au d i t & acco u n t i n g G u i d e Entities With Oil and Gas Producing Activities January 1, 2014 14216-359 AAG_OGP_Title.indd 2/4/14 3:08 PM Copyright © 2014 by American Institute of Certified Public Accountants, Inc New York, NY 10036-8775 All rights reserved For information about the procedure for requesting permission to make copies of any part of this work, please e-mail copyright@aicpa.org with your request Otherwise, requests should be written and mailed to the Permissions ­Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110 AAP ISBN 978-1-94023-542-4 AAG_OGP_Copyright_ebook.indd 2/4/14 3:01 PM iii Preface About AICPA Audit and Accounting Guides This AICPA Audit and Accounting Guide has been developed by the AICPA Entities With Oil and Gas Producing Activities Task Force to assist management in the preparation of their financial statements in conformity with U.S generally accepted accounting principles (GAAP) and to assist practitioners in performing and reporting on their audit engagements The Financial Reporting Executive Committee (FinREC) is the designated senior committee of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting Conforming changes made to the financial accounting and reporting guidance contained in this guide are approved by the FinREC Chair (or his or her designee) Updates made to the financial accounting and reporting guidance in this guide exceeding that of conforming changes are approved by the affirmative vote of at least two-thirds of the members of FinREC This guide does the following: • Identifies certain requirements set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codificationđ (ASC) Describes FinRECs understanding of prevalent or sole industry practice concerning certain issues In addition, this guide may indicate that FinREC expresses a preference for the prevalent or sole industry practice, or it may indicate that FinREC expresses a preference for another practice that is not the prevalent or sole industry practice; alternatively, FinREC may express no view on the matter • Identifies certain other, but not necessarily all, industry practices concerning certain accounting issues without expressing FinREC’s views on them • Provides guidance that has been supported by FinREC on the accounting, reporting, or disclosure treatment of transactions or events that are not set forth in FASB ASC Accounting guidance for nongovernmental entities included in an AICPA Audit and Accounting Guide is a source of nonauthoritative accounting guidance As discussed later in this preface, FASB ASC is the authoritative source of U.S accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC Accounting guidance for governmental entities included in an AICPA Audit and Accounting Guide is a source of authoritative accounting guidance described in category (b) of the hierarchy of GAAP for state and local governmental entities and has been cleared by the Governmental Accounting Standards Board AICPA members should be prepared to justify departures from GAAP as discussed in Rule 203, Accounting Principles (AICPA, Professional Standards, ET sec 203 par .01) Auditing guidance included in an AICPA Audit and Accounting Guide is recognized as an interpretive publication as defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards (AICPA, Professional Standards) Interpretive publications are recommendations on the application of generally accepted auditing standards (GAAS) in specific circumstances, including engagements for entities in specialized industries AAG-OGP iv An interpretive publication is issued under the authority of the AICPA Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with GAAS The members of the ASB have found this guide to be consistent with existing GAAS Although interpretive publications are not auditing standards, AU-C section 200 requires the auditor to consider applicable interpretive publications in planning and performing the audit because interpretive publications are relevant to the proper application of GAAS in specific circumstances If the auditor does not apply the auditing guidance included in an applicable interpretive publication, the auditor should document how the requirements of GAAS were complied with in the circumstances addressed by such auditing guidance The ASB is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to auditing Conforming changes made to the auditing guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and Attest Standards Staff Updates made to the auditing guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the Statements on Auditing Standards Recognition AICPA Senior Committees Auditing Standards Board Mike Santay, ASB Member Bruce P Webb, Chair Financial Reporting Executive Committee Philip J Santarelli, FinREC Member Richard C Paul, Chair The AICPA gratefully acknowledges Christopher O Champion and Randol Justice, who reviewed or otherwise contributed to the development of this edition of the guide AICPA Staff Ivory Bare Technical Manager Accounting and Auditing Publications Guidance Considered in This Edition This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate Authoritative guidance issued through January 1, 2014, has been considered in the development of this edition of the guide Authoritative guidance that is issued and effective for entities with fiscal years ending on or before January 1, 2014, is incorporated directly in the text of this guide Authoritative guidance issued but not yet effective for fiscal years ending on or before January 1, 2014, is being presented as a guidance update A guidance update is a shaded area that contains information on the guidance AAG-OGP v issued but not yet effective and a reference to appendix A, “Guidance Updates,” where appropriate The distinct presentation of this content is intended to aid the reader in differentiating content that may not be effective for the reader’s purposes This includes relevant guidance issued up to and including the following: • FASB Accounting Standards Update (ASU) No 2013-12, Definition of a Public Business Entity: An Addition to the Master Glossary • Statement on Auditing Standards (SAS) No 127, Omnibus Statement on Auditing Standards—2013 (AICPA, Professional Standards) • AU-C section 9265, Communicating Internal Control Related Matters Identified in an Audit: Auditing Interpretations of Section 265 (AICPA, Professional Standards) • Statement of Position 13-2, Performing Agreed-Upon Procedures Engagements That Address the Completeness, Mapping, Consistency, or Structure of XBRL-Formatted Information (AICPA, Technical Practice Aids, AUD sec 14,470) • PCAOB Auditing Standard No 16, Communications with Audit Committees (AICPA, PCAOB Standards and Related Rules, Auditing Standards) Users of this guide should consider guidance issued subsequent to those items listed previously to determine their effect on entities covered by this guide In determining the applicability of recently issued guidance, its effective date should also be considered The changes made to this edition of the guide are identified in the Schedule of Changes appendix The changes not include all those that might be considered necessary if the guide was subjected to a comprehensive review and revision FASB ASC Pending Content Presentation of Pending Content in FASB ASC Amendments to FASB ASC (issued in the form of ASUs) are initially incorporated into FASB ASC in “pending content” boxes below the paragraphs being amended with links to the transition information The pending content boxes are meant to provide users with information about how the guidance in a paragraph will change as a result of the new guidance Pending content applies to different entities at different times due to varying fiscal year-ends, and because certain guidance may be effective on different dates for public and nonpublic entities As such, FASB maintains amended guidance in pending content boxes within FASB ASC until the roll-off date Generally, the roll-off date is six months following the latest fiscal year end for which the original guidance being amended could still be applied Presentation of FASB ASC Pending Content in AICPA Audit and Accounting Guides Amended FASB ASC guidance that is included in pending content boxes in FASB ASC on January 1, 2014, is referenced as “Pending Content” in this guide Readers should be aware that “Pending Content” referenced in this guide will eventually be subjected to FASB’s roll-off process and no longer be labeled as “Pending Content” in FASB ASC (as discussed in the previous paragraph) AAG-OGP vi Defining Professional Responsibilities AICPA professional standards for audit engagements use the following two categories of professional requirements, identified by specific terms, to describe the degree of responsibility it imposes on auditors: • Unconditional requirements The auditor must comply with an unconditional requirement in all cases in which such requirement is relevant GAAS uses the word must to indicate an unconditional requirement • Presumptively mandatory requirements The auditor must comply with a presumptively mandatory requirement in all cases in which such a requirement is relevant except in rare circumstances GAAS uses the word should to indicate a presumptively mandatory requirement In rare circumstances, the auditor may judge it necessary to depart from a relevant presumptively mandatory requirement In such circumstances, the auditor should perform alternative audit procedures to achieve the intent of that requirement The need for the auditor to depart from a relevant presumptively mandatory requirement is expected to arise only when the requirement is for a specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be ineffective in achieving the intent of the requirement Prior to SAS No 122, Statements on Auditing Standards: Clarification and Recodification (AICPA, Professional Standards), the phrase is required to or requires was used to express an unconditional requirement in GAAS (equivalent to must) With the issuance of SAS No 122, the phrases is required to and requires does not convey a requirement or the degree of responsibility it imposes on auditors Instead those terms are used to express that a requirement exists The terms are typically used in the clarified auditing standards to indicate that a requirement exists elsewhere in GAAS Terms Used to Define Professional Requirements in This AICPA Audit and Accounting Guide Any requirements described in this guide are normally referenced to the applicable standards or regulations from which they are derived Generally the terms used in this guide describing the professional requirements of the referenced standard setter (for example, the ASB) are the same as those used in the applicable standards or regulations (for example, must or should) However, where the accounting requirements are derived from FASB ASC, this guide uses should, whereas FASB uses shall The Notice to Constituents in FASB ASC states that FASB considers the terms should and shall to be comparable terms Readers should refer to the applicable standards and regulations for more information on the requirements imposed by the use of the various terms used to define professional requirements in the context of the standards and regulations in which they appear Certain exceptions apply to these general rules, particularly in those circumstances where the guide describes prevailing or preferred industry practices for the application of a standard or regulation In these circumstances, the applicable senior committee responsible for reviewing the guide’s content believes the guidance contained herein is appropriate for the circumstances AAG-OGP vii Applicability of Generally Accepted Auditing Standards and PCAOB Standards Appendix A, “Council Resolution Designating Bodies to Promulgate Technical Standards,” to Rule 202, Compliance with Standards (AICPA, Professional Standards), of the AICPA Code of Professional Conduct recognizes both the ASB and the PCAOB as standard setting bodies designated to promulgate auditing, attestation, and quality control standards Paragraph 01 of Rule 202 requires an AICPA member who performs an audit to comply with the applicable standards Audits of the financial statements of those entities not subject to the oversight authority of the PCAOB (that is, those entities not within its jurisdiction— hereinafter referred to as nonissuers) are to be conducted in accordance with GAAS as issued by the ASB, a senior committee of the AICPA The ASB develops and issues standards in the form of SASs through a due process that includes deliberation in meetings open to the public, public exposure of proposed SASs, and a formal vote The SASs and their related interpretations are codified in Professional Standards Audits of the financial statements of those entities subject to the oversight authority of the PCAOB (that is, those entities within its jurisdiction— hereinafter referred to as issuers) are to be conducted in accordance with standards established by the PCAOB, a private sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 The SEC has oversight authority over the PCAOB, including the approval of its rules, standards, and budget References to Professional Standards In citing GAAS and their related interpretations, references use section numbers within the codification of currently effective SASs and not the original statement number, as appropriate For example, SAS No 126 is referred to as AU-C section 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (AICPA, Professional Standards) In those sections of the guides that refer to specific auditing standards of the PCAOB, references are made to the AICPA’s PCAOB Standards and Related Rules publication AICPA.org Website The AICPA encourages you to visit its website at www.aicpa.org and the Financial Reporting Center at www.aicpa.org/FRC The Financial Reporting Center supports members in the execution of high-quality financial reporting Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process and provides timely and relevant news, guidance, and examples supporting the financial reporting process, including accounting, preparing financial statements, and performing compilation, review, audit, attest, or assurance and advisory engagements Certain content on the AICPA’s website referenced in this guide may be restricted to AICPA members only Select Recent Developments Significant to This Guide ASB’s Clarity Project To address concerns over the clarity, length, and complexity of its standards, the ASB redrafted standards for clarity and also converged the standards with the AAG-OGP viii International Standards on Auditing, issued by the International Auditing and Assurance Standards Board As part of redrafting the standards, they now specify more clearly the objectives of the auditor and the requirements with which the auditor has to comply when conducting an audit in accordance with GAAS The clarified auditing standards are now fully effective As part of the clarity project the “AU-C” identifier was established to avoid confusion with references to existing “AU” sections The AU-C identifier had been scheduled to revert back to the AU identifier at the end of 2013, by which time the previous AU sections would be superseded for all engagements