Audit and Accounting Guide Entities With Oil and Gas Producing Activities August 1, 2018 23574-349 Copyright © 2018 by American Institute of Certified Public Accountants All rights reserved For information about the procedure for requesting permission to make copies of any part of this work, please email copyright@aicpa.org with your request Otherwise, requests should be written and mailed to Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110 AAP ISBN 978-1-94830-621-8
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F1VC iii Preface PREPARED BY THE ENTITIES WITH OIL AND GAS PRODUCING ACTIVITIES TASK FORCE (Updated as of August 1, 2018) 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 practitioners in performing and reporting on their audit engagements and to assist management in the preparation of their financial statements in conformity with U.S generally accepted accounting principles (GAAP) An AICPA Guide containing auditing guidance related to generally accepted auditing standards (GAAS) 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.1 Interpretive publications are recommendations on the application of GAAS in specific circumstances, including engagements for entities in specialized industries Interpretive publications are issued under the authority of the AICPA's 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 the auditing guidance in 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 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 (SASs) Any auditing guidance in a guide appendix or exhibit (whether a chapter or back matter appendix or exhibit), though not authoritative, is considered an "other auditing publication." In applying such guidance, the auditor should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit Although the auditor determines the relevance of other auditing guidance, auditing guidance in a guide All AU-C sections can be found in AICPA Professional Standards ©2018, AICPA AAG-OGP iv appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the auditor may presume that it is appropriate 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: r r r r Identifies certain requirements set forth in the FASB Accounting Standards Codification® (ASC) Describes FinREC's 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 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 AICPA Guides may include certain content presented as "Supplement," "Appendix," or "Exhibit." A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide Both appendixes and exhibits are included for informational purposes and have no authoritative status Recognition AICPA Senior Committees Auditing Standards Board Mike Santay, Chair Financial Reporting Executive Committee James Dolinar, Chair AAG-OGP ©2018, AICPA v The AICPA gratefully acknowledges Diane Kirk, Megan McFarland, Brian Matlock, and Josh Sherman, who reviewed or otherwise contributed to the development of this edition of the guide The AICPA also thanks Jeffrey Washington for his invaluable assistance in updating the 2018 edition of the guide AICPA Staff Liese Faircloth Manager Product Management and Development Daniel Noll Senior Director Accounting Standards 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, as well as other revisions as deemed appropriate Relevant guidance issued through August 1, 2018, has been considered in the development of this edition of the guide However, this guide does not include all audit, accounting, reporting, regulatory, and other requirements applicable to an entity or a particular engagement This guide is intended to be used in conjunction with all applicable sources of relevant guidance Relevant guidance that is issued and effective on or before August 1, 2018, is incorporated directly in the text of this guide Relevant guidance issued but not yet effective as of August 1, 2018, but becoming effective on or before December 31, 2018, is also presented directly in the text of the guide, but shaded gray and accompanied by a footnote indicating the effective date of the new guidance 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 (as part of the guide's "dual guidance" treatment of applicable new guidance) Relevant guidance issued but not yet effective as of the date of the guide and not becoming effective until after December 31, 2018, is referenced in a "guidance update" box; that is, a box that contains summary information on the guidance issued but not yet effective In updating this guide, all guidance issued up to and including the following was considered, but not necessarily incorporated, as determined based on applicability: r r r FASB Accounting Standards Update (ASU) No 2018-08, Not-ForProfit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made SAS No 133, Auditor Involvement With Exempt Offering Documents (AU-C sec 945) Interpretation No 4, "Reporting on Audits Conducted in Accordance With Auditing Standards Generally Accepted in the United States of America and the Standards of the PCAOB" (AU-C sec 9700 par .04), of AU-C section 700, Forming an Opinion and Reporting on Financial Statements ©2018, AICPA AAG-OGP vi r r Statement of Position 17-1, Performing Agreed-Upon Procedures Related to Rated Exchange Act Asset-Backed Securities ThirdParty Due Diligence Services (AUD sec 60)2 PCAOB Release No 2017-01, The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB 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 PCAOB quoted content is from PCAOB Auditing Standards and PCAOB Staff Audit Practice Alerts, ©2015, Public Company Accounting Oversight Board All rights reserved Used by permission FASB standards quoted are from the FASB Accounting Standards Codification ©2015, Financial Accounting Foundation All rights reserved Used by permission 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 August 1, 2018, 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) All AUD sections can be found in AICPA Professional Standards AAG-OGP ©2018, AICPA vii 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 In its resource document "About the Codification" that accompanies FASB ASC, FASB states that it considers the terms should and shall to be comparable terms and to represent the same concept — the requirement to apply a standard 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 Applicability of Generally Accepted Auditing Standards and PCAOB Standards Appendix A, "Council Resolution Designating Bodies to Promulgate Technical 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 the "Compliance With Standards Rule" (ET sec 1.310.001 and 2.310.001)3 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 audit reports within the PCAOB's jurisdiction as defined by the Sarbanes-Oxley Act of 2002, as amended) 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 Inciting the auditing standards of the PCAOB, references generally use section numbers within the reorganized PCAOB auditing standards and not the original standard number, as appropriate Audits of the financial statements of those entities not subject to the oversight authority of the PCAOB (that is, those audit reports not within the PCAOB's jurisdiction as defined by the Sarbanes-Oxley Act of 2002, as amended) — hereinafter referred to as nonissuers4 — are to be conducted in accordance with GAAS as issued by the ASB The ASB develops and issues standards in the form of SASs through All ET sections can be found in AICPA Professional Standards See the definition of the term nonissuer in the AU-C Glossary ©2018, AICPA AAG-OGP viii 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 AICPA Professional Standards In citing GAAS and their related interpretations, references generally use section numbers within the codification of currently effective SASs and not the original statement number, as appropriate The auditing content in this guide primarily discusses GAAS issued by the ASB and is applicable to audits of nonissuers Users of this guide may find the tool developed by the PCAOB's Office of the Chief Auditor helpful in identifying comparable PCAOB Standards The tool is available at pcaobus.org/standards/ auditing/pages/findanalogousstandards.aspx Considerations for audits of entities in accordance with PCAOB standards may also be discussed within this guide's chapter text When such discussion is provided, the related paragraphs are designated with the following title: Considerations for Audits Performed in Accordance With PCAOB Standards PCAOB guidance included in an AICPA Guide has not been reviewed, approved, disapproved, or otherwise acted upon by the PCAOB and has no official or authoritative status Applicability of Quality Control Standards QC section 10, A Firm's System of Quality Control,5 addresses a CPA firm's responsibilities for its system of quality control for its accounting and auditing practice A system of quality control consists of policies that a firm establishes and maintains to provide it with reasonable assurance that the firm and its personnel comply with professional standards, as well as applicable legal and regulatory requirements The policies also provide the firm with reasonable assurance that reports issued by the firm are appropriate in the circumstances QC section 10 applies to all CPA firms with respect to engagements in their accounting and auditing practice In paragraph 06 of QC section 10, an accounting and auditing practice is defined as "a practice that performs engagements covered by this section, which are audit, attestation, compilation, review, and any other services for which standards have been promulgated by the AICPA ASB or the AICPA Accounting and Review Services Committee under the "General Standards Rule (ET sec 1.300.001) or the "Compliance With Standards Rule" (ET sec 1.310.001) of the AICPA Code of Professional Conduct Although standards for other engagements may be promulgated by other AICPA technical committees, engagements performed in accordance with those standards are not encompassed in the definition of an accounting and auditing practice." In addition to the provisions of QC section 10, readers should be aware of other sections within AICPA Professional Standards that address quality control considerations, including the following provisions that address engagement level quality control matters for various types of engagements that an accounting and auditing practice might perform: r AU-C section 220, Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards All QC sections can be found in AICPA Professional Standards AAG-OGP ©2018, AICPA r r ix AT-C section 105, Concepts Common to All Attestation Engagements6 AR-C section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services7 Because of the importance of engagement quality, this guide includes appendix C, Overview of Statements on Quality Control Standards This appendix summarizes key aspects of the quality control standard This summarization should be read in conjunction with QC section 10, AU-C section 220, AT-C section 105, AR-C section 60, and the quality control standards issued by the PCAOB, as applicable AICPA.org Website The AICPA encourages you to visit its website at 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 Another important focus of the Financial Reporting Center is keeping those in public practice up to date on issues pertaining to preparation, compilation, review, audit, attestation, assurance and advisory engagements Certain content on the AICPA's websites referenced in this guide may be restricted to AICPA members only All AT-C sections can be found in AICPA Professional Standards All AR-C sections can be found in AICPA Professional Standards ©2018, AICPA AAG-OGP Table of Contents xi 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 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 ©2018, AICPA 01-.78 01-.20 02-.07 08-.10 11-.13 14-.20 21-.29 30-.48 33-.37 38-.40 41-.48 49-.56 54-.56 57-.66 60 61-.63 64-.65 66 67-.76 77-.78 01-.100 01-.48 10-.28 29-.39 40-.48 49-.67 53-.60 61-.67 68-.88 77-.80 81-.85 86-.87 88 89-.100 97-.98 99-.100 Contents Subject Index 275 Subject Index A ABANDONED WELLS See also well abandonment or plugging Asset retirement obligations 4.71 Full cost accounting 5.13, 5.37 International operations 6.36–.40 Successful efforts accounting 4.80–.81 Audit and Accounting Guide: Entities With Oil and Gas Producing Activities By AICPA Copyright © 2018 by American Institute of Certified Public Accountants ACCOUNTING ESTIMATES 7.70–.77 ACCOUNTING METHODS Consolidation method accounting 3.15–.17, 3.21, 5.12 Entitlement method of accounting 4.58–.61, 7.127 Equity method accounting 3.20–.26, 5.12 Full cost See full cost accounting Sales method accounting 4.59–.61 Straight line method of accounting 4.25 Successful efforts See successful efforts accounting ACCOUNTING POLICY DISCLOSURES 4.146 ACCRUALS 8.41 ACQUISITION As discontinued operations 4.95 Mineral interests 4.103–.104 ACQUISITION COSTS Audit considerations 7.91–.92, 7.96–.99 Full cost accounting 5.07 Successful efforts accounting 