Joint arrangements in the oil and gas industry - home.kpmg · a joint operation or a joint venture. When a joint operation is the customer, the accounting outcome is the same regardless

Joint arrangements in the oil and gas industryIdentifying the customer in a contract for the use of assets

IFRS 16 Leases

May 2018

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Contents

ContentsWho is the customer? 1

Overview 2Who is the customer in a joint arrangement? 2

Practical scenarios 4Scenario A What if the joint arrangement is

unincorporated? 4Scenario B Does the nature of the asset matter? 6Scenario C What if the contract is signed by the

operator on behalf of a single incorporated joint arrangement? 9

Scenario D What if the contract is signed by an operator in its own name for its own use? 11

Scenario E What if the asset is committed to more than one joint arrangement? 12

Scenario F What if the asset is sub-leased to a joint arrangement? 14

Summary 18

About this publication 19

Keeping in touch 20

Contacts 22

© 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

Who is the customer? Many companies have made significant progress with assessing the impact of the

new leases standard, IFRS 16. Predictably, many are finding the key challenge to be the volume of work required to gather all of the data required to bring all leases on-balance sheet by the effective date of 2019.

One of the biggest technical and practical challenges for those in the oil and gas industry is identifying the customer in a contract for the use of assets by a joint arrangement.

Is the joint arrangement or another party – e.g. an operator – the customer in the contract with the asset supplier?

This assessment is critical to the accounting treatment for each of the parties to the arrangement. IFRS 16 acknowledges this issue but addresses it only briefly.

Key questions that we have identified in assessing real-life scenarios include whether an unincorporated joint arrangement can be a customer? Does the nature of the asset matter? What does it mean for a party to sign ‘on behalf of’ a joint arrangement? In each case, what are the accounting consequences?

We have prepared this publication to share our emerging insights on these questions. We hope that it will help you with identifying the customer when accounting for assets used by your joint arrangements.

Serge Heidrich, KPMG in France

Dave Vijfvinkel, KPMG in Norway

KPMG’s Energy and Natural Resources Practice

2 | Joint arrangements in the oil and gas industry


Overview Identifying the customer in a lease contract is critical to the

accounting for all of the parties in a joint arrangement.

Who is the customer in a joint arrangement?IFRS 16.9, B9, B11 IFRS 16 defines a lease as a contract, or part of a contract, that conveys the right

to control the use of an identified asset (the underlying asset) for a period of time in exchange for consideration. If a contract contains a lease, then it will generally be on-balance sheet for the lessee.

To determine whether a contract conveys the right to control the use of an identified asset for a period of time, an entity assesses whether, throughout the period of use, the customer has the right to:

– obtain substantially all of the economic benefits from use of the identified asset; and

– direct the use of the identified asset.

If the customer in the contract is a joint arrangement, then an entity considers whether the joint arrangement has the right to control the use of an identified asset throughout the period of use.

KPMG insight – Is it possible for a joint arrangement to be a lessee?

Yes.

A joint arrangement – i.e. a joint venture or joint operation – may be a lessee in a lease, provided that the parties to the joint arrangement collectively have the right to control the use of an identified asset throughout its period of use. In many cases, this control is exercised through their joint control of the arrangement.

It would be inappropriate to conclude that a contract does not contain a lease if each of the parties to the joint arrangement:

– obtains only a capacity portion that is not physically distinct;

– obtains only a portion of the economic benefits from use of the underlying asset; or

– does not unilaterally direct the use of the underlying asset.


IFRS 16.B11, BC126, IFRS 11.20, 24 For a joint arrangement to be a lessee, it must first be identified as the customer in the lease contract with the asset supplier. This means that the contract with the asset supplier is:

– entered into by the joint arrangement itself; or

– signed by one or more parties to the joint arrangement on behalf of the joint arrangement.

When the joint arrangement is considered to be the customer in a lease, the accounting for the lease is as follows.

– For a joint operation, each party to the joint operation accounts for its share of the right-of-use asset and its share of the lease liability in its own financial statements.

– For a joint venture, the right-of-use asset and the lease liability are recognised in the financial statements of the joint venture, but not in the financial statements of the partners to the joint venture.

