Lease accounting proposals worry operators, contractors

Oil and gas operators, drilling contractors, and their trade associations have voiced concern about proposed accounting changes they fear would complicate contractual relationships, confuse investors, and raise administrative costs.

The proposal relates to leases of property and equipment. The changes would make companies account for leases with terms greater than 1 year as assets—or capitalized—in financial reports. They would not apply to leases of mineral rights but, as currently worded, potentially would treat drilling contracts as leases requiring new levels of reporting.

The Financial Accounting Standards Board and International Accounting Standards Board want to improve the ability of investors to compare financial performances of companies that lease much of their equipment and property with those favoring ownership.

Under present standards, explained an analysis this month by PricewaterhouseCoopers LLP (PwC), companies in many businesses can use leasing to take nearly full advantage of the benefits of outright ownership while avoiding the need to book debt and incur related interest expense. Their reported financial performances thus differ from disclosures of competitors that own corresponding assets, confounding comparisons by investors.

Drilling contractors argue treatment of their agreements with operating companies as leases under the new standards would make reports less comparable than they are now.

The proposal

In a May exposure draft, the Financial Accounting Standards Board and International Accounting Standards Board proposed to require a company using equipment or property under leases longer than 1 year to calculate a value for each such lease and report it as a “right-of-use” asset on its balance sheet along with a related liability.

According to PwC, the asset initially would be equal to the lease liability plus any initial direct costs, which might include commissions or legal fees. The corresponding liability would be the present value of lease payments due over the lease term.

Under the exposure-draft proposal, income-statement handling of capitalized leases would depend on the nature of the lease.

Leases of equipment, called Type A, would be presumed to have higher expenses early than later in the lease term. The expenses would be allocated between interest and amortization.

Type B leases, covering property such as land, would be presumed to have constant, “straight-line” expenses over their terms.

PwC said the proposal introduces a concept of components, explaining an asset would be a separate lease component if the company could benefit from use of the asset and the asset wasn’t dependent on or highly interrelated with other underlying assets in the contract.

Each component would be accounted for as a separate lease.

Companies would have to establish processes for identifying lease components and conduct periodic reassessments, which PwC warned “may produce significant financial statement volatility.”

Industry responses

A comment period that ended Sept. 13 attracted responses from a number of oil and gas industry representatives, most acknowledging the need for changes in lease accounting in service to comparability while questioning the applicability to drilling contracts.

“The proposed accounting model introduces unnecessary judgments and complexity into revenue recognition, reduces the transparency of our financial information, reduces comparability of financial information across our peer group, and significantly increases the manpower required to administer the proposed model suggested by the exposure draft,” said a statement by James MacLennan, chief financial officer, and Dennis Lubojacky, chief accounting officer of Noble Corp.

The Noble representatives said drilling contractors “construct wells for our customers” and argued: “We generally object to any accounting model where equipment used in the delivery of construction services would be considered a lease obligation of the client (or a lease receivable to the contractor).”

David Meliza, of the International Association of Drilling Contractors Accounting Issues and Policies Committee, said the dayrate structure of current drilling contracts provides comparability. Contractors generally publish their fleet statuses and dayrates, enabling analysts to project revenues and compare companies.

“Assuming we are required to bifurcate the contract into a lease component and service component under the proposed standards, the dayrate would not continue to have this relationship with revenues,” he said.

Like many industry representatives, Meliza warned of new administrative burdens. Companies would have to reevaluate key terms quarterly and assess effects changes had on balances related to leases. Type A leases would require “relatively complex calculations that must be performed on a lease-by-lease basis.”

Patrick T. Mulva, chairman of the American Petroleum Institute General Finance Committee, said requirements proposed for Type A leases would end the “symmetry across partners” in specific wells or projects under joint agreements common in the oil and gas industry.

Mulva also warned of possible increases in administrative costs. “The implementation cost for most large companies with extensive use of contracts that may be considered leases under the proposal will likely run into the tens of millions of dollars for each company,” he said, adding, “Small and mid-sized companies would likely be required to invest millions of dollars to implement an accounting standard offering little incremental benefit to investors.”

Pengrowth Energy Corp., Calgary, suggested the exclusion related to mineral ownership be expanded to include surface rights. In Canada, oil and gas rights are separate from surface rights and generally are owned by provincial governments.

Contact Bob Tippee at bobt@ogjonline.com.

Related Articles

FourPoint Energy to acquire Anadarko basin assets from Chesapeake

07/02/2015 FourPoint Energy LLC, a privately owned Denver company, plans to acquire oil and gas assets from Chesapeake Energy Corp. subsidiaries Chesapeake Ex...

Puma Energy completes purchase of Murco’s UK refinery, terminals

07/02/2015 Singapore-based Puma Energy Group Pte. has completed its purchase of UK midstream and downstream assets from Murco Petroleum Ltd., a subsidiary of ...

BP to settle federal, state Deepwater Horizon claims for $18.7 billion

07/02/2015 BP Exploration & Production Inc. has agreed in principle to settle all federal and state claims arising from the 2010 Deepwater Horizon inciden...

MARKET WATCH: NYMEX oil prices plummet on crude inventory build, Iran deadline extension

07/02/2015 Oil prices plummeted more than $2/bbl July 1 to settle at a 2-month low on the New York market after a weekly government report showed the first ri...

API to issue recommended practice to address pipeline safety

07/01/2015 The American Petroleum Institute expects to issue a new recommended practice in another few weeks that addresses pipeline safety issues, but the tr...

Shell Midstream Partners takes interest in Poseidon oil pipeline

07/01/2015 Shell Midstream Partners LP has completed its acquisition of 36% equity interest in Poseidon Oil Pipeline Co. LLC from Equilon Enterprises LLC, a s...

MARKET WATCH: Oil prices decline as US crude inventories post first gain in 9 weeks

07/01/2015 Oil prices on July 1 surrendered much of their gains from the day before after the release of a government report showing the first rise in US crud...

FWS issues Shell letter of authorization on Chukchi Sea lease

07/01/2015 The US Fish & Wildlife Service issued Shell Gulf of Mexico Inc. a letter of authorization (LOA) related to the potential disturbance of polar b...

USGS: Water usage for fracturing varies widely across shale plays

07/01/2015 The volume of water required to hydraulically fracture wells varies widely across the country, according to the first national analysis and map of ...
White Papers

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by
Available Webcasts

On Demand

OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST


Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected