of up to one year from the acquisition date, during which
verify the measurement period is no greater it can retrospectively adjust provisional amounts
than one year from the acquisition date. recognized as part of the business combination.
Refer to the following excerpt from IFRS 3.45:
If the initial accounting for a business combination is
incomplete by the end of the reporting period in
which the combination occurs, the acquirer shall
report in its financial statements provisional amounts
for the items for which the accounting is incomplete.
During the measurement period, the acquirer shall
retrospectively adjust the provisional amounts
recognized at the acquisition date to reflect new
information obtained about facts and circumstances
that existed as of the acquisition date and, if known,
would have affected the measurement of the amounts
recognized as of that date.
During the measurement period, the acquirer shall
also recognize additional assets or liabilities if new
information is obtained about facts and
circumstances that existed as of the acquisition date
and, if known, would have resulted in the recognition
of those assets and liabilities as of that date.
The measurement period ends as soon as the acquirer
receives the information it was seeking about facts
and circumstances that existed as of the acquisition
date or learns that more information is not
obtainable. However, the measurement period shall
not exceed one year from the acquisition date.
The client must report in its financial statements that
business acquisition accounting is preliminary and
subject to change, otherwise all adjustments to the
acquisition accounting are recognized prospectively
within the financial statements. If material adjustments
to the purchase equation are proposed, engagement
teams should consider consulting with ACS to conclude
whether such treatment is appropriate (i.e. adjustments
are based on facts and circumstances that existed at the
acquisition date).
166
b) Test the accounting for adjustments made to If accounting adjustments have been made to the initial
provisional amounts and verify these relate to amounts recognized, engagement teams are required to
new information obtained about facts and test material changes.
circumstances that existed at the acquisition
New or better information may have been obtained by the
date.
acquirer after the acquisition date, which provides a
better estimate for the balances in the business
combination. This information can be used by
management to improve their estimates.
Teams should obtain support for all material changes.
Consider changes in the following areas:
 Adjustments made to recognize new or amend
provisional assets, liabilities or contingent
liabilities acquired
 Adjustments made to the consideration paid
 Adjustments made to the accounting for an
acquisition in stages
 Adjustments made to the calculation and
allocation of goodwill
 Presentation of comparative information
The key is to ensure that the new facts and circumstances
relating to the adjustments actually existed at the
acquisition date. This is the point in time that all items
should be appropriately valued.
Facts or circumstances that did not exist at the
acquisition date cannot be used to revise management’s
estimate.
9. Test Disclosures
a) Determine whether the presentation and Teams should also inquire with management about
classification (subcategories, current vs. non- whether or not the disclosures are complete and in
current, restricted vs. non-restricted, gross vs. accordance with IFRS 3.
net, etc.) is in accordance with the applicable
financial reporting framework. The disclosure requirements are found under IFRS 3.59-
63.
b) Review the financial statements and the
requirements of applicable international This section will refer teams to Appendix B64-B67, where
standards/interpretations to determine which detailed guidance for specific disclosures is presented.
disclosures relate to this FSLI. Obtain client
schedules and other information used to Also consider referencing the PwC disclosure checklist
prepare these disclosures and agree to audit (ADC) to ensure that the disclosures are appropriate.
work performed and supporting information.
Key disclosures which are required (not complete):
(a) Name and description of the acquiree
(b) Acquisition date
(c) Percentage of voting equity interests acquired
and a description on how the acquirer obtained
control
(d) Primary reason for business combination
167
(e) If goodwill, the qualitative description on why
goodwill was recognized, i.e. expected synergies
or intangible assets which do not qualify for
recognition. If bargain purchase, the amount of
gain recognized and a description of the reasons
why a gain was recognized
(f) Acquisition date fair value of each major class of
assets and liabilities
(g) For transactions recognized outside the business
combination (i.e. acquisition expenses), include a
description of the transaction, the amount and
how it was accounted for
(h) The amounts of revenue and profit or loss of the
acquiree since the acquisition date included in
the consolidated statement of comprehensive
income for the reporting period; and
(i) The revenue and profit or loss of the combined
entity for the current reporting period as though
the acquisition date for all business combinations
that occurred during the year had been as of the
beginning of the annual reporting period.
Note: for disclosures (h) and (i) this is a commonly
omitted disclosure, and is specifically required by the
standard. Although this is pro forma information, it is
required to be audited by engagement teams. AAG
Newsletter 2012-079 addresses auditing pro forma note
disclosure. The note disclosure should also include a
caveat indicating that the information is not necessarily
indicative of future results.
Most oil and gas companies are expected to be able to
determine revenue, and operating profit or loss (i.e. O&G
sales less royalties less operating expenses less
transportation) through the lease operating statements.
Although operating profit or loss is not technically correct
with respect to the standard, it should be readily
available. If this is the case, the calculation should be
disclosed, and that pro forma profit or loss is not
determinable.
Engagement teams should:
1. Obtain an understanding of the acquired entity
for the period included in the pro forma
disclosure
2. Discuss assumptions and adjustments used in
developing pro forma disclosure
3. Assess completeness of the adjustments in pro
forma disclosure
4. Obtain specific representations from
management related to pro forma disclosure.
The level of work required will depend on materiality,
how significant the acquisition is, and timing of the
transaction.
168
Bring in the following step if applicable:
Test business combinations achieved in stages
a) Obtain an understanding of the stages Business combinations achieved in stages can often be
involved in the acquisition and verify complex. Consider the use of experts to assess the
whether a non-controlling interest was held accounting for the transaction. Where such experts are used,
prior to the acquisition. add EGA '*Evaluate use of an expert' to this FSLI.
Engagement teams should conclude on whether the acquirer
held a controlling interest prior to the acquisition.
Questions often arise as to whether there is a ‘business
combination achieved in stages’ when an oil and gas
company acquires multiple working interests in the same
properties i.e. the company is already operating in the area,
and obtains additional working interests in the same wells.
It has been concluded that where a client accounts for each
working interest transaction as a separate business
combination this will not be a business combination
achieved in stages.
b) Verify the previously held equity interest In a business combination achieved in stages, the acquirer
has been remeasured at its acquisition-date remeasures its previously held equity interest in the acquiree
fair value and the gain or loss (including at its acquisition-date fair value and recognizes the resulting
amounts previously recognized in gain or loss, if any, in profit or loss.
revaluation reserves) has been recognized
In prior reporting periods, the acquirer may have recognized
in profit or loss.
changes in the value of its equity interest in the acquiree in
other comprehensive income (for example, because the
investment was classified as available for sale). If so, the
amount that was recognized in other comprehensive income
shall be recognized on the same basis as would be required if
the acquirer had disposed directly of the previously held
equity interest (in profit or loss).
Test contingent liabilities and contingent assets - Business combinations
a) Obtain detailed analysis of contingencies Engagement team should obtain management’s listing of
and commitments of the acquiree, assess any contingent liabilities/ contingent assets identified.
completeness and test mathematical
Consider the completeness of the listing by performing some
accuracy.
or all of the following:
 Review the acquiree's most recent financial
statements
 Consider due diligence reports
 Consider the results of the examination of minutes
 Consider agreements in place
 Consider bank and loan confirmations for items
such as guarantees or other liabilities
 Consider the results of the search for unrecorded
liabilities
 Examine legal correspondence
 Consider compliance with laws and regulations
169
Finally, ensure that the schedule is mathematically accurate
by verifying formulas or recalculating.
There is no recognition threshold for contingent liabilities in
a business combination. For example, a contingent liability
with a chance of occurrence of 10% would be measured in a
business combination even though it would not be measured
under IAS 37’s recognition thresholds. Therefore, all
potential contingent liabilities should be considered in the
client’s analysis.
b) Assess commitments and contingencies Management should individually assess each contingent
liability, contingent asset and provision.
i. Obtain a description of the nature,
current status and the entity's The guidance under IAS 37 applies to these assets/ liabilities
assessment of the potential outcome. acquired. Refer to this standard to determine if they should
be recognized as part of the business combination.
ii. Agree matter to supporting
documentation to determine whether it Teams should consider whether the amounts can be reliably
has been appropriately identified. measured and whether it is like that economic benefits will
be used/ received. Refer to IAS 37 for further considerations.
Contractual commitments should be evaluated by the client
to determine whether a favourable/unfavourable contract
should be recognized. For example, a fixed price drilling
contract might be at favourable rates compared to current
market transactions and result in an intangible recognized.
c) Determine whether accounting estimates If the contingent assets/ liabilities are accounting estimates
made by management in this area that represents a risk of material misstatement, teams
represent a risk of material misstatement. should add EGA '*Substantive procedures - Accounting
estimates'- Business Combinations to the Gather evidence
view.
170
Business combinations are a complex area of accounting, and engagement teams are encouraged to use the
following references for further guidance:
1. Template Manager has a Business Combination Toolkit and Practice Aid available (under PwC
Accounting/Auditing Practice Aids). Procedures are applicable even under US GAAP as there is not
significant divergence in the standards.
2. Refer to PwC Publication – A Global Guide to Accounting for Business Combinations and Noncontrolling
Interests: Application of the U.S. GAAP and IFRS Standards (2013) which is available on the Accounting,
Auditing and SEC Development database. Topic View – By Accounting - 5030 – Business Combinations
and Noncontrolling Interests --> PwC Guides --> 05/21/2013 A Global Guide to Accounting for Business
Combinations and Noncontrolling Interests – 2013 Edition
3. PwC Manual of Accounting, Chapter 25 – Business Combinations and Chapter 5 – Fair Value, Section:
Applying IFRS 13 to Business Combinations
171

