The PASC 2011 Accounting Procedure – The First Look (Part 2, Direct Charges)
My first blog in this series on the Board-approved PASC 2011 Accounting Procedure took a look at what was new and interesting in Article I of the Accounting Procedure. Whereas Article I deals more with the guidance of joint venture accounting practices and agreement administration, Article II of the PASC Accounting Procedures has always been to indicate what is and is not to be considered direct charges to the Joint Account and sets out the foundation of our joint venture accounting practices. Article II will be the focus of this blog where we’ll work to address some of the notable additions or changes in the PASC 2011 Accounting Procedure, without getting lost in some of the details.
Labour and Contracted Services
The labour and contracted services clauses in our PASC Accounting Procedures have grown and expanded over time in the face of changing operating and competitive environments. Industry’s compensation programs have become more complex to attract and retain talented and experienced personnel. Technology and communication systems have blurred what used to be a definitive line between what is on-site versus off-site for the purposes of establishing what activities are chargeable to the Joint Account. Naturally, you could expect the Labour and Contracted Services clauses in PASC 2011 to evolve just as our labour needs and compensation programs have and so some discussion on just the personnel component of Joint Operations is warranted.
- Alignment by Function
Previous versions of PASC had a significant distinction between how to treat employee labour (i.e. salaried individuals) and contracted services, even though a contractor might very well provide the same service that an employee would. For example, the “Services” clause of PASC 1996 never contemplated that something like supervision might be outsourced, but we regularly see it in industry practice. With PASC 2011, we have more of an alignment by using similar phrasing through Clauses 201 and 207 that places less emphasis on whether an individual is an employee or a contractor, and chargeability therefore becomes more dependent on the services provided by an individual. Further, separating on-site/off-site functions into their own sub clauses provides us with a more simplified approach to determine the chargeability of individuals.
- A Note on Supervision
When auditing supervision, auditors have to constantly be aware of which accounting procedure they are working with because each version modified the chargeability of the different layers of supervision. For comparison, PASWC 1976 and PASC 1983 indicated that only first level field supervision was chargeable. PASC 1988 then came and allowed us to elect whether second level supervision was allowable or not. PASC 1996 later established that any supervision, regardless of whether it was first level or second level, was allowable as long as it was “On-site” (meaning it could also be in the field or production office servicing the Joint Property). Now we come full circle with PASC 2011, which defines Supervision as only being first level and it must be “On-site”, with any other supervision chargeable only with approval of the Parties.
Will this change be enough to make companies revaluate their organization charts that auditors review payroll against? Maybe not. At the very least, though, I’d suggest that this is still worth bringing to the attention of companies’ managers who determine the field organizational structure, and the analysts who do the budgets.
- ICPs – Incentive Compensation Programs
ICPs are a new definition for PASC 2011, but not a new concept. Variable pay and pay for performance were discussed in passing in PASC 1996, but increasingly sophisticated compensation plans meant that separate guidance on just ICPs was warranted. What is new for PASC 2011 is a limit of 25% of base salary for ICPs, and an election to either include or exclude company stock options from being chargeable to the Joint Account.
(For those with the burning questions on administration labour, I can say for now that administrative labour continues to not be chargeable to the Joint Account, but I’ll address this in more detail in Part 3 of this blog series.)
Engineering and Technical Services
There has always been a fine line between Engineering and Technical Services. PASC 2011 makes the two even more related. Engineering and Technical Services are addressed under both the Labour and Contracted Services clauses (with reasonably similar phrasing), and it’s interesting to note that PASC 2011 allows Technical Services to be charged on a “percentage of cost” basis provided it’s clearly disclosed, much like Engineering and Design has been in previous versions of PASC. The biggest modification to Engineering that we see with the PASC 2011 Accounting Procedure is that we have an entire Accounting Procedure Interpretation (API) document dedicated to the chargeability of Engineering functions.
The audit community has wrestled for some time with what do with certain items that had been outsourced to third party engineering firms. For example, project management, bid review and selection, AFE management, and project budgeting were all items that would be commonly queried as potentially “administrative” in nature. API-15 provides some relief to those that would have to respond to such queries by explicitly listing an array of chargeable engineering activities, including those above.
Please don’t take this as a blank cheque for charging “engineering” time, however. The word “procurement” is notably absent from the list of chargeable activities in API-15, and administrative activities like invoice coding and invoice routing remain administrative in nature.
Computerized Systems and Communication
I have a friend who is an engineer. I joined his family at his house for dinner one evening and walking past his den, I noticed his computer running with a variety of changing graphs, charts and indicators. He explained that he was monitoring a well that was being drilled in real time. He was able to review the rate of penetration, pressures, pump rates, string torque, gas at mud tanks, and any comments entered by field personnel, amongst a variety of other things. He grabbed his Blackberry and shot off a quick email, and promptly received a phone call from someone on the rig site. They only needed to chat for a few minutes since my friend could already see what was going on down the hole just as well as the field personnel.
To the engineering readers of this blog, this is just another regular day in the office (wherever that office happens to be at the moment) and this is nothing new. To the accountants and auditors, it might be an interesting perspective of why we need API-16 on Chargeable Communication Systems and API-17 on Chargeable Field Computer Systems.
Thanks to the computerized systems and communication tools available, my friend was able monitor the well in real time saving him a trip to the rig site; he was also able to provide instantaneous instruction to the on-site workers and received immediate updates back. Plus I got a free dinner. It’s a win-win-win situation. The third win is for the Non-Operators in the well. The computerized tools that are on-site allow head office technical staff responsible for the design and execution of a drilling program to monitor rig parameters during the actual drilling process with the ultimate goal of improving drilling efficiency for the benefit of the Joint Account.
API-16 and API-17 have been written keeping in mind that technology changes, practices evolve, and new tools are constantly popping up to service this industry. It stands to reason that if new technology and communication tools are making Joint Operations more effective and efficient while simultaneously reducing travel and personnel costs, the Non-Operators should share in the costs of maintaining any system that directly benefits the Joint Property.
Did We Really Need the Allocation Options Clause in PASC 1996?
PASC 1996 had Clause 221 – Allocation Options, which laid out some options (fixed rate, percentage of cost or some other basis such as well count) for charging various activities to the Joint Account. Really, you could have taken any activity listed in Article II in PASC 1996 and assigned an allocation option to it. I don’t think I’ve seen an Accounting Procedure that actually utilizes this option recently, so it was no surprise to see this clause removed from PASC 2011 altogether.
Personally, I really liked the Allocation Options clause. While some of the larger companies already have the sophisticated allocation procedures and accounting systems in place for administration of operating cost recoveries, the smaller operators wrestle with ways to administer their chargeable activities since they might not have or be able to afford the expensive licenses just for the allocation modules. The small operators are the ones that would really benefit from Clause 221, so it surprises me why more small operators don’t use it with PASC 1996. Going forward with PASC 2011, the options for charging the various activities are often contained within the clause governing that activity, but without some of the more flexible options that were afforded by Clause 221.
In this blog, we’ve only scratched the surface of the new, changed or interesting items in Article II of PASC 2011. Having reviewed some of the things you can and can’t do, I’d like to close by referring to my discussion on approval in my previous Part 1 blog. Please keep in mind that you can charge anything you want under PASC 2011, even if it contradicts the terms of Article II of the Accounting Procedure, as long as you get approval. Make it easy on an auditor to look at an AFE or other approval document and recognize that there is appropriate disclosure of typically non-chargeable or gray-area items that can be accepted as chargeable to the Joint Account.
Please check back on the Integrity blog site for the next article in this series, which will focus on Article III – Overhead and will discuss other administration activities.
If you have any questions on the subject matter contained within this blog or are interested in a custom training program for your company joint venture issues, please feel free contact us through our website at http://www.integrity-audit.com/.
All content provided on this blog is for informational purposes only. The content contained herein does not represent the official or unofficial opinion of PASC, CAPL or any other industry association and is based solely on the opinion of the author. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.