4.03, 4.09 ADMINISTRATIVE OVERHEAD EXPENSES 7.142, 7.144 ADVANCES UNDER CASH CALLS 8.36 AERIAL PHOTOGRAPHY 2.54–.58 AFE See authorization for expenditure AMERICAN PETROLEUM INSTITUTE (API) 2.70 AMORTIZATION Asset retirement obligations 4.76 Capitalized costs 4.24–.30, 5.09–.18 Full cost accounting 5.09–.18 Successful efforts accounting 4.24–.30 ANTIBRIBERY LAWS 6.41–.42, 7.48 API See American Petroleum Institute ARAB OIL EMBARGO (1973) 1.11 ARO See asset retirement obligations ASSERTION CATEGORIES Table at 7.21 ASSERTIONS 7.21–.24 ASSET GROUPING, IMPAIRMENT ASSESSMENT 7.114 ©2018, AICPA ASSET RETIREMENT OBLIGATIONS (ARO) Audit considerations 7.152 Capitalized cost impairment tests 4.38–.40 Carrying amount 4.03 Full cost accounting 5.21, 5.38–.41 Internal controls 8.46 International operations 6.35–.40 Revision 4.74, 5.38–.41 Revisions and settlements 4.75, 4.76, 5.38–.41 Successful efforts accounting 4.03, 4.38–.40, 4.71–.78, 4.146 ASSETS Fair value 4.124–.126 Held for sale 4.93, 4.95 Measurement controls 8.27 AUDIT CONSIDERATIONS 7.01–.178 Accounting estimates and related disclosures 7.70–.77 Asset retirement obligations 7.152 Audit evidence 7.86–.88 Audit objectives 7.04–.05 Audit planning 7.07–.08 Audit risk 7.09–.13 Authorization for expenditure 7.95 Capitalized overhead costs 7.104–.105 Cash calls 7.137 Cash flows 7.159–.160 Collectability 7.138–.139 Commitments and contingencies 7.161–.163 Communication with those charged with governance 7.89 Conveyances 7.118–.122 Depreciation, depletion, and amortization (DD&A) 7.109–.111 Derivatives and hedging 7.155–.157 Division of interest 7.100–.101 Documentation 7.85 Dry hole costs 7.106 Evidence See audit evidence Fair value measurements 7.158 Going concern 7.167 Imbalances 4.58, 7.136 Impairment 7.112–.117 Inventory 7.140–.141 Material misstatements 7.81–.84 Materiality 7.14–.17 Operating expenses 7.142–.144 Operator/nonoperator 7.35–.38 Ownership arrangement procedures 7.39–.42 Payables 7.145–.151 Pricing regulations and contractual agreements 7.129 Procedure design and performance 7.61–.69 AAG-OGP AUD 276 Entities With Oil and Gas Producing Activities AUDIT CONSIDERATIONS—continued Production 7.123–.144 Production sharing contracts 7.131 Professional skepticism 7.06 Property costs 7.94 Receivables 7.132–.139 Related parties 7.165–.166 Revenue 7.100–.101, 7.123–.131 Risk assessment 7.09–.13, 7.164 Specialists, use of 7.18–.20 Specific audit areas 7.90–.158 Statement of cash flows 7.159–.160 Supplementary oil and gas reserves 7.168–.178 Suspended wells 7.107 Taxation 7.153–.154 Uncertainties 7.164 Wells in progress 7.108 AUDIT EVIDENCE Additional considerations 7.86–.88 Derivatives and hedging 7.156 Operator/nonoperator 7.37 Specialists 7.18 Sufficiency and appropriateness 7.78 AUDIT PLANNING, GENERALLY 7.07–.08 AUDIT RISK 7.09–.13 Assessment 7.29–.31, 7.57–.60 Emerging markets 7.41 Foreign Corrupt Practices Act 7.48–.49 Geographical considerations 7.47 Internal control 7.50–.56 Operations and related business 7.43–.46 Uncertainties 7.164 BUSINESS, AS DISCONTINUED OPERATIONS 4.95, 4.96 BUSINESS ACTIVITIES, PRIMARY 2.01–.100 Drilling and development 2.68–.88 Mineral interests acquisitions 2.01–.48 Production 2.89–.100 Prospecting and exploration 2.49–.67 BUSINESS COMBINATIONS Full cost accounting 5.50–.54 Successful efforts accounting 4.100–.105 BUSINESS RISK, INTERNAL CONTROL EVALUATION 8.02 C CALCULATIONS, COMPUTER-BASED CONTROLS 8.71 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 Development costs 4.17–.22 Disclosure requirements 4.147–.148, 4.152 Exploration costs 4.10–.16 Full cost accounting 5.02, 5.04, 5.08–.35 Impairment tests 4.31–.40, 5.19–.35 Interest capitalization 4.23, 5.08 Overhead 7.104–.105, 8.43 Successful efforts accounting 4.03, 4.10–.40 AUDITING STANDARDS Fair value measurements updates 4.121–.141 Generally 7.01–.7.03 CAPITALIZED INTEREST 8.44 AUTHORIZATION FOR EXPENDITURE (AFE) Audit considerations 7.95, 7.146 Documentation 2.40–.48 Internal controls 8.33–.34 Lease acquisition 8.24 Mineral interests 2.40–.48, 8.24 Nonoperator exploration, development, and production 8.50 Property costs 8.41–.42 Workovers 8.60 CASH CALLS 7.137, 8.36 CARRYING AMOUNT, INVENTORY 4.67 CARVE OUT 2.30 CASH FLOWS 7.159–.160 CASING POINT 2.81 CEILING TESTS Capitalized cost impairment 5.19–.28 New country applications 5.29–.35 COLLECTABILITY Audit considerations 7.138–.139 Of joint interest receivables 8.37 COMMITMENTS 7.161–.163, 8.74–.76 B BASIC ROYALTY INTERESTS 2.18 BASIC SEDIMENT AND WATER (BS&W) 2.90 BITUMEN 1.54–.55 BORROWINGS, PRODUCTION PURCHASERS 7.149 BS&W See basic sediment and water AAG-OGP AUD COMMITTEE OF SPONSORING ORGANIZATIONS OF THE TREADWAY COMMISSION (COSO) 8.03–.04, 8.06, 8.13, 8.17, 8.19, 8.21 COMMODITY DERIVATIVES Audit considerations 7.155–.157 Full cost accounting 5.56 Internal controls 8.63 Option contracts 4.112, 4.114 Successful efforts accounting 4.109–.120 ©2018, AICPA 277 Subject Index COMMODITY FORWARD CONTRACTS 4.117 COST CENTER CEILING TEST 5.19–.28 COMMUNICATION Internal controls 8.05, 8.20–.21 Those charged with governance 7.89 COSTLESS COLLAR 4.114 COMPENSATION, EXPATRIATE 8.66 COMPENSATORY ROYALTIES 2.19 COMPLETENESS, ASSET RETIREMENT OBLIGATIONS 7.152 COMPLEX SPREADSHEETS, COMPUTER-BASED CONTROLS 8.72 COMPLIANCE CONTROLS 8.80–.82 COMPONENT OF AN ENTITY 4.96–.97, 5.48, 7.122 COMPUTER-BASED CONTROLS 8.70–.72 CONCESSIONS, INTERNATIONAL CONTRACTS 6.06 CONSOLIDATION METHOD ACCOUNTING 3.15–.17, 3.21, 5.12 CONTINGENCIES 7.161–.163, 8.74–.76 CONTINUOUS DRILLING 2.26 CONTRACT REVIEW 8.69 CONTRACTUAL ARRANGEMENTS See also lease agreements Audit considerations 7.129 Concessions 6.06 Exploration costs 6.09 Internal controls 8.65 International oil and gas industry 6.05–.14 Production sharing 6.07–.08 Service contracts 6.10–.11 CONTROL, DEFINED 3.17 CONTROL ACTIVITIES 8.05, 8.21 CONTROL ENVIRONMENT 8.05, 8.17 COST RECOVERY OIL 6.09 COUNCIL OF PETROLEUM ACCOUNTANTS SOCIETIES (COPAS) 2.42, 2.46, 4.69, 8.47 CURRENT PERIOD PRODUCTION, CAPITAL COST AMORTIZATION 4.26 CUSTOMER, DEFINED 4.69 D DAY RATE CONTRACT 2.79 DD&A See depreciation, depletion, and amortization DECONSOLIDATION 4.43 DELAY COSTS 4.15 DELAY RENTALS 2.16, 4.01, 7.98 DEPRECIATION Asset retirement obligations 4.76 Capitalized cost amortization 4.25 Support equipment and facilities 7.111 DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A) Abandoned or plugged wells 4.81 Audit considerations 7.109–.111 Capital cost amortization 5.09, 5.13, 5.15 Disclosure of risk and uncertainties 7.164 