If the joint arrangement is not considered to be the customer, then the party that contracts with the asset supplier – e.g. the operator in the joint arrangement – is typically the customer and accounts for any lease in its own financial statements. The non-contracting parties do not account for any lease unless the contracting party – e.g. the operator – sub-leases the asset to the joint arrangement.

Therefore, identifying the customer is critical to determining the accounting for each of the partners in a joint arrangement. The diagram below illustrates the key considerations in identifying the customer when contractual arrangements for the use of an asset involve a joint arrangement – and the typical outcomes.

Is the contract signed by the oint rrangement ?j a (JA)

Is the asset dedicated up-front to JA *?the (s)

Is the perator acting on behalf of the JA?o

The JA is the customer The operator is the customer

No signed by the perator– o

Yes Yes

No

Yes

* Requires judgement based on facts and circumstances of individual arrangements.

See cenario E.S

Overview | 3



Practical scenarios We consider below some of the common issues that may arise when making this

assessment. In each of the scenarios, assume that the parties have concluded that it is appropriate to account for the oil and gas activities as a joint arrangement.

Scenario A What if the joint arrangement is unincorporated?

It is common in the oil and gas industry for joint arrangements not to be structured as a separate legal vehicle. Therefore, joint arrangements often do not contract in their own name.

Instead, it is common practice to appoint one party as the operator in a joint arrangement. The operator has the authority to enter into contracts on behalf of the arrangement, including contracts for the use of assets. All other parties involved in the arrangement are usually known as non-operators. In these cases, the asset supplier may have legal recourse against the operator, but not the non-operators.

IFRS 11 Joint Arrangements requires each joint arrangement to be classified as a joint operation or a joint venture. When a joint operation is the customer, the accounting outcome is the same regardless of whether the joint operation is incorporated or unincorporated – i.e. each party to the joint operation accounts for its share of the right-of-use asset and the lease liability in its own accounts. However, the process of identifying the customer may be more complicated and judgemental when the joint operation is unincorporated.

Incorporated joint arrangements are capable of contracting in their own name and, therefore, identifying whether they are the customer is more straightforward (see Scenario D). Conversely, unincorporated joint arrangements are dependent on one of the parties to the joint arrangement (usually the operator) contracting on their behalf.

KPMG insight – Can an unincorporated joint arrangement be a customer?

Yes.

A joint arrangement is not required to be a separate legal vehicle to be identified as the customer. The key consideration is whether the nature of the contractual arrangements with the asset supplier demonstrate that the joint arrangement acts as principal and has the right to direct the use of the asset.


Example A – Unincorporated joint arrangement

K(Joint operation)

R(Supplier)

FPSOcontract

X(Operator)

Y(Non-operator)

Z(Non-operator)

Parties X, Y and Z set up joint operation K to exploit a mineral interest. X is appointed as the operator of K, and Y and Z are non-operators.

X enters into a 15-year contract for the use of a floating production storage and offloading (FPSO) vessel with Supplier R, a service provider for the oil and gas industry.

Before X entered into the arrangement, X, Y and Z jointly agreed upon the specific vessel to be leased, the supplier to be used and the terms that the parties would be willing to accept. The terms of the joint operating agreement (JOA) state that all three parties are jointly and severally liable for amounts owed in respect of the contracts for the use of the FPSO and for any damage to the vessel.

In this case, the detail of the contractual arrangements supports the view that K is the customer for the purpose of applying IFRS 16, even though K is not a separate legal vehicle. In this case, X appears to act as agent for K in contracting for the FPSO. To reach a definitive conclusion, it would be necessary to consider all of the facts and circumstances, including the nature of the asset because this might be an important factor in determining how R contracts with K (see Scenario B).

If R, as supplier of the FPSO, has legal recourse against operator X, then this is a shared obligation for each of the joint operators, X, Y and Z. This is because provisions in the joint operating agreement or other agreements, or local laws and regulations, require parties to a joint operation to be jointly liable for contracts entered into by the operator.

Having established that a joint arrangement can be the customer, the next step is to determine who the customer actually is – the joint arrangement or the operator.

In many cases, identifying the customer will be straightforward, especially when a contract is entered into by an operator in its own name as principal, or by an incorporated joint arrangement.

In other cases – e.g. if it is unclear whether the operator is contracting on behalf of the joint arrangement – considerable judgement will be required to identify who the customer is, so the nature of the asset may also need to be considered.

