Accounting Procedures

There are times when people ask me my opinion about the chargeability of certain items under the various PASC Accounting Procedures. Often the answer is clear cut and it is easy to point people in the right direction. Sometimes, I get asked about a grey area, in which case my answer is usually “tell me what side of the coin you want me to argue, and I’ll prepare a good argument for it.” 

It’s not very often that I come across an issue that isn’t a grey area, but that I feel like maybe it should be. The chargeability of severance pay under a typical Accounting Procedure is one of those cases. 

First, let’s be clear on what our PASC Accounting Procedures tell us. It is fairly clear that severance pay is not eligible to be charged to the Joint Account because of normal corporate downsizing. It is only chargeable in the event of complete abandonment of a project, but its not very often that we see a company shut down operations completely in an area, requiring them to lay off all of the staff in that area. 

So now let me put forth what are perhaps two common arguments. 

First, one might suggest that it is completely fair that severance pay should not be chargeable to the Joint Account. After all, it is the Operator’s sole corporate decision to lay off the individuals in question, and this is perhaps indicative that the Operator was not running the operations in as cost-conscientious fashion as they could have. It’s not the Non-operators’ fault that the Operator was overstaffed to begin with. 

The counter argument, however, might be that the Operator was required to have all of the required personnel available for growing operations, and there is no way that the Operator could have perceived the downturn that has left no part of this industry unaffected. The Operator wasn’t over staffed to begin with, but rather the shut in of various wells and facilities because of a low-price environment has meant that fewer personnel are now required that originally intended. Aside from this, the individuals laid off and the severance pay accordingly paid are saving non-Operators money through lower monthly operating costs. So why shouldn’t non-operators share in that cost? 

Maybe the right answer is somewhere in the middle. But if it is in the middle, how much should be a fair amount? Isn’t severance at the complete discretion of the Operator? Let’s face it, some companies have far more generous severance packages than others. Even if the severance pay were chargeable to the Joint Account, the challenge for non-Operators would be determining what kind of severance amount is fair and reasonable. 

The challenge for Operators, however, is that the PASC Accounting Procedure(s) aren’t going to change any time in the immediate future, and even if a new procedure is released that suddenly dictates that severance pay is chargeable, that doesn’t help us on the Accounting Procedures that are already attached to all of our existing agreements. 

In this case, there may be one loophole built into the existing Accounting Procedures that affords Operators the chance to possibly recover some severance pay, but also mitigates a Non-operator’s concern about excessive severance packages. 

To be clear, this is NOT a PASC-endorsed opinion, and quite frankly it hasn’t even been tested by the audit community. To that end, I wouldn’t even be able to say whether I would or wouldn’t raise a query on it if I were an auditor looking at it myself! 

Nonetheless, The PASC Clause regarding benefits (202 in PASC 1988, 1996 and 2011) indicates that compulsory benefits are chargeable to the Joint Account. Compulsory benefits are defined as “Payments made by the Operator pursuant to assessments imposed by government authority such as Unemployment Insurance, Workers Compensation, Canada Pension, or other payments of like nature that are applicable to the Operator’s salaries and wages charged to the Joint Account”. 

While severance pay has a very much elective component to it, the reality of the situation is that severance pay is consideration for wrongful dismissal in Alberta. We don’t often see lawsuits on severance because the Statutory minimum for severance pay in Alberta is one week pay for each year of service to a company. The industry severance packages usually exceed that so it’s not typically an issue. 

But let’s go back to the statutory minimum one week per year of service. This sounds a lot to me like a “definition from compulsory benefit”, in which case an argument might be made that it’s a compulsory benefit. Accordingly, should the Operator not be able to charge the one week per year of service to the Joint Account? 

Again, I can’t stress enough that this isn’t a PASC-approved function and I haven’t actually seen where this has been done in practice. In any event, given just how much our industry has been affected by the downturn and how significant of a cost everyone is bearing for severance pay, it’s worth an internal discussion to determine whether some portion of severance pay can be considered a compulsory benefit if you’re an Operator, and if you’re willing to accept that argument if you’re a Non-operator. 

By | 2018-02-05T22:20:49+00:00 November 1st, 2017|Categories: Journal|Comments Off on Accounting Procedures

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Integrity is a Calgary, Alberta based company specializing in Joint Venture Audit, Management of Joint Ventures, and Oil and Gas Joint Venture Accounting. We recognize the strategic importance of Joint Venture relationships and strive to help both Operators and Non-Operators alike find solutions to their problems. Call (403) 813-8837 today to set up an appointment