Discontinued operations 4.98 Full cost method 5.09, 5.13, 5.15, 7.110 Internal controls 8.61–.62 Reserves estimation 8.38 Successful efforts method See successful efforts accounting, for DD&A DERECOGNITION 4.43 CONTROL TRANSFERS, TAXES 4.54 DERIVATIVE COMMODITY CONTRACTS 4.109–.120, 7.155–.157 CONVERSIONS, INVOLUNTARY 4.82–.87 DEVELOPED OIL AND GAS RESERVES 1.36 CONVEYANCES Audit considerations 7.118–.122 Defined 4.41 Full cost accounting 5.02, 5.44–.47 Production payments 4.48–.50 Successful efforts accounting 4.41–.50 DEVELOPMENT ACTIVITIES 7.91–.92 COPAS See Council of Petroleum Accountants Societies DEVELOPMENT COSTS Capitalized cost amortization 4.27–.28 Defined 4.21–.22 Full cost accounting 5.07 Internal controls 8.33–.34, 8.50 Successful efforts accounting 4.17–.22, 4.27–.28 CORE DRILLING 2.64 DEVELOPMENT OPERATIONS 2.68–.88 CORPORATE ENTITIES EQUITY METHOD OF ACCOUNTING 3.21–.22 DEVELOPMENT WELLS 2.68 COSO See Committee of Sponsoring Organizations of the Treadway Commission COST APPROACH FOR VALUATION 4.130 COST BASIS ACCOUNTING 3.27, 4.51–.70 ©2018, AICPA DIRECTIONAL DRILLING 2.74–.76 DISCLOSURE REQUIREMENTS Accounting estimates 7.70–.77 Accounting policies 4.146 Annual 4.146, 4.147, 4.149–.153 Derivative contracts 4.120 AAG-OGP DIS 278 Entities With Oil and Gas Producing Activities DISCLOSURE REQUIREMENTS—continued Exchange offer 4.162–.163 Fair value measurements 4.138–.141 FASB ASC 606 4.146 FASB ASC 932 4.146, 4.149–.154 Financial statement controls 8.73–.82 Full cost accounting 4.156, 5.57–.60 Generally 4.142–.145 Interim 4.146, 4.148, 4.154 Oil and gas entities 4.142–.163 Publicly business entities 4.149 Publicly traded entities 4.139, 4.149–.154 Reserve quantity and value 7.168–.174 Reserves 4.152, 4.161 Revenue 4.146, 4.152 SEC requirements for 4.157–.163 Successful efforts accounting 4.142–.163 Suspended wells 4.147–.148 Undeveloped proved reserves 4.162 DRILLING AND DEVELOPMENT 2.68–.88 Carbon tool rigs 2.72 Contracts 2.77–.80 Development wells 2.68 Directional drilling 2.74–.76 Drilling contract 2.77–.80 Environmental aspects 2.70 Exploratory wells 2.68, 4.13 Geological information 2.71 Horizontal drilling 2.75–.76 Hydraulic fracturing (fracking) 1.10, 2.76 Production information 2.71 Regulatory environment 2.69, 2.88 Reservoir development 2.86–.87 Rotary drilling 2.73 State and federal regulations 2.69 Successful efforts accounting 4.03 Undeveloped oil and gas reserves 1.37 Vertical drilling 2.74 Well abandonment or plugging 2.81–.85 DISCONTINUED OPERATIONS Assets held for sale 4.95 Disposals 4.93–.94, 4.98–.99 Full cost accounting 5.48 Internal controls 8.28 Successful efforts accounting 4.93–.99, 4.97 DRILLING OBLIGATION, MINERAL INTEREST LEASE AGREEMENT 2.13 DISCOUNTED FUTURE NET CASH FLOWS 4.152, 7.115 DISMANTLEMENT COSTS Full cost accounting 5.13 International operations 6.36–.40 DISPOSALS Discontinued operations 4.93–.94, 4.98–.99 Full cost accounting 5.50–.54 Property 8.28 DRY HOLE CONTRIBUTION 2.66 DRY HOLE DEVELOPMENT Audit considerations 7.106 Development costs 4.18 Full cost accounting 5.30–.35 Internal controls 8.42 Successful efforts and general accounting 4.01 DUE DILIGENCE, INTERNAL CONTROLS 8.26 E ECONOMIC INTEREST, INTERNATIONAL PRODUCTION SHARING 6.33 DISTRIBUTION OF REVENUE 7.145–.148 EMBEDDED DERIVATIVES 4.109 DISTRICT AND WAREHOUSING EXPENSES 7.142, 7.144 ENERGY INFORMATION ADMINISTRATION 1.10 DIVISION OF INTEREST Audit considerations 7.100–.101 Internal controls 8.29–.32 ENERGY POLICY AND CONSERVATION ACT OF 1975 1.12 DIVISION ORDERS 2.47–.48 DOCUMENTATION AND RECORD KEEPING Audit considerations 7.85 Authorization for expenditures 2.40 Division orders 2.47–.48 Joint interest audits 2.45–.46 Joint interest billing 2.43 Joint interest operations 2.41–.43 Mineral interests 2.40–.48 Nonoperators 2.44, 2.46 Operating agreements 2.41 DOWNSTREAM ACTIVITIES 1.50 DOWNSTREAM PETROLEUM OPERATIONS 1.50 DRAINAGE CLAUSE 2.24 AAG-OGP DIS ENHANCED RECOVERY METHODS, PRODUCTION 2.99–.100 ENTITLEMENT METHOD OF ACCOUNTING 4.58–.61, 7.127 ENVIRONMENTAL LIABILITIES 4.79, 7.25–.56, 8.76 EQUIPMENT LEASING 4.91–.92 EQUIPMENT SECURITY, INTERNAL CONTROLS 8.47 EQUITY METHOD ACCOUNTING 3.20–.26, 5.12 ESTIMATES Accounting disclosure requirements 7.70–.77 Of reserves 1.48, 4.161, 8.38 ©2018, AICPA 279 Subject Index EXCHANGE OFFER DISCLOSURES 4.162–.163 EXCISE TAXES, PRODUCTION ACCOUNTING 4.54 EXCLUDED COSTS 5.15–.18 EXPATRIATE COMPENSATION 8.66 EXPENSES Internal controls 8.59 Operating 4.68–.70, 7.142–.144 EXPLORATION See prospecting and exploration EXPLORATION COSTS Disclosure requirements 4.152 Dry holes 4.18 Full cost accounting 5.07 Internal controls 8.33–.34, 8.50 Production sharing contracts 6.09 Successful efforts accounting 4.01, 4.03, 4.10–.16, 4.18, 4.152 EXPLORATORY WELLS 2.68, 4.147, 7.108 FINANCIAL REPORTING EXECUTIVE COMMITTEE (FINREC)—continued Successful efforts accounting 4.06 Taxes 4.54 FINANCIAL STATEMENTS See also material misstatements, risk of Fraud 7.27 Internal controls 8.73–.82 Limited partnerships 1.63 Materiality 7.15–.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 2.78 FOREIGN CORRUPT PRACTICES ACT OF 1977 (FCPA) 6.41–.43, 7.48–.49, 8.67 EXPROPRIATIONS 4.88 FOUR DIMENSION SEISMIC PROCESS 2.60 F FRACING (HYDRAULIC FRACTURING) 1.10, 2.76 FAIR VALUE Asset applications 4.124–.126 Asset retirement obligations 4.71–.78 Assumptions regarding 4.123 Audit considerations 7.158 Defined 4.121–.123 Derivative commodity contracts 4.111 Disclosures 4.138–.141 Full cost accounting 5.42 Hierarchy 4.135–.137 Inventory accounting 4.65–.66 Liabilities and instrument applications 4.127–.129 Measurement updates 4.121–.141 Present value techniques 4.133–.134 Valuation techniques 4.130–.132 FRAUD RISK 7.27, 8.02 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 INSTRUMENTS, ACCOUNTING FOR Appendix E FINANCIAL REPORTING See also financial statements 8.06–.08 FINANCIAL REPORTING EXECUTIVE COMMITTEE (FINREC) Derivative commodity contracts 4.119 Full cost accounting 5.24, 5.40, 5.48 Limited partnerships 3.25 Oil and gas industry accounting 1.72, 4.06, 5.24, 5.40 Proportionate share 4.58 ©2018, AICPA FREQUENTLY ENCOUNTERED TRANSACTIONS 2.29–.39 Carve out 2.30 Lease burden 2.35 Mineral interests 2.29–.39, 8.25–.27 Net profit interest 2.32, 2.34, 2.37 Net revenue interest 2.32–.33, 2.37 Nonmonetary exchanges 2.39 Overriding royalty interest 2.31 Production payments 2.36 Volumetric production payment 2.36–.37 Working interest purchase or sale 2.29 FULL COST, DEFINED 1.76 FULL COST ACCOUNTING 5.01–.60 