However, in response to user requests, the AU-C identifier will be retained indefinitely The superseded AU sections were removed from Professional Standards at the end of 2013, as scheduled International Financial Reporting Standards Appendix A to Rule 202 of the AICPA Code of Professional Conduct recognizes the International Accounting Standards Board (IASB) as a designated standard setting body to promulgate accounting principles As such, International Financial Reporting Standards (IFRS) are recognized as an acceptable accounting framework, along with other acceptable accounting frameworks, such as U.S GAAP This means that private entities in the U.S may prepare their financial statements in accordance with U.S GAAP as promulgated by FASB; a special purpose framework (such as other comprehensive basis of accounting), or IFRS, among others However, domestic issuers are currently required to follow U.S GAAP and rules and regulations of the SEC In contrast, foreign private issuers may present their financial statements in accordance with IFRS as issued by the IASB without a reconciliation to U.S GAAP, or in accordance with non-IFRS home-country GAAP reconciled to U.S GAAP as permitted by the SEC The growing trend towards convergence of IFRS and U.S GAAP accounting standards represents a fundamental change for the U.S accounting profession Acceptance of a single set of high-quality accounting standards for worldwide use by public companies has been gaining momentum around the globe for the past few years See appendix E, “International Financial Reporting Standards,” of this guide for a discerning look at the status of convergence with IFRS in the United States and the important issues that accounting professionals need to consider now Applicability of Requirements of the Sarbanes-Oxley Act of 2002 Publicly held companies and other issuers (see the following definition) are subject to the provisions of the Sarbanes-Oxley Act of 2002 (SOX) and related SEC regulations implementing SOX Their outside auditors are also subject to the rules and standards issued by the PCAOB Presented in the following paragraph is a summary of certain key areas addressed by SOX, the SEC, and the PCAOB that are particularly relevant to the preparation and issuance of an issuer’s financial statements and the preparation and issuance of an audit report on those financial statements However, the provisions of SOX, the regulations of the SEC, and the rules and standards of the PCAOB are extensive and are not all addressed in this section or in this guide AAG-OGP Table of Contents ix TABLE OF CONTENTS Chapter Paragraph Overview of the Industry The Industry’s History Development of the Oil Industry Development of the Natural Gas Industry Prices for Oil and Gas Recent Developments in the Oil and Gas Industry Origin and Accumulation of Oil and Gas Oil and Gas Reserves The SEC’s Definition of Proved Reserves The Society of Petroleum Engineers’ Definitions of Reserves Determination of Reserves Operations in the Upstream Petroleum Industry Oil Sands Sources of Capital and Organizational Structure of Oil and Gas Entities Joint Interest Arrangements Limited Partnerships Royalty Trusts Other Sources of Capital History of Accounting for Oil and Gas Producing Activities International Standards of Accounting for Oil and Gas 01-.78 01-.20 02-.07 08-.10 11-.13 14-.20 21-.29 30-.48 33-.37 Primary Business Activities of the Industry Acquisition of Mineral Interests Important Provisions in Lease Contracts Frequently Encountered Transactions for Transferring Mineral Interests Documents and Files Relating to Mineral Interests Basic Concepts of Prospecting and Exploration Activities Prospecting and Exploring for Potential Hydrocarbon-Bearing Structures Other Significant Aspects of Exploration Activities Drilling and Development The Drilling Contract Completing the Well or Plugging and Abandoning the Well Developing the Reservoir The Regulatory Environment Production Workovers Enhanced Recovery Methods 01-.97 01-.47 10-.28 38-.40 41-.48 49-.56 54-.56 57-.66 60 61-.63 64-.65 66 67-.76 77-.78 29-.38 39-.47 48-.66 52-.59 60-.66 67-.85 74-.77 78-.82 83-.84 85 86-.97 94-.95 96-.97 Contents x Table of Contents Chapter Paragraph Accounting for Common Oil and Gas Ownership Arrangements Ownership Arrangements Ownership Arrangements—Mineral Interests Other Arrangements Accounting Models Variable Interest Model (ЉVariable Interest EntitiesЉ Subsections of FASB ASC 810-10) Voting Interest Model Special Considerations LLCs Partnerships General Guidance on the Consolidation, Equity, and Cost Methods Consolidation Method Equity Method Cost Method Successful Efforts Method and General Accounting for Oil and Gas Activities General Accounting for Acquisition, Exploration, and Development Costs Acquisition Costs Exploration Costs Development Costs Interest Capitalization Amortization of Capitalized Costs Impairment Tests for Capitalized Costs Unproved Properties Proved Properties Conveyances Accounting for Production Revenue Inventory Operating Expenses Asset Retirements, Environmental Liabilities, Abandonments, Involuntary Conversions, Expropriations, and Joint and Several Liabilities AROs Environmental Liabilities Abandonments Involuntary Conversions Contents 01-.22 01-.04 02 03-.04 05-.06 05 06 07-.12 07 08-.12 13-.22 13-.15 16-.21 22 01-.160 01-.08 09-.23 09 10-.16 17-.22 23 24-.30 31-.40 32-.36 37-.40 41-.50 51-.69 52-.62 63-.66 67-.69 70-.87 70-.75 76 77-.78 79-.84 242 Entities With Oil and Gas Producing Activities Title Securities And Exchange Commission Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance Securities Exchange Act of 1934 (The 1934 Act) Rule 12b-2 Rule 13(a)-15(f) SOP 78-9, Accounting For Investments In Real Estate Ventures AAG-OGP SEC Paragraphs 4.152 1.20, 4.157, 9.11 9.15 9.06-.07 3.21 Subject Index 243 Subject Index A ABANDONED WELLS Asset retirement obligations 4.70–.75 Full cost accounting 5.13, 5.37 International operations 6.36–.40 Successful efforts accounting 4.77–.78 ACCOUNTING ESTIMATES 8.69–.76 ACCOUNTING MODELS 3.05–.06 Variable interest model 3.05 Voting interest model 3.05, 3.06 ACCOUNTING POLICY DISCLOSURES 4.143 ACCRUALS 9.41 ACQUISITION COSTS Audit considerations 8.90–.91, 8.95–.98 Full cost accounting 5.07 Successful efforts accounting 4.03, 4.09 AD VALOREM TAXES 7.26–.27 ADVANCES UNDER CASH CALLS 9.36 AERIAL PHOTOGRAPHY 2.53–.57 AFE See authorization for expenditure ALLOCATION OF INTEREST 8.124 AMERICAN JOBS CREATION ACT (2004) 7.30 AMERICAN PETROLEUM INSTITUTE (API) 2.69 AMORTIZATION Capitalized costs 4.24–.30, 5.09–.18 Full cost accounting 5.09–.18 Intangible drilling and development costs 7.09 Successful efforts accounting 4.24–.30 ANTI-BRIBERY LAWS 6.41–.42, 8.47 API See American Petroleum Institute ARAB OIL EMBARGO (1973) 1.11 ARO See asset retirement obligations ASSERTIONS 8.21–.24 ASSET GROUPING, IMPAIRMENT ASSESSMENT 8.113 ASSET HELD FOR SALE 4.90–.96 ASSET RETIREMENT OBLIGATIONS (ARO) Audit considerations 8.151 Capitalized cost impairment tests 4.38–.40 Carrying Amount 4.03 Full cost accounting 5.21, 5.38–.42 Internal controls 9.46 International operations 6.35–.40 Revisions and settlements 5.38–.42 Successful efforts accounting 4.03, 4.38–.40, 4.70–.75, 4.143 ASSETS Acquisitions 7.19–.21 Fair value 4.121–.123 Measurement controls 9.27 AUDIT CONSIDERATIONS 8.01–.175 Accounting estimates and related disclosures 8.69–.76 Asset retirement obligations 8.151 Audit objectives 8.04–.05 Audit planning 8.07–.08 Audit risk 8.09–.13 Authorization for expenditure 8.94 Capitalized overhead costs 8.103–.104 Cash calls 8.136 Cash flows 8.158–.159 Collectability 8.137–.138 