Practical scenarios | 5



KPMG insight – Do some scenarios require more judgement than others?

Yes, as illustrated by the diagram below.

Operator is customer*

Contract entered into by operator in own name as principal (see Scenario D)

Judgement required

Asset committed to more than one joint arrangement (see Scenario E)

Unclear whether operator contracts on behalf of joint arrangement – consider nature of the asset (see Scenario B)

Joint arrangement is customer

Contract entered into by or on behalf of joint arrangement (see Scenario C)

* Consider whether operator sub-leases asset to joint arrangement (see Scenario F).

Scenario B Does the nature of the asset matter? Operators routinely contract directly with asset suppliers for assets to be used

by joint arrangements. The rights and obligations of non-operators in relation to these assets may be unclear or undefined, leading to uncertainty over whether the operator is contracting on behalf of the joint arrangement or in its own name as principal.

A wide range of assets may be contracted for, ranging from those critical to the joint arrangement (e.g. complex and expensive offshore drilling rigs) to ancillary assets used to discharge the operator’s day-to-day responsibilities (e.g. vehicles, general use supply vessels and helicopters used at the operator’s discretion for multiple joint arrangements).


KPMG insight – Does the nature of the asset alone determine whether the operator or the joint arrangement is the customer?

No.

The assessment will depend on the contractual arrangements, which may also be influenced by the nature of the asset.

In our experience, when the asset is specialised, expensive and of strategic importance, all parties will seek a higher degree of transparency and assurance when entering into the arrangement, and throughout the term of the arrangement. In other words, non-operators are unlikely to allow an operator to negotiate independently for the use of strategically significant assets, and will ensure that they are involved in the end-to-end contracting process. At the same time, the asset supplier is likely to seek detailed information and assurances regarding the composition, plans and financial capacity of the joint arrangement.

In these cases, a careful assessment of the contractual arrangements and the supporting evidence to determine the substance of those arrangements will be required, and may support a conclusion that the joint arrangement is the customer rather than the operator.

Indicators that the joint arrangement, and not the operator, is the customer include the following.

– Asset performance requirements are discussed specifically during meetings between parties to the joint arrangement.

– The asset supplier agrees to the contract because it has information on all joint arrangement parties and understands how the asset will be deployed during the lease term.

– Local laws or regulations stipulate that certain contracts entered into by an operator are presumed to be entered into on behalf of the joint arrangement.

– Strategic decisions for the procurement of the use of an asset require pre-consent of all parties.

– Strategic decisions about the design and/or use of the asset require pre-consent of all parties.

– The rights to the asset of each party in the joint arrangement, or the extent of their liability, are set out explicitly in the joint operating agreement or other documentation.

Conversely, the operator is more likely to be the customer when contracting for assets of less strategic importance. In these cases, the operator may retain the right to direct the use of the asset – e.g. by employing it for purposes unrelated to the joint arrangement – such that there is no collective control over the asset.




KPMG insight – Are there any types of industry assets that might indicate that the joint arrangement is the customer?

Yes.

Offshore assets are often customised significantly to meet the needs of the joint arrangement – e.g. FPSOs configured for a particular field and environment – and cannot be redeployed without incurring significant cost. In these cases, the joint arrangement is more likely to be the customer.

A support vehicle for onshore assets may be redeployed on another arrangement with relative ease and may be of less strategic importance. In these cases, the joint arrangement is less likely to be the customer.

Example B – Strategic importance of assets

X(Operator)

Y(Non-operator)

Z(Non-operator)

K(Joint operation)

R(Supplier)

FPSO &support tugcontracts

Parties X, Y and Z set up joint operation K to exploit a mineral interest. X is appointed as the operator of K, and Y and Z are non-operators.

X enters into separate 15-year contracts for the use of an FPSO vessel and a support tug with Supplier R, a service provider for the oil and gas industry.