Acquisition, exploration and development costs 5.07–.08 Amortization of capitalized cost 5.09–.18 Asset retirement obligations revisions and settlements 4.75, 4.76, 5.38–.41 Audit considerations 7.109–.111 Capitalized costs 5.02, 5.04, 5.08–.35 Capitalized overhead costs 7.105 Commodity derivatives 5.56 Conveyances 5.44–.47 Cost center ceiling test 5.19–.28 Depreciation, depletion, and amortization 7.110 Disclosure requirements 4.156, 5.57–.60 Discontinued operations 5.48 Excluded costs 5.15–.18 Fair value measurements 5.42 Generally 4.01–.08, 5.01–.06 AAG-OGP FUL 280 Entities With Oil and Gas Producing Activities FULL COST ACCOUNTING—continued Goodwill 5.50–.54 Impairment tests for capitalized cost 5.19–.35 Income 5.55 Interest capitalization 5.08 Lease arrangements 5.43 Management fees 5.55 New country applications 5.29–.35 Production 5.36 Summary Appendix A Unevaluated (unproved) property abandonment 5.37 FUTURE NET CASH FLOWS 4.152, 7.115 FUTURE NET RESERVES 5.19–.28 FUTURES CONTRACTS 4.116–.117 G GAAP See generally accepted accounting principles GAAS See generally accepted auditing standards GAINS Conveyances and 4.45–.47 Involuntary conversions 4.83–.87 GENERAL PARTNERSHIPS 3.07, 3.08, 3.19 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) Accounting for oil and gas producing activities 1.64, 1.67 Acquisition, exploration, and development costs 7.91 Commitments and contingencies 7.161–.162 International oil and gas industry 6.01–.04 Involuntary conversions 4.82–.87 Oil and gas reserves, disclosure 1.31–.32, 1.43 Royalty trusts 1.65 Supplementary oil and gas reserve audits 7.175 GENERALLY ACCEPTED AUDITING STANDARDS (GAAS) Auditing 7.03, 7.07, 7.27 Derivatives and hedging activities 8.156 GEOGRAPHIC AREAS Audit risk assessment 7.47 Disclosure requirements 4.158–.163 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 4.152 Full cost accounting 5.29–.35 Mineral interests 2.49–.67 AAG-OGP FUL GEOLOGICAL AND GEOPHYSICAL (G&G) EXPLORATION—continued Successful efforts accounting 4.01, 4.10–.16 G&G See geological and geophysical (G&G) exploration GOE See government-owned entities GOING CONCERN, AS AUDIT CONSIDERATION 4.142, 7.167 GOODWILL Full cost accounting 5.50–.54 Impaired 4.106–.108 Successful efforts accounting 4.100–.105 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 2.91 HEDGING 7.155–.157 HEDGING, DERIVATIVE COMMODITY CONTRACTS 4.110 HELD BY PRODUCTION (HBP) 2.23 HELD FOR SALE 8.28 HORIZONTAL DRILLING 2.75–.76 HOST COUNTRIES, INTERNATIONAL OIL AND GAS INDUSTRY 6.15–.16, 6.21–.28 HYDRAULIC FRACTURING (FRACING) 1.10, 2.76 HYDROCARBON ALTERNATIVES, SOURCES OF 1.19 HYDROCARBON-BEARING STRUCTURES, PROSPECTING AND EXPLORATION 2.53–.67 HYDROCARBON SUPPLY, DISRUPTION AND DECLINE 1.15–.16 I IASB See International Accounting Standards Board IMBALANCE Production 4.58, 4.59–.61, 7.136 Production accounting 4.58–.61 Proportionate share 4.58–.62, 8.53 Receivables, audit considerations 7.136 Revenue recognition 4.59–.61 Sales 4.59–.61 IMPAIRMENT, DEFINED 4.38 ©2018, AICPA 281 Subject Index IMPAIRMENT OF GOODWILL 4.106–.108 IMPAIRMENT TESTS, CAPITALIZED COSTS Audit considerations 7.112–.117 Cost center ceiling test 5.19–.28 Excluded costs 5.16–.18 Full cost accounting 5.16–.35 Internal controls 8.48–.49 Limitations 7.112 New country applications 5.29–.35 Proved properties 4.37–.40 Successful efforts 4.31–.40, 4.88, 7.113–.116 Unproved properties 4.32–.36, 7.117, 8.48 IN-SUBSTANCE COMMON STOCK 3.23 INCOME Full cost accounting 5.55 Taxable 6.25 INCOME APPROACH FOR VALUATION 4.130 INCOME TAXES 6.15–.16, 6.21–.28 INDEPENDENTS IN PETROLEUM OPERATIONS 1.51 INFORMATION COMMUNICATION, INTERNAL CONTROL 8.05 INHERENT RISK, INTERNAL CONTROL EVALUATION 8.02 INJECTION WELLS 2.71 INPUTS Asset retirement obligations 7.152 In business 4.101 Fair value hierarchy 4.135–.136 INSTRUMENTS, FAIR VALUE MEASUREMENTS 4.127–.129 INTEREST CAPITALIZATION Audit considerations 7.102–.103 Full cost accounting 5.08 Property accounting 8.44 Successful efforts accounting 4.23 INTEREST HOLDERS Operating expenses 4.69 Operator or nonoperator 7.35 Proportionate share 4.58 Revenue accounting 4.54 Taxes 4.54 INTERNAL CONTROL—continued Contract review 8.69 Defined 7.50, 8.04, 8.07 Defined, by SEC 8.13 Entity investments 8.64 Exploration and development 8.33–.49, 8.50 Financial reporting 8.06–.08 Financial statement disclosures 8.73–.82 Framework and components 8.05 International operations 8.65–.67 Inventory 8.51–.60 Management evaluation 8.18–.22 Material misstatement 7.50–.56 Mineral interests acquisition 8.24–.32 Nonpublic entity audits 8.10–.11 Oil and gas entity activities 8.23–.72 Production 8.51–.62 Public entity reporting requirements 8.13–.17 Related party transactions 8.68 Reserve estimates disclosure 1.48, 4.161, 8.38 Tax and regulatory compliance 8.80–.82 INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) 1.77–.78 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 Generally 6.01–.04 Income taxes 6.15–.16, 6.21–.28 Internal controls 8.65–.67 Production taxes 6.15–.16, 6.19–.20 Proved reserves reporting 6.29–.34 Royalties 6.15–.18 INVENTORY Audit considerations 7.140–.141 Internal controls 8.47, 8.51–.60 Net realizable value 4.63, 7.141, 8.55 Product inventory 8.55 Production accounting 4.63–.67 INVESTEE ENTITY 3.03 INTERIM DISCLOSURE REQUIREMENTS 4.146, 4.148, 4.154 INVESTMENTS Cost basis accounting 3.27 Equity method accounting 3.22 In-substance common stock 3.23 Internal controls 8.64 Limited partnerships 3.25 INTERIM FINANCIAL STATEMENTS 4.147 INVESTOR ENTITY 3.03 INTERNAL ACQUISITION, DEVELOPMENT AND EXPLORATION, SUCCESSFUL EFFORTS ACCOUNTING 4.03 INVOLUNTARY CONVERSIONS 4.82–.87 INTERFACES, COMPUTER-BASED CONTROLS 8.70 INTERNAL CONTROL 8.01–.82 Commodity derivatives 8.63 Computer-based controls 8.70–.72 ©2018, AICPA J JIB See joint interest billing JOA See joint operating agreements AAG-OGP JOA 282 Entities With Oil and Gas Producing Activities JOINT AND SEVERAL LIABILITIES 4.71–.78, 4.89–.90 JOINT INTEREST AUDITS Collectability 7.138–.139 Considerations 7.94, 7.128 Documentation 2.45–.46 Payables 7.146 JOINT INTEREST BILLING (JIB) 2.43, 7.133, 7.146, 7.150, 8.35–.37 JOINT INTEREST CREDITS 7.134 JOINT INTEREST OPERATIONS 2.41–.43 JOINT INTEREST RECEIVABLES 8.37 JOINT OPERATING AGREEMENTS (JOA) Allocation of interest 7.125 Documentation and record keeping 2.41–.43 Operating expenses 4.69 Taxes 4.54 JOINT VENTURES 1.54, 1.60, 7.41 K LEASE TERMINATION 2.14 LEASEHOLD COSTS, AUDIT CONSIDERATIONS 7.97–.98 LESSOR’S ROYALTY INTEREST 2.18 