The PASC The PASC 2011 Accounting Procedure – The First Look (Part 1)
The highly anticipated and long awaited Board-approved PASC 2011 Accounting Procedure has finally been released to industry! This means that our industry wish lists have all been granted and companies are going to rush to adopt the latest joint venture accounting practices, right? Well, not quite.
First and foremost, I take my hat off to those who were tasked with having to write and review a new accounting procedure for a complex industry. Developing a new accounting procedure to satisfy everyone from the tiny producer to the international integrated corporation isn’t easy. In fact it’s impossible. Is it better to tighten the leash on an Operator by adding more restrictions, or is it a better approach to loosen the rope a bit to provide for additional flexibility? In many cases in PASC 2011, it’s both.
In a four part blog series, I’ll give a synopsis of what’s new and interesting in the new PASC 2011 Accounting Procedure. Naturally, it won’t be possible to discuss every change or modification, of which there are plenty, but let’s try to hit some of the bigger and more interesting points.
This first blog will look at some of the major changes of Article 1 – General Provisions and of the Accounting Procedure in general.
Say Bye to the Explanatory Text
Older versions of the Accounting Procedures were a bit like getting two procedures for the price of one; you’d review your Accounting Procedure for whatever interests you, and then you’d have to go check the Explanatory Text (which was technically part of that Accounting Procedure) for any additional phrasing that might help or hurt you. PASC 2011 was developed with the intent of eliminating the need for a separate document to clarify additional terms, but with a catch; complex topics (like chargeable engineering activities, for example) may be entitled to their own Accounting Procedure Interpretation (API) document, which discusses the issue in greater detail. Accounting Procedure Interpretations (APIs), Accounting Guidelines (AGs) and General Publications (GPs) become an extension of the Accounting Procedure and replace the Explanatory Texts.
The Idea of Evergreen
The preamble to PASC 2011 mentions the word “evergreen”; in essence, a clause in the Procedure indicates that any future PASC endorsed API or AG publication becomes part of this Accounting Procedure. This idea sounds great as far as incorporating current industry opinion and standards, but might sound scary for some. Can your Accounting Procedure really change without your representative’s explicit approval? While it might be PASC’s intent to use the APIs and AGs to only clarify existing terms of PASC 2011, don’t be surprised if you find companies introducing a modification to specifically eliminate the “evergreen” clause from the Procedure. The unknown can be daunting when you’re bound to its terms.
To Dispute, or Not to Dispute
PASC 1996 let us dispute items if it was warranted, but they had to be significant and the Operator had to agree with us disputing them. Other clauses then told us we had to pay everything within 30 days as rendered by the Operator. A number of Non-Operators would also regularly request sample copies of backup before paying a bill, which may or may not have been provided. It’s easy to see how confusion would ensue and some partner account reconciliations would get out of control. The new Accounting Procedure uses more explicit language where it comes to billing and disputes.
First, an Operator is not obligated to provide copies of supplier invoices supporting charges to the Joint Account. Phew, you don’t need to provide backup for that $8 maintenance charge to that shut-in well. An Operator does, however, have to provide an explanation and documentation supporting “significant or unusual adjustments” (more on this in a moment).
Also, a list of criteria has been provided detailing specific circumstances when a Non-Operator may withhold payment. The acceptable reasons include unapproved AFEs, overspent AFEs requiring supplementals, working interest errors, and failure to provide sufficient details on “significant or unusual charges or prior period adjustments”. So, what constitutes significant or unusual, and are we any further ahead? Good questions. PASC was actually asked to define “Significant” in Clause 101 during the draft reviews of the Accounting Procedure, but understandably refrained from doing so. This one will ultimately be for industry to discuss and figure out.
Procedure Versus Practice – Cash Calls
PASC 1996 gave the Operator the right to request capital advances, but the method outlined was so administratively difficult that industry came up with our own practices of cash calling for the full estimated amount of an AFE. The project might take a number of months, and recovering unspent amounts on cash calls could sometimes be a challenge for Non-Operators. PASC recognized that the old method was cumbersome and was not being used, but couldn’t write our current practice into an official Accounting Procedure as it could be potentially crippling to companies where cash is tight. So for PASC 2011, the Operator provides a schedule showing all anticipated payments for the entire project by month. The Non-Operator is then only obligated to pay according to the schedule, one month at a time (or in full, at the Non-Operator’s discretion). This gets us slightly closer to practice and might be more fair to the Parties, but if we try to follow things according to the Accounting Procedure, you’ll still need to be ready to spend a lot more time on your cash call reconciliations and management.
A Necessary Evil – The Audit Clause
Joint venture auditors rejoice – you are in no danger of losing your jobs. The audit clause now fills a full three pages of the 2011 Accounting Procedure. So what’s new in those three pages? Notably, the timeframes around the submission, response and rebuttal process have very much tightened so as to bring about faster resolution of audits. This is a good thing. No one likes to see a 4 year old audit still unresolved. If any of the Parties don’t adhere to the definitive time frames laid out in the Accounting Procedure, though, then what? Well, not a lot. It seems PASC opted to eliminate the “hammer” for not complying with the audit clause. In PASC 1996 we saw a phrase that said if an Operator doesn’t respond to a query within 6 months, a credit for the full amount of the query would be granted. While this clause doesn’t get enforced very often, it was a potential consequence of non-response. Going forward in a PASC 2011 era, even in absence of the type of consequential language that we saw in PASC 1996, hopefully industry will collaborate to try to meet the timeframes that PASC has provided us with.
AFEs and the Issue of Approval
Under previous accounting procedures, it would be common for an auditor to raise a query for some ineligible expense to which the Operator would respond, “It was in the AFE that you approved.” The auditor would invariably counter, “The AFE does not supersede the accounting procedure and does not constitute approval according to Clause 110.” (Did that sound rehearsed?) Well, in PASC 2011, the AFE now does constitute approval. It is up to the Operator, however, to ensure that there is sufficient information in the AFE to establish that the Non-Operator is approving an expense that would not otherwise be covered under Article II (Direct Charges). I would suggest that it would not be sufficient for an Operator to simply point to an amount in an AFE estimate and say, “That’s where it is.”
There is a lot of new material in Article I, and definitely too many differences to describe in a single blog. There will certainly be some additional informal guidance presented by PASC in the coming months on anything that still requires clarification. PASC 2011 makes a lot of headway, particularly on topics that engineers have been asking about for some time now like what constitutes approval on AFEs.
Please feel free to check back on the Integrity blog site for the next article in this series, which will focus on Article II – Direct Charges.
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.
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