FPSO vessel Support tug

– The FPSO is key to achieving the – The tug will be used to assist the objectives of K FPSO throughout the period of

– Performance of the FPSO is a the contract

standing agenda item at each – The asset is not referred to in meeting of the joint operation the joint operating agreement

– The joint operating agreement states that decisions to deploy the vessel require the

and the non-operating parties (Y and Z) are not kept briefed on its activities

unanimous consent of all parties, – Y and Z are not involved in the and X, Y and Z have joint and contract with R several liability for the costs of

–using the FPSO

R required no information on the proposed usage of the vessel

– R has performed due diligence or on any of the other parties on all joint operation parties involved in the joint operationbefore entering into the contract

K is the customer in the contract X is the customer in the contract with R. Although X is the sole with R. Although the tug is used contracting party, the asset is in the joint arrangement’s course critical to the joint operation and of business, it is of less strategic cannot be deployed without the importance and the non-operators consent of all parties – i.e. X has are largely unaware of its existence contracted for the asset on behalf or its importance.of the joint operation.

This means that X cannot be considered to have contracted for the asset on behalf of the joint arrangement. However, if the contract contains a lease, then the parties should consider whether the tug is sub-leased to K (see Scenario F).

Scenario C What if the contract is signed by the operator on behalf of a single incorporated joint arrangement?

The contract for the use of an asset may be entered into:

– by an incorporated joint arrangement with its own legal identity;

– on behalf of an incorporated joint arrangement by all parties to the arrangement; or

– by the operator on behalf of an incorporated joint arrangement.




In each of these cases, the joint arrangement is the customer for the purpose of performing the lease definition test. If it is established that the contract is, or contains, a lease, then each party to the arrangement recognises its share of the right-of-use asset and lease liability directly (in the case of a joint operation) or indirectly through equity accounting (in the case of a joint venture).

Example C – Operator signs a contract on behalf of an incorporated joint arrangement

X(Operator)

Y(Non-operator)

Z(Non-operator)

K(Joint operation)

R(Supplier)

Drilling rigcontract

Parties X, Y and Z set up joint operation K as a separate vehicle with its own legal identity to explore a mineral interest. X is appointed as the operator of K, and Y and Z are non-operators.

X enters into a two-year contract on K’s behalf with Supplier R for the use of a drilling rig. In accordance with the joint operating agreement, X, Y and Z jointly make all decisions about when and where to use the rig, as well as geographical targets to test, on behalf of K.

K is the customer to the contract, because X enters into the contract on behalf of K. If the contract is subsequently found to contain a lease, then K will be the lessee and R will be the lessor. Because the joint arrangement is a joint operation, X, Y and Z will account in their own financial statements for their share of the right-of-use asset and their share of the lease liability.

KPMG insight – Does a lack of visibility over the contractual arrangements indicate that the operator is the customer?

Not always.

There is no explicit requirement in IFRS for all parties to have access to detailed information to demonstrate that they have joint control over an arrangement, or that the joint arrangement is a customer in a contract with an asset supplier.

A lack of access to relevant information by the non-operators may indicate that the operator is the customer in some cases. However, this may not be definitive and all of the facts and circumstances will need to be considered.


Operators and non-operators will need to agree to share sufficient information to enable all parties to the arrangement to account for the asset appropriately. If there is currently not enough information provided to non-operators to make the accounting determinations required by IFRS 16, then changes to operating agreements and practices will be required.

The parties to the joint arrangement may find it difficult to gather the information that is necessary to separate out any non-lease components in a contract – e.g. service elements.

IFRS 16 allows lessees to make an accounting policy choice to account for lease and non-lease components as a single lease component, by class of underlying asset. However, this practical expedient is not available for lessors. Therefore, operators acting as an intermediate lessor in a sub-lease (see Scenario F) will face an accounting mismatch if they take the practical expedient as a lessee.

Scenario D What if the contract is signed by an operator in its own name for its own use?

The contract for the use of an asset will often be entered into by the operator in its own name for its own use, rather than on behalf of the joint arrangement or other parties.

In these cases, the operator is the customer in the contract with the supplier. If the operator determines that the contract contains a lease, then it may be necessary to consider whether the asset is sub-leased to the joint arrangement (see Scenario F).

Example D – Operator enters into a contract in its own name and for its own use

K(Joint operation)

R(Supplier)

Drilling rigcontract(head lease)

X(Operator)

Y(Non-operator)

Z(Non-operator)

Parties X, Y and Z set up joint operation K to explore a mineral interest. X is appointed as the operator of K, and Y and Z are non-operators.




X, in its own name as a principal, enters into a four-year contract with Supplier R for the use of a drilling rig. Under the contract, X makes all of the decisions about when and where to use the drilling rig.

X is involved in a number of projects at various stages of development. X allocates the drilling rig to K for an initial two-year period, and for the remaining two years of the contract earmarks it for another unrelated project in the same geographic region.

X is the customer in the contract because it enters into the contract in its own name, as a principal, and not on behalf of K. If the contract is subsequently found to contain a lease, then X will be the lessee in the lease. X will need to consider whether the asset is sub-leased to joint operation K (see Scenario F).

Scenario E What if the asset is committed to more than one joint arrangement?

Sometimes, the contract for the use of an asset will be signed between the operator and an asset supplier, and the operator will subsequently commit the asset to several joint arrangements (either in sequential order or in terms of total time commitment).

In these cases, the operator is likely to be identified as the customer if it has the right to use the asset on other joint arrangements. The operator has ultimate discretion to deploy the asset throughout the contract period regardless of the fact that the joint arrangements may exercise control throughout the periods for which they have use of the asset – i.e. if a sub-lease exists.

In other cases, an agreement with an asset supplier may be signed by, or on behalf of, two or more joint arrangements that will use the asset sequentially, such that the operator does not have the right to use the asset on other joint arrangements. In such cases it may be appropriate to conclude that the joint arrangements are customers in the initial contract. However, this would apply only if it is evident up-front that the initial contract was entered into by them or on their behalf. This would require analysis to:

– identify the customers in line with Scenarios A–D above; and

– demonstrate that the joint arrangements have the right to use the asset for the entire period of the contract with the asset supplier.

Demonstrating this may be more straightforward when the asset is of strategic importance to each of the joint arrangements – e.g. a drilling rig. This is because the parties may seek to achieve greater transparency and assurance when entering into contracts for such assets by including the drilling plans within the contract, or otherwise requiring the collective consent of all parties for the drilling plans to be modified.

In this case, the inclusion of the drilling plans in the contract demonstrates that the contract has been entered into on behalf of the joint arrangements, rather than by the operator as principal. However, in practice contracting for multiple joint arrangements in this way might be difficult to achieve due to the flexibility required as drilling plans evolve.


For a lease to exist, joint arrangements identified as the customer should individually have the right to direct the use of the asset between the dates specified in the contract.

If the operator is the customer and the contract contains a lease, then it will be necessary to determine whether the asset is sub-leased to the individual joint arrangements (see Scenario F).

Example E – Drilling rig committed to multiple joint arrangements

K(Joint operation)

L(Joint operation)

X(Operator)

R(Supplier)

Drilling rigcontract Commitment

X is the operator in two unincorporated joint operations, K and L. The two joint operations are separate but have been set up to exploit mineral interests in the same geographical area and with similar geological specifics.

X enters into a three-year contract with Supplier R, a service provider for the oil and gas industry, for the use of an offshore drilling rig. The agreed drilling plans show that K will use the drilling rig for the first 18 months of the contract period and L will use the drilling rig for the second 18 months. That is, the contractual arrangements show that K and L have the right to use the rig for the whole of the term of the agreement with R, and X does not have the right to use the rig on other joint arrangements. K and L have undertaken to compensate X for the charges paid to Supplier R.

In this example, K and L are the customers in the contract with R. The existence of up-front commitments to use the drilling rig for the entire period of X’s contracted use indicates that K and L are the contracting parties and bear the liability associated with the contract. K is the customer for the first 18 months and recognises a right-of-use asset and a lease liability on contract commencement. L is the customer for the following 18 months and recognises a right-of-use asset and lease liability when the asset is made available to it – i.e. at the start of month 19.

This outcome may be different if K and L’s periods of use were not determined up-front, or if the rig’s commitments are flexible – e.g. based on actual rather than contracted drilling – such that X has the right to deploy the drilling rig when and where it chooses during the period of use. Additional information would be required to conclude in such cases, including whether X had a substantive substitution right – but it is possible that X rather than K and L would be the customer in such cases.

If X is the customer in the contract with R, then further consideration is required of whether K and L sub-lease the drilling rig from X (see Scenario F).




Scenario F What if the asset is sub-leased to a joint arrangement?

Yes

The operator is the customer

Operator recognisesfull lease liability

Sub-lease accountedfor under IFRS 16

Is the asset sub-leased to the joint arrangement?

