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Audit and Accounting Guide: Entities with Oil and Gas Producing Activities


First update in 2 years! This publication includes over 200 pages of invaluable guidance to help you improve your industry knowledge, fine-tune your strategies, and provide high-quality services to your clients.

This 2014 edition provides important technical guidance, summarizes new standards and practices, and delivers "how-to" advice for handling audit and accounting issues that will be critical to your success.

As fluctuating oil prices, off-shore drilling, and other energy-related issues impact the way your clients conduct business, it’s essential to have a keen understanding of the domestic and international topics and trends facing the oil and gas industry today.

Founded in 1887, the American Institute of Certified Public Accountants (AICPA) represents the CPA and accounting profession nationally and globally regarding rule-making and standard-setting, and serves as an advocate before legislative bodies, public interest groups and other professional organizations. The AICPA develops standards for audits of private companies and other services by CPAs; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and monitors and enforces compliance with the accounting profession’s technical and ethical standards.

The AICPA’s founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, a licensing status and a commitment to serving the public interest.

1 Overview of the Industry .01-.78

The Industry’s History .01-.20

Development of the Oil Industry .02-.07

Development of the Natural Gas Industry .08-.10

Prices for Oil and Gas .11-.13

Recent Developments in the Oil and Gas Industry .14-.20

Origin and Accumulation of Oil and Gas .21-.29

Oil and Gas Reserves .30-.48

The SEC’s Definition of Proved Reserves .33-.37

The Society of Petroleum Engineers’ Definitions of Reserves .38-.40

Determination of Reserves .41-.48

Operations in the Upstream Petroleum Industry .49-.56

Oil Sands .54-.56

Sources of Capital and Organizational Structure of Oil and Gas Entities .57-.66

Joint Interest Arrangements .60

Limited Partnerships .61-.63

Royalty Trusts .64-.65

Other Sources of Capital .66

History of Accounting for Oil and Gas Producing Activities .67-.76

International Standards of Accounting for Oil and Gas .77-.78

2 Primary Business Activities of the Industry .01-.97

Acquisition of Mineral Interests .01-.47

Important Provisions in Lease Contracts .10-.28

Frequently Encountered Transactions for Transferring Mineral Interests .29-.38

Documents and Files Relating to Mineral Interests .39-.47

Basic Concepts of Prospecting and Exploration Activities .48-.66

Prospecting and Exploring for Potential Hydrocarbon-Bearing Structures .52-.59

Other Significant Aspects of Exploration Activities .60-.66

Drilling and Development .67-.85

The Drilling Contract .74-.77

Completing the Well or Plugging and Abandoning the Well .78-.82

Developing the Reservoir .83-.84

The Regulatory Environment .85

Production .86-.97

Workovers .94-.95

Enhanced Recovery Methods .96-.97

3 Accounting for Common Oil and Gas Ownership Arrangements .01-.22

Ownership Arrangements .01-.04

Ownership Arrangements--Mineral Interests .02

Other Arrangements .03-.04

Accounting Models .05-.06

Variable Interest Model (0Variable Interest Entities 0 Subsections of FASB ASC 810-10) .05

Voting Interest Model .06

Special Considerations .07-.12

LLCs .07

Partnerships .08-.12

General Guidance on the Consolidation, Equity, and Cost Methods .13-.22

Consolidation Method .13-.15

Equity Method .16-.21

Cost Method .22

4 Successful Efforts Method and General Accounting for Oil and Gas Activities .01-.160

General .01-.08

Accounting for Acquisition, Exploration, and Development Costs .09-.23

Acquisition Costs .09

Exploration Costs .10-.16

Development Costs .17-.22

Interest Capitalization .23

Amortization of Capitalized Costs .24-.30

Impairment Tests for Capitalized Costs .31-.40

Unproved Properties .32-.36

Proved Properties .37-.40

Conveyances .41-.50

Accounting for Production .51-.69

Revenue .52-.62

Inventory .63-.66

Operating Expenses .67-.69

Asset Retirements, Environmental Liabilities, Abandonments, Involuntary Conversions, Expropriations, and Joint and Several Liabilities .70-.87

AROs .70-.75

Environmental Liabilities .76

Abandonments .77-.78

Involuntary Conversions .79-.84

4 Successful Efforts Method and General Accounting for Oil and Gas Activities--continued Expropriations .85

Joint and Several Liability Arrangements .86-.87

Lease Arrangements .88-.89

Discontinued Operations and Asset Held for Sale Considerations .90-.96

Goodwill and Business Combinations .97-.105

Goodwill Impairment .103-.105

Derivative Commodity Contracts .106-.117

Fair Value Measurement .118-.138

Definition of Fair Value .119-.120

Application to Nonfinancial Assets .121-.123

Application to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity .124-.126

Valuation Techniques .127-.129

Present Value Techniques .130-.131

The Fair Value Hierarchy .132-.134

Fair Value Disclosures .135-.138

Disclosure Requirements for Oil and Gas Entities .139-.160

General .139-.142

Accounting Policy Disclosures .143

Suspended Well Disclosures .144-.145

FASB ASC 932 Disclosures .146-.151

Other Disclosure Matters .152

Additional Disclosures for Entities Following the Full Cost Method of Accounting .153

SEC Disclosures--Subpart 1200 of Regulation S-K .154-.158

Exchange Offer Disclosures .159-.160

5 Full Cost Method of Accounting for Oil and Gas Activities .01-.61

General .01-.06

Accounting for Acquisition, Exploration, and Development Costs .07-.08

Capitalization of Interest .08

Amortization of Capitalized Costs .09-.18

Excluded Costs .15-.18

Impairment Tests for Capitalized Costs .19-.35

Cost Center Ceiling Test .19-.28

Applications Involving a New Country .29-.35

Accounting for Production .36

5 Full Cost Method of Accounting for Oil and Gas Activities--continued Asset Retirements, Environmental Liabilities, Abandonments, Involuntary Conversions, and Expropriations .37-.42