Commitments and contingencies 8.160–.161 Conveyances 8.117–.121 Depreciation, depletion, and amortization (DD&A) 8.108–.110 Derivatives and hedging 8.154–.156 Division of interest 8.99–.100 Documentation 8.84 Dry hole costs 8.105 Evidence See audit evidence Fair value measurements 8.157 Imbalances 8.135 Impairment 8.12–.116 Inventory 8.139–.140 Material misstatements 8.80–.83 Materiality 8.14–.17 Operating expenses 8.141–.143 Operator/nonoperator 8.35–.38 Payables 8.144–.150 Pricing regulations and contractual agreements 8.128 Procedure design and performance 8.60–.68 Production 8.122–.143 Production sharing contracts 8.130 Professional skepticism 8.06 Property costs 8.93 Receivables 8.131–.138 Related parties 8.163–.164 Revenue 8.99–.100, 8.122–.130 Risk assessment 8.09–.13, 8.162 Specialists, use of 8.18–.20 Specific audit areas 8.89–.157 Statement of cash flows 8.158–.159 Supplementary oil and gas reserves 8.165–.175 Suspended wells 8.106 Taxation 8.152–.153 Uncertainties 8.162 Wells in progress 8.107 Audit & Accounting Guide: Entities With Oil and Gas Producing Activities, First Edition AICPA © 2014 American Institute of Certified Public Accountants, Inc Published 2014 by John Wiley & Sons, Inc AAG-OGP AUD 244 Entities With Oil and Gas Producing Activities AUDIT EVIDENCE Additional considerations 8.85–.87 Derivatives and hedging 8.155 Operator/nonoperator 8.37 Specialists 8.18 Sufficiency and appropriateness 8.77 AUDIT PLANNING, GENERALLY 8.07–.08 AUDIT RISK 8.09–.13 Assessment 8.29–.31, 8.56–.59 Emerging markets 8.41 Foreign Corrupt Practices Act 8.47–.48 Geographical considerations 8.46 Internal control 8.49–.55 Operations and related business 8.42–.45 Uncertainties 8.162 AUDITING STANDARDS Fair value measurements updates 4.118–.138 Overview 8.01–.8.03 CAPITALIZED COSTS—continued Exploration costs 4.10–.17 Full cost accounting 5.02, 5.04, 5.08–.35 Impairment tests 4.31–.40, 5.19–.35 Intangible drilling and development costs 7.09 Interest capitalization 4.23, 5.08 Overhead 8.103–.104, 9.43 Successful efforts accounting 4.03, 4.10–.42 CAPITALIZED INTEREST 9.44 CASH CALLS 8.136, 9.36 CASH FLOWS 8.158–.159 CASING POINT 2.78 CEILING TESTS Capitalized cost impairment 5.19–.28 New country applications 5.29–.35 COLLECTABILITY Audit considerations 8.137–.138 Of joint interest receivables 9.37 AUTHORIZATION FOR EXPENDITURE (AFE) Audit considerations 8.94, 8.145 Documentation 2.39–.47 Internal controls 9.33–.34 Lease acquisition 9.24 Mineral interests 2.39–.47, 9.24 COMMITMENTS 8.160–.161, 9.74 B COMMODITY DERIVATIVES Full cost accounting 5.57 Internal controls 9.63 Successful efforts accounting 4.106–.117 BASIC ROYALTY INTERESTS 2.18 BASIC SEDIMENT AND WATER (BS&W) 2.87 COMMITTEE OF SPONSORING ORGANIZATIONS OF THE TREADWAY COMMISSION (COSO) 9.02–.03, 9.05, 9.12, 9.17, 9.19, 9.21 COMMODITIES, DEFINED 4.95 BITUMEN 1.54 COMMODITY FORWARD CONTRACTS BORROWINGS, PRODUCTION PURCHASERS 8.148 COMMUNICATION Internal controls 9.04, 9.20–.21 Those charged with governance 8.88 BS&W See basic sediment and water BUSINESS ACTIVITIES, PRIMARY Drilling and development Mineral interests acquisitions Production Prospecting and exploration 2.01–.97 2.67–.85 2.01–.47 2.86–.97 2.48–.66 BUSINESS COMBINATIONS Full cost accounting 5.50–.55 Successful efforts accounting 4.97–.102 Temporary differences, asset acquisitions 7.19–.21 4.114 COMPENSATION, EXPATRIATE 9.66 COMPENSATORY ROYALTIES 2.19 COMPLETENESS, ASSET RETIREMENT OBLIGATIONS 8.151 COMPLEX SPREADSHEETS, COMPUTERBASED CONTROLS 9.72 COMPLIANCE CONTROLS 9.79–.81 COMPONENT OF AN ENTITY 4.90, 5.49, 8.121 COMPUTER-BASED CONTROLS 9.70–.72 C CALCULATIONS, COMPUTER-BASED CONTROLS 9.71 CAPITAL REQUIREMENTS Conveyances 4.41–.50 Organizational structure and 1.57–.66 CAPITALIZED COSTS Acquisition costs 4.09 Amortization 4.24–.30, 5.09–.18 Depletion deduction 7.11–.15 Development costs 4.17–.22 Disclosure requirements 4.144–.145, 4.149 AAG-OGP AUD CONCESSIONS, INTERNATIONAL CONTRACTS 6.06 CONSOLIDATION METHOD ACCOUNTING Capital cost amortization 5.12 Ownership arrangements 3.13–.15 Pro rata consolidation 3.17 CONTINGENCIES 8.160–.161 CONTINUOUS DRILLING 2.26 CONTRACT REVIEW 9.69 CONTRACTUAL ARRANGEMENTS See also lease agreements (contracts) Audit considerations 8.128 Subject Index CONTRACTUAL ARRANGEMENTS—continued Concessions 6.06 Exploration costs 6.09 Internal controls 9.65 International oil and gas industry 6.05–.14 Production sharing 6.07–.08 Service contracts 6.10–.11 CONTROL, DEFINED 3.14 245 DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A)—continued Successful efforts method See successful efforts accounting, for DD&A DERECOGNITION 4.43 DERIVATIVE CONTRACTS 4.106–.117, 8.154–.156 CONTROL ACTIVITIES 9.04, 9.21 DEVELOPED OIL AND GAS RESERVES 1.36 CONTROL ENVIRONMENT 9.04, 9.17 DEVELOPMENT ACTIVITIES 8.90–.91 CONVERSIONS, INVOLUNTARY 4.79–.84 DEVELOPMENT COSTS Capitalized cost amortization 4.27–.28 Defined 4.21–.22 Full cost accounting 5.07 Intangible drilling and development costs 7.06–.10 Internal controls 9.33–.34, 9.50 Successful efforts accounting 4.17–.22, 4.27–.28 CONVEYANCES Audit considerations 8.117–.121 Full cost accounting 5.02, 5.45–.48 Income taxes 7.18 Successful efforts accounting 4.41–.50 COPAS See Council of Petroleum Accountants Societies CORE DRILLING 2.63 CORPORATE ENTITIES 3.17–.18 COSO See Committee of Sponsoring Organizations of the Treadway Commission COST BASIS ACCOUNTING 3.22, 4.51–.69 COST CENTER CEILING TEST 5.19–.28 COST DEPLETION 7.13–.15 COST RECOVERY OIL 6.09 COSTLESS COLLAR 4.111 COUNCIL OF PETROLEUM ACCOUNTANTS SOCIETIES (COPAS) 2.41, 2.45, 4.68, 9.47 CURRENT PERIOD PRODUCTION, CAPITAL COST AMORTIZATION 4.26 D DAY RATE CONTRACT 2.76 DD&A See depreciation, depletion, and amortization DECONSOLIDATION 4.43 DELAY COSTS 4.15 DELAY RENTALS 2.16, 4.01, 8.97 DEPLETION DEDUCTION, INCOME TAXES 7.11–.15 DEPRECIATION Capitalized cost amortization 4.25 Support equipment and facilities 8.110 DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A) Audit considerations 8.108–.110 Capital cost amortization 5.09, 5.13, 5.15 Full cost method 5.09, 5.13, 5.15, 8.109 Internal controls 9.61–.62 Reserves estimation 9.38 DEVELOPMENT OPERATIONS Oil and gas industry 2.67–.85 Reservoir development 2.83–.84 DEVELOPMENT WELLS 2.67 DISCLOSURE REQUIREMENTS Accounting estimates 8.69–.76 Accounting policies 4.143 Annual 4.144, 4.146–.150 Derivative contracts 4.117 Exchange offer 4.159–.160 Fair value measurements 4.135–.138 FASB ASC 932 4.146–.152 Financial statement controls 9.73–.81 Full cost accounting 4.153, 5.58–.61 Generally 4.139–.142 Interim 4.145, 4.151 Oil and gas entities 4.139–.160 Oil and gas industry 4.132–.160 Reserve quantity and value 8.165–.171 SEC requirements for 4.154–.160 Successful efforts accounting 4.139–.160 Suspended wells 4.144–.145 Uncertain tax positions 7.22–.24 DISCONTINUED OPERATIONS Full cost accounting 5.49 Internal controls 9.28 Successful efforts accounting 4.90–.96 DISCOUNTED FUTURE NET CASH FLOWS 4.149, 8.114 DISMANTLEMENT COSTS Full cost accounting 5.13 International operations 6.36–.40 DISTRIBUTION OF REVENUE 8.144–.147 DIVISION OF INTEREST Audit considerations 8.99–.100 Internal controls 9.29–.32 DIVISION ORDERS 2.46–.47 AAG-OGP DIV 246 Entities With Oil and Gas Producing Activities DOCUMENTATION AND RECORD KEEPING Audit considerations 8.84 Authorization for expenditures 2.39 Division orders 2.46 Joint interest audits 2.44–.45 Joint interest billing 2.42 Joint interest operations 2.41 Mineral interests 2.39–.47 Nonoperators 2.43 Operating agreements 2.40 ENTITLEMENT METHODS Audit considerations 8.126 Revenue recognition 4.58–.59 ENVIRONMENTAL LIABILITIES 4.76 Disclosures 