Operator recognisesfull right-of-useasset and lease

liability

No

If the operator leases an asset from an asset supplier and is considered to be the customer and then grants a right to use the asset to a joint arrangement, then the operator accounts separately for:

– the head lease between the operator and the asset supplier; and

– the sub-lease of that asset to the joint arrangement.

As a lessor, the operator classifies the sub-lease to the joint arrangement as a finance lease or an operating lease. The operator’s right to use the asset specified in the head lease is the underlying asset in the sub-lease – e.g. if the operator leases a drilling rig from an asset supplier that it sub-leases to a joint arrangement, then:

– the drilling rig itself is the underlying asset in the head lease with the asset supplier; and

– the operator’s right to use the drilling rig is the underlying asset in the sub-lease.

If the sub-lease is classified as a finance lease, then the operator derecognises the portion of the right-of-use asset that the other parties to the joint arrangement control, and recognises a net investment in the sub-lease. It does not derecognise the share of the right-of-use asset that it controls itself as a party to the joint arrangement. Any difference between the carrying amount of the derecognised right-of-use asset and the newly recognised net investment in the sub-lease is recognised in profit or loss on commencement of the sub-lease. This process could involve a significant amount of work for the operator.

If the sub-lease is an operating lease, then the operator continues to recognise the full right-of-use asset. Reimbursements received from the other parties for the sub-lease are presented as other revenue or lease income.

In both cases, the operator continues to recognise the whole of its liability to the asset supplier under the head lease.

The non-operators account for the sub-lease in the same way as they would account for their share of any other lease entered into by, or on behalf of, the joint arrangement.


Example F – Sub-lease of a drilling rig

X(Operator)

Y(Non-operator)

Z(Non-operator)

K(Joint operation)

R(Supplier)

Drilling rigcontract(head lease)

Sub-lease

Parties X, Y and Z set up joint operation K to explore a mineral interest. X is appointed as the operator of K, and Y and Z are non-operators. X, Y and Z each have a one-third interest in K.

X, in its own name as a principal, enters into a 10-year contract with Supplier R for the use of a drilling rig, making annual payments of 120. X is the customer in the contract and the contract is considered to contain a lease. X recognises a right-of-use asset and a lease liability of 750 (based on a discount rate of 9.5%).

X allocates the drilling rig to K in exchange for annual payments of 45 each from Y and Z.

In this example, X determines whether it has entered into a sub-lease of the drilling rig with K, with X as lessor and K as the lessee. When determining whether there is a sub-lease, K is assessed as the customer – i.e. X’s share in the joint operation is included.

Assuming a sub-lease exists, X then classifies the sub-lease as either a finance lease or an operating lease. In this case, X notes that the sub-lease is for the whole of the life of its right to use the drilling rig under the head lease and classifies the sub-lease as a finance lease.

On this basis:

–

–

–

X applies finance lessor accounting for the sub-lease. Y and Z’s share in the right-of-use asset, 500 – i.e. 2/3 x 750 – is derecognised.

X recognises a net investment in the sub-lease of 566, based on annual payments of 45 due from each of Y and Z and a discount rate of 9.5%. Unlike when testing whether there is a sub-lease, lessor accounting for the sub-lease is restricted to Y and Z’s share because X cannot record a sub-lease to itself.

X recognises a gain of 66 in profit or loss on commencement of the sub-lease, being the difference between the right-of-use asset derecognised of 500 and the net investment in the sub-lease recognised of 566.




– Y and Z each recognise a right-of-use asset and lease liability of 283 in respect of their share of the sub-lease as lessees (assuming that the discount rate for the joint operation does not differ from that determined by the operator).

– If the sub-lease were classified as an operating lease, then X would continue to recognise the full right-of-use asset of 750 and recognise reimbursements from Y and Z as lease income in the income statement.

It should be noted that the accounting by Y and Z essentially remains the same whether K or X is identified as the customer in the contract with R. In the first case, Y and Z account for their share of the right-of-use asset and lease liability arising under the lease with R; in the second case, Y and Z account for their share of the right-of-use asset and lease liability arising under the sub-lease with X.

KPMG insight – How is an operator affected if it recognises a sub-lease?

Recognition of a sub-lease by the operator may result in volatility in profit or loss for the operator. Volatility is likely to be greater if the sub-lease is an operating lease, because reimbursements will be recognised on a straight-line basis as operating lease income but any head lease costs will be front-loaded.