Abandonment of Unevaluated (Unproved) Properties .37

Revisions and Settlements of AROs .38-.42

Fair Value Measurements .43

Lease Arrangements .44

Conveyances .45-.48

Discontinued Operations .49

Goodwill .50-.55

Goodwill--Property Disposals .51-.55

Other Matters .56

Management Fees and Other Income .56

Commodity Derivative Activities .57

Disclosure Requirements .58-.61

Additional Disclosure Requirements for Full Cost Entities .59-.61

6 Accounting for International Oil and Gas Activities .01-.43

Overview .01-.04

International Contractual Arrangements .05-.14

Concessions .07

Production Sharing Contracts .08-.09

Service Contracts .10-.11

Other Arrangements .12-.14

Royalty, Production Taxes, and Income Taxes .15-.28

Royalty .17-.18

Production Tax .19-.20

Income Tax .21-.28

Reporting International Proved Reserves .29-.34

Asset Retirement Obligations in International Operations .35-.40

The Foreign Corrupt Practices Act of 1977 .41-.43

7 Tax Considerations .01-.37

General .01-.03

Income Taxes .04-.25

Intangible Drilling and Development Costs .06-.10

Depletion .11-.15

Common Temporary Differences .16-.17

Conveyances .18

Accounting for Temporary Differences in Asset Acquisitions .19-.21

7 Tax Considerations--continued FASB ASC 740-10--Uncertain Tax Positions .22-.24

Net Operating Losses--Valuation Allowances .25

Other Common Tax Matters .26-.30

Ad Valorem and Severance Taxes .26-.27

EOR Credit (Section 43) .28

Credit for Production of Oil and Gas From Marginal Wells (American Jobs Creation Act of 2004) .29

Deduction for Income Attributable to Domestic Production Activities .30

International Operations .31-.37

U.SForeign Tax Credit .31-.32

Taxes in Foreign Jurisdictions .33-.37

8 Auditing .01-.175

Overview .01-.03

Planning Related Auditing Considerations .04-.20

Objectives of the Auditor .04-.05

The Importance of Exercising Professional Skepticism .06

Audit Planning .07-.08

Audit Risk .09-.13

Determining Materiality and Performance Materiality When Planning and Performing an Audit .14-.17

Use of Specialists .18-.20

The Use of Assertions When Identifying and Assessing the Risks of Material Misstatement .21-.24

Understanding the Entity, Its Environment, and Identifying and Assessing the Risks of Material Misstatement .25-.55

Risk Assessment Procedures .29-.31

Industry, Regulatory, and Other External Factors .32

Nature of the Entity and Its Operations .33-.48

Understanding of Internal Control .49-.55

Assessment of Risks of Material Misstatement and the Design of Further Audit Procedures .56-.76

Assessing the Risks of Material Misstatement .56-.59

Designing and Performing Further Audit Procedures .60-.68

Auditing Accounting Estimates and Related Disclosures .69-.76

Evaluating the Sufficiency and Appropriateness of the Audit Evidence Obtained .77

Written Representations From Management .78-.79

Evaluating Misstatements Identified During the Audit .80-.83

8 Auditing--continued Additional Audit Considerations .84-.87

Audit Documentation .84

Audit Evidence .85-.87

Communication With Those Charged With Governance .88

Additional Considerations for Specific Audit Areas .89-.157

Oil and Gas Properties--Acquisition, Exploration, and Development Activities .90-.107

Depreciation, Depletion, and Amortization .108-.110

Impairment .111-.116

Oil and Gas Property Conveyances .117-.121

Production .122-.143

Payables .144-.150

Asset Retirement Obligations .151

Tax and Other Regulatory Matters .152-.153

Derivatives and Hedging Activities .154-.156

Auditing Fair Value Measurements .157

Other Audit Considerations .158-.164

Statement of Cash Flows .158-.159

Commitments and Contingencies .160-.161

Risks and Uncertainties .162

Related Parties .163-.164

Supplementary Oil and Gas Reserve Disclosure Considerations and Related Procedures .165-.175

Reserve Quantity and Value Disclosures .165-.171

Supplementary Oil and Gas Reserves Procedures .172-.175

9 Internal Control Considerations .01-.81

Definition of Internal Control and Internal Control Framework .02-.07

Internal Control Framework .02-.04

Internal Control Over Financial Reporting .05-.07

Internal Control Considerations for Audit of a Nonpublic Entity .08-.10

Reporting Requirements for a Public Entity .11-.16

Evaluating the Effectiveness of Internal Control by Management .17-.22

Components of Internal Control .17-.22

Common Control Activities for Oil and Gas Entities .23-.72

Acquisition of Mineral Interests .24-.32

Exploration and Development Activities .33-.49

Exploration, Development, and Production--Nonoperator .50

9 Internal Control Considerations--continued Production .51-.62

Other Control Areas .63-.69

Computer Based Controls .70-.72

Control Over Financial Statement Disclosures Specific to Oil and Gas Entities .73-.81

Control Over Compliance With Tax and Regulatory Requirements .79-.81


A Guidance Updates

B Clarified Auditing Standards and PCAOB Standards

C Summary of the Successful Efforts and Full Cost Methods of Accounting

D Sample Management Representations for Entities With Oil and Gas Producing Activities

E International Financial Reporting Standards

F Schedule of Changes Made to the Text From the Previous Edition

Glossary and Other Commonly Used Industry Terms

Index of Pronouncements and Other Technical Guidance

Subject Index