9.75 Material misstatements 8.25–.55 E&P See exploration and production (E&P) entity EQUIPMENT LEASING 4.88–.89 DOMESTIC OIL PRODUCTION TAX CREDIT 7.30 EQUIPMENT SECURITY, INTERNAL CONTROLS 9.47 DOWNSTREAM ACTIVITIES 1.50 EQUITY METHOD ACCOUNTING 3.16–.21, 5.12 DOWNSTREAM PETROLEUM OPERATIONS 1.50 DRAINAGE CLAUSE 2.24 DRILLING AND DEVELOPMENT 2.67–.85 Carbon tool rigs 2.71 Contracts 2.74–.77 Development wells 2.67 Drilling contract 2.74–.77 Environmental aspects 2.69 Exploratory wells 2.67, 4.13 Geological information 2.70 Horizontal drilling 2.73 Intangible drilling and development costs 7.06–.10 Production information 2.70 Regulatory environment 2.68, 2.85 Reservoir development 2.83–.84 Rotary drilling 2.72 State and federal regulations 2.68 Successful efforts accounting 4.03 Undeveloped oil and gas reserves 1.37 Well abandonment or plugging 2.78–.82 DRILLING CONTRACT 2.74–.77 DRILLING OBLIGATION, MINERAL INTEREST LEASE AGREEMENT 2.13 DRY HOLE DEVELOPMENT Audit considerations 8.105 Contribution 2.65 Development costs 4.18 Full cost accounting 5.30–.35 Internal controls 9.42 Successful efforts and general accounting 4.01 DUE DILIGENCE, INTERNAL CONTROLS 9.26 E ECONOMIC INTEREST Depletion deduction 7.12–.15 International production sharing 6.33 EMBEDDED DERIVATIVES 4.106 ENHANCED RECOVERY METHODS Production 2.96–.97 Tax credit 7.28 AAG-OGP DOC ESTIMATES, ACCOUNTING DISCLOSURE REQUIREMENTS 8.69–.76 ESTIMATES OF RESERVES Disclosure 4.158, 9.38 Precision of 1.47 EXCHANGE OFFER DISCLOSURES 4.159–.160 EXCISE TAXES, PRODUCTION ACCOUNTING 4.54 EXCLUDED COSTS 5.15–.18 EXPATRIATE COMPENSATION 9.66 EXPENSES Internal controls 9.59 Operating 4.67–.69, 8.141–.143 EXPLORATION ACTIVITIES 8.90–.91 EXPLORATION COSTS Disclosure requirements 4.149 Dry holes 4.18 Full cost accounting 5.07 Internal controls 9.33–.34, 9.50 Production sharing contracts 6.09 Successful efforts accounting 4.01, 4.03, 4.10–.17, 4.18, 4.149 EXPLORATORY WELLS Audit considerations 8.107 Cost disclosures 4.144 Oil and gas industry 2.67 EXPROPRIATIONS 4.85 F FAIR VALUE Asset applications 4.121–.123 Asset retirement obligations 4.70–.75 Assumptions regarding 4.120 Audit considerations 8.157 Defined 4.118–.120 Derivative commodity contracts 4.108 Disclosures 4.135–.138 Full cost accounting 5.43 Guidance updates, summary Appendix A Hierarchy 4.132–.134 Inventory accounting 4.66 247 Subject Index FAIR VALUE—continued Liabilities and instrument applications 4.124–.126 Measurement updates 4.118–.138, Appendix A Present value techniques 4.130–.131 Valuation techniques 4.127–.129 FAULT TRAP, OIL AND GAS DEPOSITS 1.26 FCPA See Foreign Corrupt Practices Act FEDERALLY-OWNED PROPERTIES 2.08 FEE INTEREST IN PROPERTY 2.01–.03 FINANCIAL REPORTING See also financial statements Internal controls 9.05–.07 International standards Appendix E FINANCIAL REPORTING EXECUTIVE COMMITTEE (FINREC) Full cost accounting 5.24, 5.41, 5.49 Oil and gas industry accounting 1.72, 4.06, 5.24, 5.41 Successful efforts accounting 4.06 FINANCIAL STATEMENTS See also material misstatements, risk of Fraud 8.27 Internal controls 9.73–.81 Limited partnerships 1.63 Materiality 8.15–.17 Upstream petroleum industry 1.49 FINREC See Financial Reporting Executive Committee FISCAL SYSTEMS, INTERNATIONAL OIL CONTRACTS 6.06 FIXED RENTALS 2.17 FOOTAGE RATE CONTRACT 2.75 FOREIGN CORRUPT PRACTICES ACT (FCPA, 1977) 6.41–.43, 8.47–.48, 9.67 FOREIGN EXCHANGE, INTERNATIONAL OIL OPERATIONS 7.37 FULL COST ACCOUNTING—continued Acquisition, exploration and development costs 5.07–.08 Amortization of capitalized cost 5.09–.18 Asset retirement obligations revisions and settlements 5.38–.42 Audit considerations 8.109–.110 Capitalized costs 5.02, 5.04, 5.08–.35 Capitalized overhead costs 8.104 Commodity derivatives 5.57 Conveyances 5.45–.48 Cost center ceiling test 5.19–.28 Depreciation, depletion, and amortization 8.109 Disclosure requirements 4.153, 5.58–.61 Discontinued operations 5.49 Excluded costs 5.15–.18 Fair value measurements 5.43 Generally 4.01–.08, 5.01–.06 Goodwill 5.50–.55 Impairment tests for capitalized cost 5.19–.35 Income 5.56 Interest capitalization 5.08 Lease arrangements 5.44 Management fees 5.56 New country applications 5.29–.35 Production 5.36 Summary Appendix C Unevaluated (unproved) property abandonment 5.37 FUTURE NET CASH FLOWS 4.149, 8.114 FUTURE NET RESERVES, CAPITALIZED COST IMPAIRMENT 5.19–.28 FUTURES CONTRACTS 4.113–.114 G GAAP See generally accepted accounting principles GAAS See generally accepted auditing standards FOREIGN JURISDICTIONS, TAXATION IN 7.33–.34 GAINS Conveyances and 4.45–.47 Involuntary conversions 4.80–.84 FOUR DIMENSION SEISMIC PROCESS 2.66 GENERAL PARTNERSHIPS 3.09, 3.12 FRACKING (HYDRAULIC FRACTURING) 1.10 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) Accounting for oil and gas producing activities 1.64, 1.67 International oil and gas industry 6.01–.04 Involuntary conversions 4.79–.84 Oil and gas reserves, disclosure 1.31–.32, 1.43 Royalty trusts 1.65 FRAUD, CONSIDERATIONS OF 8.27 FREQUENTLY ENCOUNTERED TRANSACTIONS 2.29–.38 Lease burden 2.35 Net profit interest 2.32, 2.34, 2.37 Net revenue interest 2.32–.33, 2.37 Overriding royalty interest 2.31 Production payments 2.36 Volumetric production payment 2.36–.37 Working interest purchase or sale 2.29–.30 FULL COST, DEFINED 1.76 FULL COST ACCOUNTING 5.01–.61 GENERALLY ACCEPTED AUDITING STANDARDS (GAAS) 8.03, 8.07, 8.27 GEOGRAPHIC AREAS Audit risk assessment 8.46 Disclosure requirements 4.155–.160 AAG-OGP GEO 248 Entities With Oil and Gas Producing Activities GEOGRAPHIC AREAS—continued Early oil and gas development 1.02–.10 Recent oil and gas development 1.14–.20 GEOLOGICAL AND GEOPHYSICAL (G&G) EXPLORATION Development costs 4.19–.22 Disclosure requirements 4.149 Full cost accounting 5.29–.35 Mineral interests 2.48–.66 Successful efforts accounting 4.01, 4.10–.17 IMPAIRMENT TESTS, CAPITALIZED COSTS Audit considerations 8.12–.116 Cost center ceiling test 5.19–.28 Excluded costs 5.16–.18 Full cost accounting 5.16–.35 Internal controls 9.48–.49 New country applications 5.29–.35 Proved properties 4.37–.40 Successful efforts accounting 4.31–.40, 4.85 Unproved properties 4.32–.36, 9.48 G&G See geological and geophysical (G&G) exploration IN-SUBSTANCE COMMON STOCK 3.19 GOE See government-owned entities INCOME APPROACH FOR VALUATION GOODWILL Full cost accounting 5.50–.55, 5.54 Impaired 4.103–.104 Successful efforts accounting 4.97–.102 INCOME TAXES 7.04–.25 Asset acquisitions 7.19–.21 Common temporary differences 7.16–.17 Conveyances 7.18 Defined 6.21 Depletion 7.11–.15 Domestic production income deduction 7.30 Foreign tax jurisdictions 7.33–.34 Intangible drilling and development costs 7.06–.10 International oil and gas industry 6.15–.16, 6.21–.28 Net operating losses 7.25 Uncertain tax positions 7.22–.24 GOVERNMENT-OWNED ENTITIES (GOE) Asset retirement operations 6.36–.40 Income taxes 6.24, 6.27 Production sharing contracts 6.08–.11 GUARANTEED/MINIMUM ROYALTIES 2.22 H HANDLING COSTS 4.55–.57 HBP See held by production HEATER-TREATER 2.88 HEDGING 4.107, 8.154–.156 HELD BY PRODUCTION (HBP) 2.23 HELD FOR SALE 9.28 HORIZONTAL DRILLING 2.73 HOST COUNTRIES, INTERNATIONAL OIL AND GAS INDUSTRY 6.15–.16, 6.21–.28 HYDRAULIC FRACTURING (FRACKING) 1.10 HYDROCARBON ALTERNATIVES, SOURCES OF 1.19 HYDROCARBON-BEARING STRUCTURES, PROSPECTING AND EXPLORATION 2.52–.66 HYDROCARBON SUPPLY DISRUPTION 1.15–.16 I IASB See International Accounting Standards Board IDC See intangible drilling and development costs IFRS See International Financial Reporting Standards IMBALANCE Production accounting 4.61 Revenue recognition 4.59 IMPAIRMENT OF GOODWILL 4.103–.104 AAG-OGP GEO INCOME 5.56 4.127 