LIABILITIES Asset retirement obligations 4.71–.78 Environmental 4.79, 7.25–.56, 8.76 Fair value measurements 4.127–.129 Joint and several 4.71–.78, 4.89–.90 Monetary liability 6.37–.40 LIFTING COSTS 4.03 LIFTINGS 7.140 LIMITED LIABILITY COMPANIES (LLCs) 3.05, 3.21 LIMITED PARTNERSHIPS 1.61–.63, 3.07, 3.25 LIQUIFIED NATURAL GAS 1.09 LLCs See limited liability companies LOSSES, CONVEYANCES AND 4.45–.47 KICK-OUT RIGHTS 3.08 M L MAJORITY SHAREHOLDERS 3.18 LANDSAT IMAGING 2.54–.58 MANAGEMENT Going concern evaluation 4.142, 7.167 Internal control evaluation 8.02, 8.18–.22 Oil and gas entities, sample representations Appendix B Written representations from 7.79–.80 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 5.43 Guaranteed/minimum royalties 2.22 Internal controls 8.24 Lease bonus 2.12 Lease extension 2.14 Lease termination 2.14 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 Revenue distribution 7.148 Right to assign interest 2.27 Shut-in royalties 2.21 Successful efforts accounting 4.91–.92 Surface damages 2.25 Taxes 4.54 Top lease 2.15 MATERIALITY 7.14–.17 LEASE BONUS 2.06, 2.12 MIDSTREAM ACTIVITIES 1.50 LEASE BURDEN 2.35 MIDSTREAM PETROLEUM OPERATIONS 1.50 LEASE EXTENSION 2.15 AAG-OGP JOI MANAGEMENT FEES 5.55 MANDATORY RENTALS 2.17 MARKET APPROACH FOR VALUATION 4.130 MATERIAL MISSTATEMENTS Assertions 7.21–.24 Assessment procedures 7.29–.31, 7.57–.60 Audit identification and evaluation 7.81–.84 Audit procedure design and performance 7.61–.69 Entity and its environment 7.25–.56 Industry, regulatory, and other external factors 7.32 Internal control 7.50–.56 Operations and related business risks 7.43–.46 Operator/nonoperator 7.35–.38 Relevant assertions 7.23 Risk of 7.12, 7.16 ©2018, AICPA 283 Subject Index MINERAL INTERESTS Acquisition 2.01–.48 Asset acquisition 4.103–.104 Conveyances 4.41–.50 Delay-related costs 2.20 Documents and files 2.40–.48 Frequently encountered transactions 2.29–.39, 8.25–.27 Internal controls 8.24–.32 Operating expenses 4.68–.70 Ownership arrangements 3.02–.04 Prospecting and exploration 2.61–.67 MINORITY SHAREHOLDERS 3.18 MONETARY LIABILITY 6.37–.40 MONITORING 8.05, 8.22 NONRISK SERVICE CONTRACTS 6.10–.11, 6.13, 6.29 NORMAL PURCHASES AND NORMAL SALES 4.118 NPI See net profit interest NRI See net revenue interest O OBSERVABLE INPUTS, FAIR VALUE HIERARCHY 4.135–.136 OFFSET CLAUSE 2.24 OFFSHORE DRILLING 1.17–.18, 2.70 OIL AND GAS FUNDS 1.61 N NATURAL DISASTERS 4.82–.87 NATURAL GAS, DEVELOPMENT OF THE INDUSTRY See also oil and gas industry 1.08–.10 NATURAL GAS POLICY ACT OF 1978 1.12 NET FUTURE CASH FLOWS 4.33, 4.39 NET PROFIT INTEREST (NPI) 2.32, 2.34, 2.37 NET QUANTITIES, DISCLOSURE REQUIREMENTS 4.154 NET REALIZABLE VALUE, INVENTORY 4.63, 7.141, 8.55 NET REVENUE INTEREST (NRI) 2.32–.33, 2.37 NEW COUNTRY APPLICATIONS 5.29–.35 NONCONTROLLING INTERESTS 8.27 NONFINANCIAL ASSETS, FAIR VALUE 4.124–.126 NONMONETARY EXCHANGES 2.39 NONOPERATING INTEREST 6.17 NONOPERATORS Audit evidence 7.37 Audit procedures 7.35–.38 Authorization for expenditure 8.50 Collectability 7.138 Documentation and record keeping 2.44, 2.46 Exploration, development, and production 8.50 Internal controls 8.50 Inventory 7.139 Joint interest credits 7.134 Joint interest payables 7.146 Material misstatements 7.35–.38 Unapplied advances 7.150 NONPUBLIC ENTITIES Disclosure requirements 4.149 Internal control for audits 8.10–.11 Successful efforts accounting 4.06–.07 ©2018, AICPA OIL AND GAS INDUSTRY 1.01–.78 Accounting history 1.67–.76 Audit considerations 7.01–.178 Capital sources and organizational structure 1.57–.66 Disclosure requirements 4.138–.163 Drilling and development 2.68–.88 Full cost accounting 1.76, 4.01–.08, 5.01–.60 History of 1.01–.20 Internal control issues 8.01–.82 International activities 6.01–.43 International standards for accounting 1.77–.78 Joint interest arrangements 1.60 Limited partnerships 1.61–.63 Mineral interests acquisition 2.01–.48 Oil sands 1.54–.56 Origin and accumulation 1.21–.29 Ownership arrangements 3.01–.27 Primary business activities 2.01–.100 Production 2.89–.100 Prospecting and exploration 2.49–.67 Regulation and oversight 2.88 Reserves 1.30–.48 Royalty trusts 1.64–.65 Successful efforts accounting 4.01–.163 Upstream operations 1.49–.56 OIL AND GAS PRODUCING ACTIVITIES, DEFINED 1.35, 1.56 OIL AND GAS PROGRAMS 1.61 OIL SANDS 1.54–.56 OPERATING ACTIVITIES 1.50, 7.43–.46 OPERATING AGREEMENTS 2.41–.44 OPERATING EXPENSES 4.68–.70, 7.142–.144 OPERATORS Audit evidence 7.37 Audit procedures 7.35–.38 Authorization for expenditure 8.50 Collectability 7.138 AAG-OGP OPE 284 Entities With Oil and Gas Producing Activities OPERATORS—continued Documentation and record keeping 2.44, 2.46 Inventory 7.139 Material misstatements 7.35–.38 PAYOUTS, INTERNAL CONTROLS 8.32 OPTION CONTRACTS, DERIVATIVE COMMODITIES 4.112, 4.114 PIPELINE IMBALANCES 8.54 PERFORMANCE MATERIALITY 7.14–.17 PETROLEUM RESOURCES MANAGEMENT SYSTEM (PRMS) 1.38–.40 ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC) 1.06–.07, 1.16 PLUGGED WELLS See also well abandonment or plugging 2.81–.85, 4.80–.81 ORRI See overriding royalty interest POB See paid on behalf (POB) arrangement OUTPUT, IN BUSINESS 4.101 POSSIBLE RESERVES 1.31, 1.38 OVERHEAD COST CAPITALIZATION 7.104–.105, 7.144, 8.43 PP&E See property, plant and equipment OVERLIFT, REVENUE RECOGNITION 4.58–.59, 7.136, 8.53 PREFERABILITY LETTER 4.05 PRECISION OF ESTIMATES, RESERVES 1.48 OVERRIDING ROYALTY INTEREST (ORRI) 2.31 PRESENT VALUE MEASUREMENTS 4.133–.134, 5.19–.28, 7.112 OVERSIGHT See regulation and oversight PRICE SWAP CONTRACT 4.115 OWNERSHIP ARRANGEMENTS 3.01–.27 Accounting models 3.09–.11 Audit procedures 7.39–.42 Consolidation method 3.15–.17 Cost method 3.27 Equity method 3.20–.26 International oil and gas contracts 6.14 LLCs 3.05 Mineral interests 3.02–.04 For risk sharing 1.59 Separate entities 3.03–.04 Undivided interests 3.02 Variable interest entities (VIEs) 3.04, 3.12–.15, 3.16 Voting interest model 3.04, 3.16–.19 PRICES, OIL AND GAS 1.11–.13 OWNERSHIP INTEREST 2.04–.05 P PAID ON BEHALF (POB) ARRANGEMENT 6.24 PARTNERSHIPS Audit procedures 7.39–.40 General partnerships 3.07, 3.08, 3.19 International oil and gas contracts 6.14 Kick-out rights 3.08 Limited partnerships 1.61–.63, 3.07, 3.25 Operating expense agreements 4.69 Pass-through LLCs 3.07 PASS-THROUGH LLCS 3.07 PAYABLES Auditing considerations 7.145–.151 Joint interest payables 7.146 Production purchasers borrowings 7.149 Production taxes 7.151 Revenue distribution 7.147 Unapplied advances 7.150 AAG-OGP OPE PRICING