If there are intra-group arrangements, then it follows that the accounting between the lessor and lessee may not eliminate completely on consolidation.

KPMG insight – What other lease-related issues might affect the oil and gas industry specifically?

Land leases

Leases linked to rights to explore for or use minerals, oil, natural gas and similar non-regenerative resources are outside the scope of IFRS 16.

Determining whether land is connected with mineral extraction will require careful analysis based on the facts and circumstances of individual arrangements.

It is the IASB’s intention that the scope of IFRS 16 should be based on the scope of the lease requirements in IAS 17 Leases. It is expected that companies will apply the scope exception in a similar way to that under the old standard.


Determining the lease liability when various rate structures apply

When a contract is considered to contain a lease, a lease liability is recognised based on the payments under the contract that meet the definition of lease payments under IFRS 16. For example, fixed and in-substance fixed payments are included in the lease liability, but payments that depend on sales or usage are recognised as expenses as incurred.

Various rate structures often apply in the oil and gas industry – e.g. separate standby rates and operating rates payable for rig leases. Separating those rates to be used in the calculation of the lease liability from those to be expensed as incurred may require significant judgement.




Summary

Is the contract signed by the joint arrangement?

Is the asset dedicated up-front to the JA(s)*?

Signed by the peratoroSee cenarios A, B, D FS –

No

No

See cenario ES

Is the operator acting on behalf of the JA,formallyor does the JOA or other contracts/facts/

circumstances make it clear that the operator isacting on behalf of the joint arrangement?

YesSee cenarios A, B, ES

The customer is the JA The customer is the operator

Yes

Yes

* Requires judgement based on facts and circumstances of individual arrangements.

See cenario E.S

SeeS Ccenario

See cenario AS

No

SeeS Dcenario

Is the asset sub-leased tothe joint arrangement?

Joint operation: each partyaccounts for its share of theright-of-use asset and leaseliability

Joint venture: right-of-use assetand lease liability recognised in thefinancial statements of the jointventure, not in the financialstatements of the partners to thejoint venture

Operatorrecognises fulllease liability

Sub-leaseaccounted forin accordancewith IFRS 16See cenario FS

Operatorrecognises fullright-of-useasset andlease liability

Yes No


About this publication | 19

About this publication This publication has been produced by KPMG International Standards Group

(part of KPMG IFRG Limited). We would like to acknowledge the efforts of Serge Heidrich and Dave Vijfvinkel of KPMG’s Energy and Natural Resource Practice, and Greg Stinson and Steven Quinn of KPMG in the UK, who were the principal authors of this publication.

The text of this publication refers to IFRS 16 Leases as published by the IASB in January 2016, and to selected other current standards in issue at 1 May 2018.

Further analysis and interpretation will be needed for a company to consider the impact of IFRS 16 in light of its own facts, circumstances and individual transactions. The information contained in this publication is based on initial observations developed by KPMG’s Energy and Natural Resources practice and the KPMG International Standards Group and these observations may change. Accordingly, neither this publication nor any of our other publications should be used as a substitute for referring to the standards and interpretations themselves.



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ContactsKPMG’s Energy and Natural Resources Practice

Anton OussovGlobal Head of Oil & Gas, KPMG InternationalPartner, KPMG in RussiaT: +7 495 937444E: [email protected]

Jonathon Peacock Serge HeidrichPartner, Oil & Gas Partner, Oil & GasKPMG in Australia KPMG in FranceT: +61 7 3233 3150 T: +33 1 55 68 66 50E: [email protected] E: [email protected]

Anderson C V Dutra Dave VijfvinkelPartner, Oil & Gas Partner, Oil & GasKPMG in Brazil KPMG in NorwayT: +55 21 2207 9477 T: +47 4063 9952E: [email protected] E: [email protected]

Michael McKerracher Mark AndrewsPartner, Oil & Gas Partner, Oil & GasKPMG in Canada KPMG in the UKT: +1 403 691 8056 T: +44 20 7694 1029E: [email protected] E: [email protected]

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Publication name: Joint arrangements in the oil and gas industry

Publication number: 135630

Publication date: May 2018


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Documents

Joint arrangements in the oil and gas industry - home.kpmg · a joint operation or a joint venture. When a joint operation is the customer, the accounting outcome is the same regardless