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EGA: Detailed analysis – Exploration and evaluation assets .....................................................................................5

3. Property, Plant & Equipment ..................................................................................................................................... 40

EGA: Test additions – Property, plant and equipment............................................................................................. 41

4. Decommissioning provisions...................................................................................................................................... 123

EGA: Test decommissioning provisions .................................................................................................................. 124

EGA: Test Acquisition Transactions ........................................................................................................................ 141

Oil & Gas Value Chain:

The oil and gas value chain can be illustrated as follows:

1. Overview and Background Information

2. Assertions and Likely Sources of Possible Misstatement

4. Detailed EGA Analysis

ii. test the mathematical accuracy of the None

Teams should consider work performed in other

i. trace totals to the analysis of E&E None

iii. examine support for any significant None

iv. test, to an extent to obtain the desired None

1. Overview and Background Information

IFRS 6 states the following with respect to E&E expenditures:

(a) acquisition of rights to explore;

 Invoices are reviewed and approved based on an established delegation of authority.

Test, to an extent based on materiality and inherent risk,

b) Select and test additions, to an extent based on Testing approach

As noted in Section 7041 of the PwC Audit Guide,

Defining the Population

Often, these items are recorded to E&E through journal

Gross versus net accounting

If the client holds 100% interest in all E&E properties,

Typically, operating agreements between working

The concept of ‘gross / net’ accounting can cause

In situations where non-operated additions are

It is often more efficient and effective to trace gross

 Need to complete separate EGA titled “Test well

 Documentation should be included in the audit file

 For both target and non-stat samples, engagement

Consider Dual Purpose Testing

Engagement teams should review invoice details or

Rights and Obligations

 Sample item selected for testing relates to a

Note: Failure to accrue the invoice in the prior

 Engagement teams select an entry from a

In addition to documenting the reference information

 The expenditure is properly capitalized or

Reminder: Costs incurred prior to obtaining the legal

iii. Verify that the additions have been Allocation of Costs

The risk associated with Rights and Obligations may be

Comfort can be obtained by examining relevant

5. Links to Templates and Best Practices

1. Overview and Background Information

Disposals - Test disposals of exploration and evaluation

Engagement teams need to document the procedures

Note: This EGA deals with disposals of E&E and lease

c) Test the calculation of gains or losses on

iv. Re-calculate the gain or loss to verify None

Note: Gains on disposal of assets do not meet the

It is very important that the engagement team obtain an

If costs are tracked by lease and the client’s policy is to

Engagement teams can perform a test that addresses

 Review lease documentation to verify that the

Policy Choice #2 – Account for lease costs at a

In this case, no specific testing is required for lease

Policy Choice #3 – Lease expiries transferred to

In this case, procedures should be performed to test the