REGULATIONS 7.129, 8.52 PRIMARY BUSINESS ACTIVITIES 2.01–.100 Drilling and development 2.68–.88 Mineral interests acquisitions 2.01–.48 Production 2.89–.100 Prospecting and exploration 2.49–.67 PRIMARY RECOVERY 2.99–.100 PRIMARY TERM, MINERAL INTEREST LEASE AGREEMENT 2.13 PRINCIPAL MARKET 4.122 PRIVATE COMPANY ALTERNATIVE, GOODWILL IMPAIRMENT 4.106 PRMS See petroleum resources management system PRO RATA CONSOLIDATION 3.21 PROBABLE RESERVES 1.31, 1.38 PROCESS, IN BUSINESS 4.101 PRODUCT INVENTORY 8.55 PRODUCTION 2.89–.100 Audit considerations 7.123–.144 Enhanced recovery methods 2.99–.100 Exploration and production (E&P) entity 4.01 Full cost accounting 5.36 Generally 2.89–.96 Imbalance 4.58, 4.59–.61, 7.136 Internal controls 8.50, 8.51–.62 Inventory 4.63–.67, 7.140–.141 Operating expenses 4.68–.70, 7.142–.144 Purchasers’ borrowings 7.149 Receivables 7.132–.139 Revenue 4.52–.62, 7.123–.131 SEC disclosure requirements 4.158 ©2018, AICPA 285 Subject Index PRODUCTION—continued Successful efforts accounting 4.03, 4.51–.70 Taxes 4.53–.54 Workovers 2.97–.100 PRODUCTION COSTS 6.19–.20 PRODUCTION HOLDS LEASE 2.23 PRODUCTION PAYMENTS Conveyances 4.48–.50 Mineral interest transactions 2.36 Oil and gas industry 1.66 PRODUCTION SHARING CONTRACTS (PSCs) Asset retirement operations 6.36–.40 Audit considerations 7.131 Generally 6.07–.09 Proved reserves 6.33 Service contracts as alternative to 6.10 PRODUCTION TAX 6.15–.16, 6.19–.20, 7.151 PROFESSIONAL SKEPTICISM 7.06 PROFIT OIL 6.09 PROJECT AREA 2.64 PROMOTES, JOINT VENTURES IN OIL AND GAS 1.60 PROVED RESERVES Developed 1.36 Development costs 4.17 Disclosures for undeveloped 4.162 International oil and gas 6.29–.34 PRMS definition 1.38–.39 SEC definitions 1.33–.37 PROVED UNDEVELOPED RESERVES 1.36 PSCs See production sharing contracts PUBLIC ACCOUNTING OVERSIGHT BOARD (PCAOB), AUDITING STANDARDS OVERVIEW 7.01–.03 PUBLIC ENTITY REPORTING, INTERNAL CONTROLS 8.13–.17 PUBLICLY TRADED ENTITIES, DISCLOSURE REQUIREMENTS 4.139, 4.149–.154 PURCHASING CONTROLS 8.40, 8.56 Q QUALITY CONTROL STANDARDS, OVERVIEW OF STATEMENTS ON Appendix C QUANTITY AND VALUE DISCLOSURES, OIL RESERVES 7.168–.174 PROPERTY, PLANT AND EQUIPMENT (PP&E) 7.92 R PROPERTY COSTS Audit considerations 7.94, 7.96–.99 Disclosure requirements 4.152 Internal controls 8.39–.47 RATE OF RETURN CONTRACTS 6.12 REASONABLE ASSURANCE 7.04–.05 PROPERTY DISPOSALS, INTERNAL CONTROLS 8.28 RECEIVABLES Annual disclosure requirements 4.146 Audit considerations 7.132–.139 Joint interest 8.37 PROPORTIONATE SHARE, PRODUCTION IMBALANCES 4.58–.62, 8.53 RECORDS See documentation and record keeping PROSPECTING AND EXPLORATION 2.49–.67 Defined 2.49, 2.50 Exploration activities 2.50, 7.91–.92 Geological and geophysical (G&G) exploration 2.48 Geological exploration 2.51 Geophysical exploration 2.52 Hydrocarbon-bearing structures 2.53–.60 Significant aspects 2.61–.67 REGULATION AND OVERSIGHT Compliance controls 8.80–.82 Drilling and development operations 2.69, 2.88 Well abandonment or plugging 2.82, 2.85 PROVED PROPERTIES Audit considerations 7.97 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 7.113–.116, 8.49 Internal controls 8.49 Successful efforts accounting 4.03, 4.25, 4.37–.40 ©2018, AICPA REIMBURSEMENTS, OPERATING EXPENSES 4.69–.70 RELATED PARTY TRANSACTIONS 7.165–.166, 8.68 RELEVANT ASSERTIONS 7.23 RELIABLE TECHNOLOGY 1.35 REPORTING ENTITIES 5.06 RESERVES Audit specialists 7.20 Capital cost amortization 4.26 Capital cost impairment test 5.25–.28 Determination of 1.41–.48 Disclosure requirements 4.152, 4.161 Estimation, internal controls 1.48, 4.161, 8.38 AAG-OGP RES 286 Entities With Oil and Gas Producing Activities RESERVES—continued Exchange offer disclosures 4.163 Generally 1.30–.32 International proved volumes 6.34 Quantity and value disclosures 7.168–.174 SEC definition 1.33–.37 SPE definition 1.38–.40 S SAGD See steam-assisted gravity damage SALES Audit considerations 7.127, 7.135 Imbalance 4.59–.61 Successful efforts accounting 4.146 RESERVES SENSITIVITY ANALYSIS, DISCLOSURE 4.161 SALES METHOD OF ACCOUNTING 4.59–.61 RESERVOIR DEVELOPMENT 2.86–.87 SALT DOME TRAP, OIL AND GAS DEPOSITS 1.27 RESIDUAL SALVAGE VALUES 4.29, 4.76 RESTORATION COSTS, INTERNATIONAL OPERATIONS 6.36–.40 REVENUE Accumulation of 7.130 Annual disclosure 4.146 Audit considerations 7.100–.101, 7.123–.131 Disclosure requirements 4.146, 4.152 Distribution 7.145–.148 Internal controls 8.52 Production accounting 4.52–.62 REVENUE RECOGNITION STANDARD, NEW (FASB ASC 606) Appendix F REVISION, ASSET RETIREMENT OBLIGATIONS (ARO) 4.74, 5.38–.41 RIGHT TO ASSIGN INTEREST 2.27 RIGHTS TO EXPLORE ONLY CONTRACT 2.65 RIGHTS TO EXPLORE WITH OPTION TO ACQUIRE ACREAGE CONTRACT 2.65 RISK ASSESSMENT PROCEDURES Accounting estimates and related disclosures 7.72–.77 Audit considerations 7.09–.13, 7.164 Internal controls 7.54, 8.01–.02, 8.05, 8.10–.11, 8.19 Material misstatements 7.29–.31 Operations and related business risks 7.43–.46 RISK MANAGEMENT 7.43–.46, 8.78 RISK SERVICE CONTRACTS 6.10–.11 ROCKEFELLER, JOHN D 1.04 ROTARY DRILLING 2.73 ROYALTIES Basic royalty interests 2.18 Compensatory royalties 2.19 Guaranteed/minimum royalties 2.22 Internal controls 8.58 International oil and gas industry 6.15–.18 Lessor’s royalty interests 2.18 Overriding royalty interest 2.31 Shut-in royalties 2.21 ROYALTY TRUSTS 1.64–.65 AAG-OGP RES SALVAGE VALUES 4.40 SARBANES-OXLEY ACT OF 2002 (SOX) 8.06, 8.12 SCHEDULE OF CHANGES MADE TO THE TEXT FROM PREVIOUS EDITION Appendix G SECONDARY RECOVERY 2.99–.100 SECURITIES ACT OF 1933 (THE 1933 ACT) 1.20, 4.160, 8.12 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 4.157–.163 Financial reporting control 8.06 Internal controls 8.13–.17 Oil and gas reserves 1.31–.37 Production accounting 4.60 Reserve quantity and value disclosures 7.168, 7.170–.171 SEISMIC DATA Drilling and development 2.68 Four dimensional seismic data 2.60 Nonproprietary data 2.62 Prospecting and exploration 2.54 Seismic shooting 2.64, 4.22 Seismic testing 2.58 Three-dimensional (3D) seismic data 2.59–.60 SEPARATE ENTITIES 3.03 SERVICE LEASE ARRANGEMENTS 4.91–.92, 6.10–.11 SETTLEMENT Asset retirement obligations 4.75, 4.76, 5.38–.41 Derivative commodity contracts 4.119 SEVERANCE TAXES 8.57 SHALE OIL AND GAS 1.07, 1.10 SHIPPING AND HANDLING COSTS 4.55–.57 SHUT-IN ROYALTIES 2.21 SIGNIFICANT INFLUENCE 3.22–.24 ©2018, AICPA Subject Index SIGNIFICANT OIL AND GAS PRODUCING ACTIVITIES, DISCLOSURE REQUIREMENTS 4.150, 4.160 SOCIETY OF PETROLEUM ENGINEERS (SPE) 1.38–.40 SOX See Sarbanes-Oxley Act SPE See Society