INDEPENDENT PRODUCER 7.05 INDEPENDENTS IN PETROLEUM OPERATIONS 1.51 INFORMATION COMMUNICATION, INTERNAL CONTROL 9.04 INPUTS Asset retirement obligations 8.151 In business 4.98 Fair value hierarchy 4.132–.133 INSTRUMENTS, FAIR VALUE MEASUREMENTS 4.124–.126 INTANGIBLE DRILLING AND DEVELOPMENT COSTS (IDCS) 7.06–.10 INTEGRATED OIL COMPANY 7.05, 7.08 INTEREST CAPITALIZATION 9.44 Audit considerations 8.101–.102 Full cost accounting 5.08 Successful efforts accounting 4.23 INTERFACES, COMPUTER-BASED CONTROLS 9.70 INTERIM FINANCIAL STATEMENTS 4.144 INTERNAL ACQUISITION, DEVELOPMENT AND EXPLORATION, SUCCESSFUL EFFORTS ACCOUNTING 4.03 INTERNAL CONTROL 9.01–.81 Commodity derivatives 9.63 Computer-based controls 9.70–.72 Contract review 9.69 Defined 8.49, 9.03, 9.06 249 Subject Index INTERNAL CONTROL—continued Defined, by SEC 9.12 Entity investments 9.64 Exploration and development 9.33–.49, 9.50 Financial reporting 9.05–.07 Financial statement disclosures 9.73–.81 Framework and components 9.04 International operations 9.65–.67 Inventory 9.51–.60 Management evaluation 9.17–.22 Material misstatement 8.49–.55 Mineral interests acquisition 9.24–.32 Nonpublic entity audits 9.08–.09 Oil and gas entity activities 9.24–.72 Production 9.51–.62 Public entity reporting requirements 9.12–.16 Related party transactions 9.68 Reserve estimates disclosure 4.158, 9.38 Tax and regulatory compliance 9.79–.81 INTERNAL REVENUE CODE (IRC) Definitions 7.05 Oil and gas taxation 7.02 INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) 1.77–.78 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) 1.77–.78, Appendix E INTERNATIONAL OIL AND GAS INDUSTRY, ACCOUNTING FOR 6.01–.43 Asset retirement obligations 6.35–.40 Contractual arrangements 6.05–.14 Foreign Corrupt Practices Act 6.41–.42 Income taxes 6.15–.16, 6.21–.28 Internal controls 9.65–.67 Overview 6.01–.04 Production taxes 6.15–.16, 6.19–.20 Proved reserves reporting 6.29–.34 Royalties 6.15–.18 Taxation 7.10, 7.31–.37 INVENTORY Audit considerations 8.139–.140 Internal controls 9.47, 9.51–.60, 9.55 Product inventory 9.55 Production accounting 4.63–.69 INVESTEE ENTITY 3.03 INVESTMENTS Cost basis accounting Equity method accounting In-substance common stock Internal controls Limited partnerships 3.22 3.18 3.19 9.64 3.21 INVESTOR ENTITY 3.03 J JIB JOA See joint interest billing See joint operating agreements JOINT AND SEVERAL LIABILITIES 4.70–.75, 4.86–.87 JOINT INTEREST AUDITS Collectability 8.137–.138 Considerations 8.93, 8.127 Documentation 2.44–.45 Payables 8.145 JOINT INTEREST BILLING (JIB) 2.42, 8.132, 8.145, 8.149, 9.35–.37 JOINT INTEREST CREDITS 8.133 JOINT INTEREST RECEIVABLES 9.37 JOINT OPERATING AGREEMENTS (JOA) 2.40–.43, 8.124 JOINT VENTURES Audit procedures 8.41 Oil and gas industry 1.60 Oil sands 1.54 K KICK-OUT RIGHTS 3.10–.11 L LANDSAT IMAGING 2.53–.57 LEASE AGREEMENTS (CONTRACTS) 2.10–.28 Acquisition costs 4.09 Compensatory royalties 2.19 Continuous drilling clause 2.26 Delay rentals 2.16 Developmental delay-related costs 2.20 Fixed/mandatory rentals 2.17 Full cost accounting 5.44 Guaranteed/minimum royalties 2.22 Internal controls 9.24 Lease bonus 2.12 Lessor’s royalty interest 2.18 Mineral interest acquisition 2.03–.09 Offset clause 2.24 Primary term and drilling obligation 2.13 Production holds lease 2.23 Provisions in 2.10–.28 Revenue distribution 8.147 Right to assign interest 2.27 Shut-in royalties 2.21 Successful efforts accounting 4.88–.89 Surface damages 2.25 Top lease 2.15 LEASE BONUS 2.06, 2.12 LEASE BURDEN 2.35 INVOLUNTARY CONVERSIONS 4.79–.84 LEASEHOLD COSTS, AUDIT CONSIDERATIONS 8.96–.97 IRC See Internal Revenue Code LESSOR’S ROYALTY INTEREST 2.18 AAG-OGP LES 250 Entities With Oil and Gas Producing Activities MINERAL INTERESTS—continued Ownership arrangements 3.02–.04 Prospecting and exploration 2.60–.66 Transfer transactions 9.25–.27 LIABILITIES Asset retirement obligations 4.70–.75 Environmental 4.76 Fair value measurements 4.124–.126 Joint and several 4.70–.75, 4.86–.87 MINORITY SHAREHOLDERS 3.15 LIFTING COSTS 4.03 MONETARY LIABILITY 6.37–.40 LIFTINGS 8.139 MONITORING 9.04, 9.22 LIMITED LIABILITY COMPANIES (LLCS) 3.07, 3.17 LIMITED PARTNERSHIPS 1.61–.63, 3.09, 3.11, 3.21 LIQUIDATION BASIS OF ACCOUNTING Update 4–1 at 4.96 LIQUIFIED NATUAL GAS 1.09 LLC See limited liability companies LOSSES, CONVEYANCES AND 4.45–.47 MANAGEMENT Internal control evaluation 9.17–.22 Oil and gas entities, sample representations Appendix D Written representations from 8.78–.79 MANAGEMENT FEES 5.56 MANDATORY RENTALS 2.17 MARGINAL WELLS, PRODUCTION TAX CREDIT 7.29 4.127 MATERIAL MISSTATEMENTS Assertions 8.21–.24 Assessment procedures 8.29–.31, 8.56–.59 Audit identification and evaluation 8.80–.83 Audit procedure design and performance 8.60–.68 Entity and its environment 8.25–.55 Industry, regulatory, and other external factors 8.32 Internal control 8.49–.55 Operations and related business risks 8.42–.45 Operator/nonoperator 8.35–.38 Relevant assertions 8.23 Risk of 8.12, 8.16 MATERIALITY 8.14–.17 1.50 MINERAL INTERESTS Acquisition 2.01–.47, 4.100–.101 Asset acquisition 4.100–.101 Conveyances 4.41–.50 Delay-related costs 2.20 Documents and files 2.39–.47 Frequently encountered transactions 2.29–.38 Internal controls 9.24–.32 Operating expenses 4.67–.69 AAG-OGP LIA NET OPERATING LOSSES 7.24–.25 NET PROFIT INTEREST (NPI) 2.32–.35 NET QUANTITIES, DISCLOSURE REQUIREMENTS 4.151 NEW COUNTRY APPLICATIONS 5.29–.35 MAJORITY SHAREHOLDERS 3.15 MIDSTREAM PETROLEUM OPERATIONS NATURAL GAS See oil and gas industry; specific topics NET REVENUE INTEREST (NRI) 2.32–.35 M MARKET APPROACH FOR VALUATION N NATURAL DISASTERS 4.79–.84 NONCONTROLLING INTERESTS 9.27 NONFINANCIAL ASSETS, FAIR VALUE 4.121–.123 NONOPERATING INTEREST 6.17 NONOPERATORS Audit procedures 8.35–.38 Collectability 8.137 Internal controls 9.50 Inventory 8.138 Joint interest credits 8.133 Joint interest payables 8.145 Unapplied advances 8.149 NONPUBLIC ENTITIES Internal control for audits 9.08–.09 Successful efforts accounting 4.06–.07 NONRISK SERVICE CONTRACTS 6.10–.11, 6.13, 6.29 NORMAL PURCHASES AND NORMAL SALES 4.115 NPI See net profit interest NRI See net revenue interest O OBSERVABLE INPUTS, FAIR VALUE HIERARCHY 4.132–.133 OFFSET CLAUSE 2.24 OFFSHORE DRILLING 1.17–.18, 2.69 OIL AND GAS FUNDS 1.61 OIL AND GAS INDUSTRY Accounting history 1.67–.76 Alternative hydrocarbon sources 1.19 Audit considerations 8.01–.175 Capital sources and organizational structure 1.57–.66 Demand increases 1.14 251 Subject Index OIL AND GAS INDUSTRY—continued Development 1.02–.10 Disclosure requirements 4.132–.160 Drilling and development 2.67–.85 Drilling contracts 2.74–.77 Enhanced recovery methods 2.96–.97 Full cost accounting 1.76, 4.01–.08, 5.01–.61 Funds and programs 1.61 History of 1.01–.20 Hydrocarbon supply disruption 1.15–.16 Internal control issues 9.01–.81 International accounting standards 1.77.