Opinion & Commentary

The PASC 2011 Accounting Procedure – The First Look (Part 4, Opinion and Commentary)

I recently found an old binder in my office bookcase labelled “Proposed PASC 2006”. I was part of a team that was providing some “industry comment” back to PASC at the time. Out of curiosity, I started flipping through the pages and quickly realized that very little of that document survived to the PASC 2011 Accounting Procedure. In fact, PASC 2011 looked to have been completely re-written.

The reason I mention this is to highlight the challenges that PASC had in developing a new Accounting Procedure. While it’s easy to look at the final version and criticize how certain items were handled, I’m sure it was difficult for the members of the JIRC (Joint Interest Research Committee) to carefully debate and modify each and every clause for any conceivable scenario, and to add in new phrasing to address items that weren’t issues back when PASC 1996 was drafted. As I mentioned in Part 1 of this blog series, my hat is off to those that volunteered and had involvement in such a large task.

All in all, how do we summarize the key take-a-ways when it comes to the PASC 2011 Accounting Procedure?

Making Accountants of Engineers

The Accounting Procedure is not just a document for accountants and auditors. Now more than ever, the engineers that are preparing the AFE budgets and operating forecasts need to be aware of what the terms of the PASC 2011 Accounting Procedure are saying. The budgets and forecasts are no longer just for information and cost control, but are now approval mechanisms and documents against which charges to the Joint Account will be audited. In reading through PASC 2011 and subsequently preparing AFE budgets and operating cost forecasts, I would encourage readers to keep in mind that the terms of the Accounting Procedure don’t just apply to direct charges or directly charged internal labour, but also to any amounts that arise because of internal system generated allocation processes. Also, given some of the changes affecting our industry (like EPAP for example), there might be some project-based items that are worth discussion amongst Joint-Owners where it comes to cost sharing.

To Seek Permission or Ask Forgiveness?

A good joint venture auditor looks far beyond just coding errors, and ultimately looks towards the governing Accounting Procedure (and now therefore an AFE or approved cost forecast) to establish the eligibility of any item. In any Accounting Procedure, anything is chargeable – as long as you get approval. In PASC 1996 (and its predecessors), “Approval” was as per Clause 110, which essentially says that Owners will receive something in writing and they have to vote on it within 15 days. This sounds like a lot of work, though, if you’re just trying to get approval for one offsite professional consultant who was working on a job for a few days. An auditor comes along two years later, smiles and says, “Did you get approval for this charge? No? Oh, then it’s covered by your overhead.”

The new Accounting Procedure makes “Approval” a far easier process, but it’s very important for companies to take advantage of this by not hiding behind any vague cost categories on the AFEs or operating cost forecasts. I readily expect auditors to challenge situations where the AFE cost estimate does not contain sufficient detail to demonstrate that approval really has been given. Just as an example, I might suggest that more detailed descriptions like “Offsite Technical Consulting”, “Contract Off-Site Professional Consulting” and “Second Level Supervision” will need to work their way into AFE cost estimates. In my opinion, vague description like “Consulting” or “Supervision” will not be sufficient to grant approval through an AFE.

Implementing the Accounting Procedure

As far as an industry goes, it took quite a while for everyone to generally accept PASC 1996, and PASC 1996 was more or less just an expansion of the same type of organization that was in its predecessor, PASC 1988. I imagine it will take just as long, if not longer, for PASC 2011 to become our new “industry standard” document.

It will take time for industry’s Joint Venture Representatives to get comfortable enough with the PASC 2011 Accounting Procedure to start attaching it to all of their Joint Operating Agreements (JOAs). This will provide the rest of us with an opportunity to ensure that our systems and internal procedures are equipped to accommodate the changes incorporated into the Accounting Procedure, particularly as it relates to overhead. On the topic of overhead, I have never seen or heard about any kind of independent Canadian study that showed how our “industry standard” overhead recovery rates compare to the actual corporate G&A costs attributable to joint operations. The Operator is not supposed to profit from their role as Operator, but they’re not supposed to lose money out of it either. With the flexibility now offered by Article III of PASC 2011 (including options that increase capital overhead), and the ability to pick and choose rates for a variety of operating activities, it would be interesting to see such an industry study and compare it to the alternatives provided by PASC.

Getting PASC 2011

At this point I think it’s important to note that use of PASC 2011 is not free, unlike PASC 1996, and so I would encourage readers to take a look at the PASC website for the licensing options. In a nutshell, the licensing ranges from $200.00 to $2,000.00 per year, depending on how many of your agreements have PASC 2011 as the accounting procedure. PASC members were mailed a reference-only copy of PASC 2011 back in January 2012, but members may purchase additional reference copies from the PASC website at a cost of $55.00 per copy.

Closing – A Matter of Opinion

PASC 2011 offers a lot of improvements over its predecessors, but you will never find a document that is ideal for every company in the industry. Since I started this blog series, I’ve had a few people ask me, “So do you think I should start using PASC 2011?” PASC certainly hopes you do. My answer to these individuals was, “It depends”. It will depend on your management and administrative practices, your company size, your field organization, your allocation procedures, your area of operations, and of course whether you’re the Operator or Non-Operator; all of these are things to consider when you’re reviewing PASC 2011 and deciding whether to adopt it or not.

I’ve heard a fair number of comments that the PASC 2011 Accounting Procedure is the best accounting document industry has seen come along, and I’d be inclined to agree. What we have in PASC 2011 is a re-write with more clear terms and a layout that is easier to follow in some cases, but also some deliberately vague open doors that we as an industry will have to interpret. The Accounting Procedure Interpretation (API) documents provide excellent guidance on previously contentious topics by giving us clear and specific direction on what it an allowable charge to the Joint Account, especially where it comes to Engineering activities. The Accounting Procedure itself has been restructured and reorganized to accommodate the elimination of the Explanatory Texts which means we don’t need to search in multiple places to understand what’s allowable and what not.  There are still a couple of kinks to work out in PASC 2011, so it might also be worthwhile to monitor the PASC discussion boards (which are open to both PASC members and non-members) to see what kinds of questions are popping up.

If you have any questions on the subject matter contained within this blog or are interested in a custom training program for your company on joint venture issues, please feel free contact us through our website at www.integrity-audit.com. To recommend topics for future blogs, please feel free to email us at info@integrity-audit.com.

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By | 2017-11-10T04:19:39+00:00 March 12th, 2012|Categories: Journal|Comments Off on Opinion & Commentary

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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