Key Accounting Considerations for Oil and Gas Companies
Do you know, oil and gas industry has contributed high revenues to UAE national economy as well as high per capita income. The resources from the oil and gas sector are invested in other industries. Thus, the oil and gas sector in the UAE contributes to the well-developed infrastructure and attracts foreign investors. The share of the oil and gas industry in the GDP decreases constantly, as it is more contributed to other industries. The oil and gas market in the UAE is expected to make a massive investment in this sector to increase its refining capacities. This investment will drive the oil and gas market better than alternative energy sources. Accounting for oil and gas companies delve into acquisition, exploration, development, and production activities. Exploration, development and production are the major activities that share substantial capital costs. The transportation of the resources through pipelines and tankers also cost some charges. As it is challenging to transport, many producers and utilities search for long-term contracts to support the infrastructure required particularly off-shore. The oil and gas industry are exposed significantly to macroeconomic factors like:
- Commodity prices
- Currency fluctuations
- Interest-rate risk
- Political developments
All the below activities are to be considered before making the key considerations.
1. Upstream: Exploration activities for the resources like offshore drilling and mining
2. Midstream: The activities are transportation and processing of resources extracted
3. Downstream: Refining of the raw materials extracted
Revenue Recognition: The approaches to revenue recognition are:
- Identify the Contract and the performance obligation
- Denote the transaction price and allocate it to the performance obligation in the contract
- Recognize revenue when the entity performs the obligation
Inventory: The companies a need to recast recorded inventory balances under weighted average or FIFO rules for financial reporting
Exploration and Evaluation Assets: Exploration and evaluation expenditure are those costs that are incurred by oil & gas companies in connection with the exploration for and evaluation of mineral resources
Asset Impairment: An asset is impaired when the carrying value exceeds the recoverable amount
Depletion, Depreciation & Amortization:
- Depletion is the actual physical depletion of natural resources by a company
- Depreciation is the means of allocating the cost of material assets over its useful life
- Amortization is the deduction of capital expenses over a specified time period
Embedded Lease: Oil and gas companies employ service contracts as a part of their operations. As per the new IFRS 16 Leases, companies need to record leases as right-of-use assets supporting an economic benefit. So, oil and gas companies got to check out their service agreements whether they contain embedded leases.
Leased Assets: Material assets utilized in oil and gas operations, like oil rigs, are often employed through a bundled contract. This contract will often include the labour and other materials needed to work the asset. If any parts of those agreements meet the definition of a lease, the new standards require companies to work out the standalone value of every element of the contract, both lease and non-lease.
Equipment Lease: It is common for oil and gas companies to enter into joint operating agreements or joint ventures with other companies to use sublet equipment like drill rigs. Under these joint operating agreements, organizations will get to determine whether to record these shared embedded leases on a gross or net basis.
License Renewal: There are multiple reasons why an oil or gas service may plan to renew or not renew a lease. Changing economic conditions or new strategic goals often require the utilization of latest or different assets. When triggering events cause changes in leases, the new guidelines require companies to reassess the lease’s operating and financial classification. Certain triggering events can also require a revaluation of the right-of-use asset of that lease and therefore the lease liability. As companies work to suit the new standards, they need to ensure processes are in situ for reassessing their leases when these triggering events occur.
CDA Accounting Services For Oil And Gas Companies
As a team of certified professionals, we provide the highest level of specialized service to the oil and gas companies. We offer our best talents in-depth to help our clients. We ensure appropriate accounting systems by understanding the financial constraints. We provide tax-effective and support strategic measures to achieve business goals. We are always available with optimum solutions.
Also read, All About Economic Substance Regulations in UAE
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