–.78 International activities 6.01–.43 Joint interest arrangements 1.60 Limited partnerships 1.61–.63 Mineral interests acquisition 2.01–.47 Offshore drilling 1.17–.18 Oil sands 1.54–.56 Origin and accumulation 1.21–.29 Overview 1.01–.78 Ownership arrangements 3.01–.22 Prices 1.11–.13 Primary business activities 2.01–.97 Production 2.86–.93 Prospecting and exploration 2.48–.66, 2.52–.59 Proved reserves, SEC and SPE definitions 1.32–.36, 1.37–.39 Recent developments 1.14–.20 Regulation and oversight 2.85 Reserves 1.30–.32, 1.41–.48 Reservoir development 2.83–.84 Royalty trusts 1.64–.65 SPE reserves definition 1.38–.40 Successful efforts accounting 4.01–.160 Tax considerations 7.01–.37 OIL AND GAS PRODUCING ACTIVITIES, DEFINED 1.35 OIL AND GAS PROGRAMS 1.61 OIL SANDS 1.54–.56 OPERATING ACTIVITIES 1.50, 8.42–.45 OPERATING AGREEMENTS 2.40–.43 OPERATING EXPENSES 4.67–.69, 8.141–.143 OPERATORS Audit procedures 8.35–.38 Collectability 8.137 Inventory 8.138 OPTION CONTRACTS, DERIVATIVE COMMODITY CONTRACTS 4.109, 4.111 OVERRIDING ROYALTY INTEREST (ORRI) 2.31 OVERSIGHT See regulation and oversight OWNERSHIP ARRANGEMENTS 3.01–.22 Accounting models 3.05–.06 Audit procedures 8.39–.41 Consolidation method 3.13–.15 Cost method 3.22 Equity method 3.16–.21 International oil and gas contracts 6.14 LLCs 3.07 Mineral interests 3.02–.04 Partnerships 3.08–.12 Separate entities 3.03–.04 Undivided interests 3.02 OWNERSHIP INTEREST 2.04–.05 P PAID ON BEHALF (POB) ARRANGEMENT 6.24 PARTNERSHIPS Audit procedures 8.39–.40 General partnerships 3.09, 3.12 International oil and gas contracts 6.14 Kick-out rights 3.10–.11 Limited partnerships 1.61–.63, 3.09, 3.11, 3.21 Overview 3.08–.12 PAYABLES Auditing considerations 8.144–.150 Joint interest payables 8.145 Production purchasers borrowings 8.148 Production taxes 8.150 Revenue distribution 8.146 Unapplied advances 8.149 PAYOUTS, INTERNAL CONTROLS 9.32 PERCENTAGE DEPLETION 7.13–.15 PERFORMANCE MATERIALITY 8.14–.17 PETROLEUM RESOURCES MANAGEMENT SYSTEM (PRMS) 1.38–.40 PIPELINE IMBALANCES 9.54 PLUGGED WELLS 2.78–.82, 4.77–.78 POB See paid on behalf (POB) arrangement POSSIBLE RESERVES 1.31, 1.38 PP&E See property, plant and equipment ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC) 1.06 PRECISION OF ESTIMATES, RESERVES ORRI PREFERABILITY LETTER 4.05 See overriding royalty interest OUTPUT, IN BUSINESS 4.98 OVERHEAD COST CAPITALIZATION 8.103–.104, 8.143, 9.43 OVERLIFT, REVENUE RECOGNITION 4.58–.59 1.47 PRESENT VALUE MEASUREMENTS 4.130–.131, 5.19–.28, 8.111 PRICE SWAP CONTRACT 4.112 PRICING REGULATIONS 8.128, 9.52 AAG-OGP PRI 252 Entities With Oil and Gas Producing Activities PRIMARY BENEFICIARY 3.05, 3.11 PRIMARY BUSINESS ACTIVITIES Drilling and development Mineral interests acquisitions Production Prospecting and exploration 2.01–.97 2.67–.85 2.01–.47 2.86–.97 2.48–.66 PRIMARY RECOVERY 2.96–.97 PRIMARY TERM, MINERAL INTEREST LEASE AGREEMENT 2.13 PRINCIPAL MARKET 4.119 PRMS See petroleum resources management system PRO RATA CONSOLIDATION 3.17 PROBABLE RESERVES 1.31, 1.38 PROCESS, IN BUSINESS 4.98 PRODUCT INVENTORY 9.55 PRODUCTION 2.86–.97 See also exploration and production (E&P) entity Audit considerations 8.122–.143 Enhanced recovery methods 2.96–.97 Full cost accounting 5.36 Generally 2.86.–.93 Imbalances in 8.135, 9.53 Internal controls 9.50, 9.51–.62 Inventory 4.63–.69, 8.139–.140 Operating expenses 4.67–.69, 8.141–.143 Purchasers’ borrowings 8.148 Receivables 8.131–.138 Revenue 4.52–.62, 8.122–.130 SEC disclosure requirements 4.155 Successful efforts accounting 4.03, 4.51–.69 Tax credits 7.29, 7.30, 7.33–.34 Taxes 4.53–.54 Workovers 2.94–.97 PROPERTY, PLANT AND EQUIPMENT (PP&E) 8.91 PROPERTY COSTS Audit considerations 8.93, 8.95–.98 Disclosure requirements 4.149 Internal controls 9.39–.47 PROPERTY DISPOSALS Full cost accounting 5.51–.55 Internal controls 9.28 PROSPECTING AND EXPLORATION 2.48–.66 Exploration activities 2.49 Geological and geophysical exploration 2.48 Geological exploration 2.50 Geophysical exploration 2.51 Hydrocarbon-bearing structures 2.52–.59 Significant aspects 2.60–.66 PROVED DEVELOPED RESERVES 1.36 PROVED PROPERTIES Audit considerations 8.96 Capitalized cost amortization 4.25 Capitalized cost impairment tests 4.37–.40 Capitalized cost impairments 5.23–.28 Excluded costs 5.16–.18 Full cost accounting 5.16–.18, 5.23–.28 Generally 4.03 Impairment assessment 8.112–.115, 9.49 Internal controls 9.49 Successful efforts accounting 4.03, 4.25, 4.37–.40 PROVED RESERVES Development costs 4.17 Disclosures for undeveloped 4.159 International oil and gas 6.29–.34 PRMS definition 1.38–.39 PRMS definitions 1.38–.39 SEC definitions 1.33–.37 PRODUCTION COSTS 6.19–.20 PROVED UNDEVELOPED RESERVES 1.36 PRODUCTION HOLDS LEASE 2.23 PSC PRODUCTION PAYMENTS Conveyances 4.48–.49 Mineral interest transactions 2.36 Oil and gas industry 1.66 PUBLIC ACCOUNTING OVERSIGHT BOARD (PCAOB) Auditing standards overview 8.01–.03 Clarified Auditing Standards and PCAOB Standards Appendix B PRODUCTION SHARING CONTRACTS (PSC) Asset retirement operations 6.36–.40 Audit considerations 8.130 Foreign tax jurisdictions 7.33–.34 Generally 6.07–.09 Proved reserves 6.33 Transfer pricing and services 7.36 PRODUCTION TAX 6.15–.16, 6.19–.20, 8.150 PROFESSIONAL SKEPTICISM 8.06 PROFIT OIL 6.09, 7.33–.34 PROJECT AREA 2.63 PROMOTES, JOINT VENTURES IN OIL AND GAS 1.60 AAG-OGP PRI See production sharing contracts PUBLIC ENTITY REPORTING, INTERNAL CONTROLS 9.12–.16 PUBLICLY TRADED ENTITIES, DISCLOSURE REQUIREMENTS 4.136, 4.146–.151 PURCHASING CONTROLS 9.40, 9.56 Q QUANTITY AND VALUE DISCLOSURES, OIL RESERVES 8.165–.171 R RATE OF RETURN CONTRACTS 6.12 REASONABLE ASSURANCE 8.04–.05 253 Subject Index RECEIVABLES, AUDIT CONSIDERATIONS 8.131–.138 RECORDS See documentation and record keeping REGULATION AND OVERSIGHT Compliance controls 9.79–.81 Drilling and development operations 2.68, 2.85 Well abandonment or plugging 2.79, 2.82 RISK ASSESSMENT PROCEDURES—continued Material misstatements 8.29–.31 Operations and related business risks 8.42–.45 RISK MANAGEMENT 8.42–.45, 9.77 RISK SERVICE CONTRACTS 6.10–.11 ROTARY DRILLING 2.72 RELEVANT ASSERTIONS 8.23 ROYALTIES Basic royalty interests 2.18 Compensatory royalties 2.19 Foreign tax jurisdictions 7.33–.34 Guaranteed/minimum royalties 2.22 Internal controls 9.58 International oil and gas industry 6.15–.18 Lessor’s royalty interests 2.18 Shut-in royalties 2.21 RELIABLE TECHNOLOGY 1.35 ROYALTY TRUSTS 1.64–.65 REIMBURSEMENTS, OPERATING EXPENSES 4.68–.69 RELATED PARTY TRANSACTIONS Audit considerations 8.163–.164 Defined 7.05 Internal controls 9.68 REPORTING ENTITIES 5.06 RESERVES Audit specialists 8.20 Capital cost amortization 4.26 Capital cost impairment test 5.25–.28 Determination of 1.41–.48 Disclosure requirements 4.149, 4.158 Estimation, internal controls 4.158, 9.38 Exchange offer disclosures 4.160 Generally 1.30–.32 International proved volumes 6.34 Quantity and value disclosures 8.165–.171 SEC definition 1.33–.37 SPE definition 1.38–.39 S SAGD See steam-assisted gravity damage SALES Audit considerations 8.126, 8.134 Revenue recognition 4.58–.59 Successful efforts accounting 4.143 SALT DOME TRAP, OIL AND GAS DEPOSITS 1.27 SALVAGE VALUES 4.40 SARBANES-OXLEY ACT (SOX, 2002) 9.05, 9.11 SCHEDULE OF CHANGES MADE TO THE TEXT FROM PREVIOUS EDITION Appendix F RESERVES SENSITIVITY ANALYSIS, DISCLOSURE 4.158 SECONDARY RECOVERY 2.96–.97 RESERVOIR DEVELOPMENT 2.83–.84 SECURITIES ACT OF 1933 (THE 1933 ACT) 1.20, 4.157 RESIDUAL SALVAGE VALUES 4.29, 4.73 RESTORATION COSTS, INTERNATIONAL OPERATIONS 6.36–.40 REVENUE Accumulation of 8.129 Audit considerations 8.99–.100, 8.122–.130 Disclosure requirements 4.149 Distribution 8.144–.147 Internal controls 9.52 Production accounting 4.52–.62 RIGHT TO ASSIGN INTEREST 2.27 RIGHTS TO EXPLORE ONLY CONTRACT 2.64 RIGHTS TO EXPLORE WITH OPTION TO ACQUIRE ACREAGE CONTRACT 2.64 RISK ASSESSMENT PROCEDURES Accounting estimates and related disclosures 8.71–.76 Audit considerations 8.09–.13, 8.162 Internal controls 8.53, 9.04, 9.08–.09, 9.18–.19 SECURITIES AND EXCHANGE COMMISSION (SEC) Capitalized cost amortization 4.26 Capitalized cost impairment tests 4.33 Compliance and Disclosure Interpretations (C&DIs) 1.35, 1.37 Disclosure requirements 4.154–.160 Financial reporting control 9.05 Internal controls 9.12–.16 Oil and gas reserves 1.31–.38 Production accounting 4.60 Reserve quantity and value disclosures 8.165, 8.167–.168 SEISMIC DATA Drilling and development Four dimension seismic Nonproprietary data Prospecting and exploration Seismic shooting 2.63, Seismic testing Three-dimensional seismic data 2.67 2.59 2.60 2.53 4.22 2.57 2.58 SEPARATE ENTITIES 3.03 AAG-OGP SEP 254 Entities With Oil and Gas Producing Activities SERVICE LEASE ARRANGEMENTS 4.88–.89, 6.10–.11 SERVICE PROVIDERS, TAXATION ISSUES 7.36 SEVERANCE TAXES 7.26–.27, 9.57 SHALE GAS 1.07, 1.10 SHIPPING AND HANDLING COSTS 4.55–.57 SHUT-IN ROYALTIES 2.21 SIGNIFICANT INFLUENCE 3.18–.20 SOCIETY OF PROFESSIONAL ENGINEERS (SPE) 1.38–.39 SOX See Sarbanes-Oxley Act SPE See Society of Professional Engineers SPECIALISTS, USE OF 8.18–.20, 8.174–.175 STATE-OWNED PROPERTIES, MINERAL INTEREST ACQUISITION 2.08 STATEMENT OF CASH FLOWS 8.158–.159 STEAM-ASSISTED GRAVITY DAMAGE (SAGD) 1.54–.55 STRAIGHT LINE METHOD, CAPITALIZED COST AMORTIZATION 4.25 STRATIGRAPHIC TEST WELLS 4.15–.16 STRATIGRAPHIC TRAPS, OIL AND GAS DEPOSITS 1.23, 1.29 STRUCTURAL TRAPS, OIL AND GAS DEPOSITS 1.23–.28 SUBSTANTIVE TESTS, AUDIT PROCEDURE DESIGN AND PERFORMANCE 8.65–.68 SUCCESSFUL EFFORTS 1.76 SUCCESSFUL EFFORTS ACCOUNTING 4.01–.160 Abandonment 4.77–.78 Acquisition costs 4.09 Amortization of capital costs 4.24–.30 Asset retirement obligations 4.70–.75 Assets held for sale 4.90–.96 Audit considerations 8.96, 8.108 Business combinations 4.97–.102 Capitalized costs 4.03, 4.10–.42 Capitalized overhead costs 8.104 Conveyances 4.41–.50 Costs included in 4.03 For DD&A See successful efforts accounting, for DD&A Derivative commodity contracts 4.106–.117 Development costs 4.17–.22 Disclosure requirements 4.139–.160 Discontinued operations 4.90–.96 Environmental liabilities 4.76 Exploration costs 4.10–.17 Expropriations 4.85 Fair value measurements 4.118–.138 Generally 4.01–.08 Goodwill 4.97–.102 AAG-OGP SER SUCCESSFUL EFFORTS ACCOUNTING—continued Goodwill impairment 4.103–.104 Impairment tests for capital costs 4.31–.40 Interest capitalization 4.23 Inventory 4.63–.69 Involuntary conversions 4.79–.84 Lease arrangements 4.88–.89 Nonpublic entities 4.06–.07 Operating expenses 4.67–.69 Preferability letter 4.05 Production 4.51–.69 Revenue 4.52–.62 Summary Appendix C Updates and guidance 4.118–.138 SUCCESSFUL EFFORTS ACCOUNTING, DISCLOSURE REQUIREMENTS 4.139–.160 Accounting policy disclosures 4.143 Exchange offer disclosures 4.159–.160 FASB ASC 932 disclosures 4.146–.151 Full cost accounting entities 4.153 Generally 4.152 Interim disclosures 4.145 SEC Subpart 1200 regulations 4.154–.158 Suspended wells 4.144–.145 SUCCESSFUL EFFORTS ACCOUNTING, FAIR VALUE MEASUREMENTS 4.118–.138 Asset applications 4.121–.123 Definitions 4.119–.121 Disclosures 4.135–.138 Hierarchy 4.132–.134 Liabilities and instruments applications 4.124–.126 Present value techniques 4.130–.131 Valuation techniques 4.127–.129 SUCCESSFUL EFFORTS ACCOUNTING, FOR DD&A Abandoned or plugged wells 4.78 Capitalized cost amortization 4.24–.30 Capitalized cost impairment tests 4.31 Component of an entity 4.93 Disclosure requirements 4.143 Generally 4.01, 8.108 SUPPLEMENTARY OIL AND GAS RESERVES Procedures 8.172–.175 Quantity and value disclosures 8.165–.171 Work management specialists 8.174–.175 SUPPORT EQUIPMENT AND FACILITIES DEPRECIATION 8.110, 9.62 SURFACE DAMAGES 2.25 SURFACE MINING OPERATIONS 1.55 SUSPENDED WELLS Audit considerations 8.106 Costs 4.14 Disclosures 4.144–.145, 9.76 SWAPS, DERIVATIVE COMMODITY CONTRACTS 4.109, 4.111 255 Subject Index T U TAX CONSIDERATIONS 7.01–.37 Acquisitions, audit considerations 8.98 Ad valorem and severance taxes 7.26–.27 Asset acquisitions 7.19–.21 Audit considerations 8.152–.153 Compliance controls 9.79–.81 Conveyances 7.18 Depletion 7.11–.15 Domestic production income deduction 7.30 EOR credit 7.28 Foreign exchange 7.37 Foreign jurisdictions’ taxes 7.33–.34 Generally 7.01–.03 Income tax 6.15–.16, 6.21–.28, 7.04–.05 Intangible drilling and development costs 7.06–.10 International operations 7.31–.37 Marginal wells credit 7.29 Net operating losses, valuation allowances 7.25 Production accounting 4.53–.54 Production tax 6.15–.16, 6.19–.20, 8.150 Temporary differences 7.12–.17 Transfer pricing-services 7.36 Uncertain tax positions 7.22–.24 U.S foreign tax credit 7.31–.32 UNAPPLIED ADVANCES 8.149 TAX HOLIDAYS 7.35 TAXABLE INCOME 6.25 TECHNICAL ASSISTANCE CONTRACTS 6.12 TEMPORARY DIFFERENCES Asset acquisitions 7.19–.21 Income tax deductions 7.16–.17, Exhibit 7–1 at 7.17 TERTIARY RECOVERY 2.96–.97 THERMAL STIMULATION 2.96–.97 THIRD PARTY MEASUREMENTS Reserve estimates disclosure 4.158, 9.38 Revenue assessment 8.125 UNCERTAINTIES 8.162 UNCONFORMITY TRAP, OIL AND GAS DEPOSITS 1.28 UNDERLIFT, REVENUE RECOGNITION 4.58–.59 UNDEVELOPED OIL AND GAS RESERVES 1.36–.37 UNINCORPORATED ENTITIES 3.17 UNIT OF PRODUCTION, CAPITALIZED COST AMORTIZATION 4.25, 5.09, 5.14 UNOBSERVABLE INPUTS, FAIR VALUE HIERARCHY 4.132–.133 UNPROVED PROPERTIES Abandonment 5.37 Audit considerations 8.96 Capitalized costs impairment tests 4.31–.36 Excluded costs 5.15–.18 Exploration costs 4.10–.11 Full cost accounting 5.15–.18, 5.37 Impairment assessment 8.116, 9.48 Impairment tests 9.48 Internal controls 9.48 Successful efforts accounting 4.02, 4.10–.11, 4.31–.36 UPSTREAM ACTIVITIES 1.50 UPSTREAM OPERATIONS 1.49–.56 UPSTREAM PETROLEUM OPERATIONS Financial statements 1.49–.56 Oil sands 1.54, 1.56 Operating activities 1.50 Uncertain tax positions 7.23 Vertical integration 1.51 U.S FOREIGN TAX CREDIT 7.31–.32 THOSE CHARGED WITH GOVERNANCE, COMMUNICATION 8.88 V TITLE SEARCH, AUDIT CONSIDERATIONS 8.96–.97 VALUATION, ASSET RETIREMENT OBLIGATIONS 8.151 TOP LEASE 2.15 VALUATION ALLOWANCES 7.24–.25, 8.151 TRANSACTIONS Mineral interest transfers 9.25–.27 Temporary differences, asset acquisitions 7.20–.21 TRANSFER PRICING 7.36 TRAPS, OIL AND GAS DEPOSITS 1.21, 1.23–.29 TRUCK AND SHOVEL OPERATIONS 1.55 See also surface mining TRUNCATION TRAP, OIL AND GAS DEPOSITS 1.28 TURNKEY CONTRACTS 2.77 VALUATION TECHNIQUES Changes in 4.129 Cost 4.127 Fair value 4.127–.129 Highest and best use 4.123 Present value techniques 4.130–.131 VARIABLE INTEREST ENTITIES (VIES) 3.04, 3.11–.12 VERTICAL INTEGRATED ENTITIES 1.51 VIE See variable interest entities VOLUMES PRODUCED 9.51 AAG-OGP VOL 256 Entities With Oil and Gas Producing Activities VOLUMETRIC PRODUCTION PAYMENT (VPP) Conveyances 4.50 As frequently encountered transaction 2.36–.37 SEC disclosure requirements 4.155 VOTING INTEREST MODEL 3.05, 3.06 VPP See volumetric production payment W WELL ABANDONMENT OR PLUGGING 2.78–.82 Asset retirement obligations 4.70–.75 Casing point 2.78 Cement and casing operations 2.80 Equipment installation and removal 2.81–.82 State and federal regulations 2.79, 2.82 Successful efforts accounting 4.77–.78 AAG-OGP VOL WELLS IN PROGRESS 8.107, 9.45 WILDCAT LOCATIONS 2.12 WORKING INTEREST Audit considerations 8.99–.100 Conveyances 4.41–.50 Intangible drilling and development costs 7.09 International production sharing 6.33 Mineral interest acquisition 2.06–.09 Purchase or sale of 2.29 Revenue recognition 4.58–.59 WORKOVER COSTS 2.94–.95, 8.142, 9.60 WORKOVERS 2.94–.95 WRITTEN REPRESENTATIONS, MANAGEMENT 8.78–.79 ... operations as oil and gas producing activities AAG-OGP 1.55 12 Entities With Oil and Gas Producing Activities 1.56 In SEC Rule No 33-8995 and ASU No 2010-03, the definition of oiland gas- producing activities. .. of FASB Accounting Standards Codification (ASC) 932, Extractive Activities Oil and Gas Sources of Capital and Organizational Structure of Oil and Gas Entities 1.57 Oil and gas producing entities. .. 3:01 PM iii Preface About AICPA Audit and Accounting Guides This AICPA Audit and Accounting Guide has been developed by the AICPA Entities With Oil and Gas Producing Activities Task Force to assist