of Petroleum Engineers SPECIALISTS, USE OF 7.18–.20, 7.177–.178 SPREADSHEET COMPLEXITY, COMPUTER-BASED CONTROLS 8.72 STANDARD OIL COMPANY 1.04 STATE-OWNED PROPERTIES, MINERAL INTEREST ACQUISITION 2.08 STATEMENT OF CASH FLOWS 7.159–.160 STEAM-ASSISTED GRAVITY DAMAGE (SAGD) 1.54–.55 STRAIGHT LINE METHOD OF ACCOUNTING 4.25 STRATIGRAPHIC TEST WELLS 2.71, 4.11, 4.15–.16 STRATIGRAPHIC TRAPS, OIL AND GAS DEPOSITS 1.24, 1.29 STRUCTURAL TRAPS, OIL AND GAS DEPOSITS 1.24–.28 SUBSEQUENT EVENTS, DISCLOSURES 8.79 SUBSTANTIVE TESTS, AUDIT PROCEDURE DESIGN AND PERFORMANCE 7.66–.69 SUCCESSFUL EFFORTS, DEFINED 1.76 SUCCESSFUL EFFORTS ACCOUNTING 4.01–.163 Abandonment 4.80–.81 Acquisition costs 4.09 Amortization of capitalized costs 4.24–.30 Asset retirement obligations 4.71–.78 Assets held for sale 4.93 Audit considerations 7.97, 7.109 Business combinations 4.100–.105 Capitalized costs 4.03, 4.10–.40, 7.105 Conveyances 4.41–.50 Costs included in 4.03, 4.09–.22 For DD&A See successful efforts accounting, for DD&A Derivative commodity contracts 4.109–.120 Development costs 4.17–.22 Disclosure requirements See successful efforts accounting, disclosure requirements Discontinued operations 4.93–.99 Environmental liabilities 4.79 Exploration costs 4.10–.16 Expropriations 4.88 ©2018, AICPA 287 SUCCESSFUL EFFORTS ACCOUNTING—continued Fair value measurements See successful efforts accounting, fair value measurements Generally 4.01–.08 Goodwill 4.100–.108 Impairment tests for capitalized costs 4.31–.40, 4.88, 7.113–.116 Interest capitalization 4.23 Inventory 4.63–.67 Involuntary conversions 4.82–.87 Joint and several liability arrangements 4.89–.90 Lease arrangements 4.91–.92 Nonpublic entities 4.06–.07 Operating expenses 4.68–.70 Preferability letter 4.05 Production 4.51–.70 Revenue 4.52–.62 Summary Appendix A SUCCESSFUL EFFORTS ACCOUNTING, DISCLOSURE REQUIREMENTS 4.142–.163 Accounting policy disclosures 4.146 Exchange offer disclosures 4.162–.163 FASB ASC 932 disclosures 4.146, 4.149–.154 Full cost accounting entities 4.156 Generally 4.155 Interim disclosures 4.146, 4.148 SEC Subpart 1200 regulations 4.157–.161 Suspended wells 4.147–.148 SUCCESSFUL EFFORTS ACCOUNTING, FAIR VALUE MEASUREMENTS 4.121–.141 Asset applications 4.124–.126 Definitions 4.122–.124 Disclosures 4.138–.141 Hierarchy 4.135–.137 Liabilities and instruments applications 4.127–.129 Present value techniques 4.133–.134 Valuation techniques 4.130–.132 SUCCESSFUL EFFORTS ACCOUNTING, FOR DD&A Abandoned or plugged wells 4.81 Capitalized cost amortization 4.24–.30 Capitalized cost impairment tests 4.30 Component of an entity 4.96–.97 Disclosure requirements 4.146 Generally 4.01, 7.109 SUPPLEMENTARY OIL AND GAS RESERVES Procedures 7.175–.178 Quantity and value disclosures 7.168–.174 Work management specialists 7.177–.178 SUPPORT EQUIPMENT AND FACILITIES DEPRECIATION 7.111, 8.62 SURFACE DAMAGES 2.25 SURFACE MINING OPERATIONS 1.55 AAG-OGP SUR 288 Entities With Oil and Gas Producing Activities SUSPENDED WELLS Audit considerations 7.107 Costs 4.14 Disclosures 4.147–.148, 8.77 UNIT OF PRODUCTION, CAPITALIZED COST AMORTIZATION 4.25, 5.09, 5.14 SWAPS, DERIVATIVE COMMODITY CONTRACTS 4.112, 4.114 UNPROVED PROPERTIES Abandonment 5.37 Audit considerations 7.97 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 and tests 4.32–.36, 7.117, 8.48 Internal controls 8.48 Successful efforts accounting 4.03, 4.10–.11, 4.31–.36 T TAX CONSIDERATIONS Acquisitions, audit considerations 7.99 Audit considerations 7.153–.154 Compliance controls 8.80–.82 Income tax 6.15–.16, 6.21–.28 Production accounting 4.53–.54 Production tax 6.15–.16, 6.19–.20, 7.151, 8.57 TAXABLE INCOME 6.25 UNOBSERVABLE INPUTS, FAIR VALUE HIERARCHY 4.135–.136 THERMAL STIMULATION 2.99–.100 UPSTREAM PETROLEUM OPERATIONS Financial statements 1.49–.56 Oil sands 1.54 Operating activities 1.50 Production accounting 4.59–.61 Vertical integration 1.51 THIRD PARTY COMMITMENTS AND CONTINGENCIES 7.162 V TECHNICAL ASSISTANCE CONTRACTS 6.12 TERTIARY RECOVERY 2.99–.100 THIRD PARTY MEASUREMENTS 4.161, 7.126, 8.38 THOSE CHARGED WITH GOVERNANCE, COMMUNICATION 7.89 TITLE SEARCH, AUDIT CONSIDERATIONS 7.97–.98 TOP LEASE 2.15 TRANSACTION PRICE, ANNUAL DISCLOSURE REQUIREMENT 4.146 TRANSACTIONS, FREQUENT See frequently encountered transactions VALUATION, ASSET RETIREMENT OBLIGATIONS 7.152 VALUATION ALLOWANCES 7.152 VALUATION TECHNIQUES Changes in 4.132 Fair value 4.130–.132 Highest and best use 4.126 Present value techniques 4.133–.134 VARIABLE INTEREST ENTITIES (VIEs) 3.04, 3.12–.15, 3.16 VERTICAL DRILLING 2.74 TRAPS, OIL AND GAS DEPOSITS 1.21, 1.23–.29 VERTICAL INTEGRATED ENTITIES 1.51 TRUCK AND SHOVEL OPERATIONS See also surface mining 1.55 VOLUMES PRODUCED 8.51 TRUNCATION TRAP, OIL AND GAS DEPOSITS 1.28 TURNKEY CONTRACT 2.80 VIEs See variable interest entities VOLUMETRIC PRODUCTION PAYMENT (VPP) 2.36–.37, 4.50, 4.158 VOTING INTEREST MODEL 3.04, 3.16–.19 VPP See volumetric production payment U W UNAPPLIED ADVANCES 7.150 WAREHOUSING EXPENSES 7.142, 7.144 UNCERTAINTIES 7.164 WELL ABANDONMENT OR PLUGGING See also abandoned wells Asset retirement obligations 4.71–.78 Casing point 2.81 Cement and casing operations 2.83 Equipment installation and removal 2.81–.85 State and federal regulations 2.82, 2.85 Successful efforts accounting 4.80–.81 UNCONFORMITY TRAP, OIL AND GAS DEPOSITS 1.28 UNDERLIFT, REVENUE RECOGNITION 4.58–.59, 7.136, 8.53 UNDEVELOPED OIL AND GAS RESERVES 1.36–.37 UNINCORPORATED ENTITIES 3.21 AAG-OGP SUS ©2018, AICPA Subject Index WELLS IN PROGRESS 7.108, 8.45 WILDCAT LOCATIONS 2.12 WORKING INTEREST Audit considerations 7.100–.101 Conveyances 4.41–.50 International production sharing 6.33 Mineral interest acquisition 2.06–.09 Operating expenses 4.69 Purchase or sale of 2.29 ©2018, AICPA 289 WORKING INTEREST—continued Revenue recognition 4.54, 4.58, 4.69–.70, 4.104 WORKOVER COSTS 2.97–.98, 7.142–.143, 8.60 WORKOVERS 2.97–.98 WRITTEN REPRESENTATIONS, MANAGEMENT 7.79–.80 AAG-OGP WRI ... PREPARED BY THE ENTITIES WITH OIL AND GAS PRODUCING ACTIVITIES TASK FORCE (Updated as of August 1, 2018) About AICPA Audit and Accounting Guides This AICPA Audit and Accounting Guide has been... 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, as the authoritative standard of accounting and reporting for oil and gas producing entities filing reports with the SEC... containing oil and gas may be cut off by irregular dispositions of sand and shale or changes in the rocks in the strata, causing the oil and gas to be trapped Oil and Gas Reserves 1.30 The discovery and