This is the first of a two-part series on partnership allocations for exploration and production partnerships. Because the upstream sector of the oil and gas industry makes extensive use of partnerships to finance drilling ventures and to spread risk, practitioners should have a fundamental knowledge of the rules for allocating partnership items, including the unique issues involving oil and gas depletion. Part Two of the series will appear in the Spring 2006 Journal and addresses the analysis required if the partnership is operating with nonrecourse debt (as is often the case in oil and gas exploration) and will also explore emerging issues involving abusive partnership allocations.

This is the conclusion of a two-part series on partnership allocations that began in our fall/winter 2005 issue. Part I of this article discussed partnership allocations with a focus on the “substantial economic effect” rules of § 704(b) of the Internal Revenue Code and presented situations where the partner is either contributing his own capital to the partnership or the partnership has recourse debt which one or more partners are obligated to repay. This article will take a close look at more advanced aspects of partnership allocations, including nonrecourse liabilities, allocations of tax credits, and the anti-abuse rules.

Many companies in the petroleum industry undertake their activities through entities treated as partnerships for federal income tax purposes. While most tax professionals are well aware of the tax return preparation and filing requirements for partnerships, many are less aware that most partnerships are subject to the mandatory TEFRA procedures. This article provides an introduction to those rules and attempts to help the reader navigate some of their complexities.

This article evaluates the two alternative accounting methods that are acceptable for use in the extractive industries ─ successful efforts (SE) and full costing (FC)—and compares the earnings quality of each method. While the earnings quality literature defines earnings quality several different ways, the authors of this article utilize two closely-aligned definitions that focus on the association between earnings and cash flows.

The issuance of Financial Reporting Standard No. 12 (FRS 12) Provisions, Contingent Liabilities and Contingent Assets presents an opportunity to explore the relationship between share prices and the adoption of new accounting regulations, since the impact of FRS 12 on corporate financial statements of oil and gas firms could be quite dramatic

This article outlines procedures and controls that are useful in accounting for volumes and differentials attributable to exchange transactions. The importance of communication between participants in crude oil and product exchanges is stressed.

With most petroleum companies having operations or interests of some kind in multiple countries, the oil and gas sector is by far one of the most international industries. This article examines several aspects of the effect of international accounting standards and global harmonization on the oil and gas industry.

Using ratios from three previous benchmark studies, the authors analyze oil and gas stock returns for each of the six years, 1992-1997, from all sectors of the oil and gas industry: independents, majors, pipelines/utilities, and diversified.

On October 22, 2004, Congress passed the American Jobs Creation Act of 2004 which impacted many areas of the Internal Revenue Code of 1986, including the taxation of energy. This article will summarize and discuss the provisions in the 2004 Act that have the greatest impact on the energy industry.

Disclosures of oil and gas reserve quantities have been advocated on the basis that users of financial reports would benefit from the disclosures. The authors have made two tests of the usefulness of the disclosures: (1) the increase in accuracy of analysts' forecasts of earnings per share resulting after the first disclosure by companies of physical reserves and (2) an increase in consensus in analysts' forecasts of earnings per share. The authors conclude that the statistical evidence does not suggest that the first disclosure of physical reserves had a significant impact on the ability of analysts to forecast earnings per share nor on the consensus of forecasts.

Whether a taxpayer holds an economic interest in a mineral property can have significant tax consequences on the nature of transactions and depletion calculations. However, the Tax Code does not provide a precise definition of an economic interest. Professor Fenton looks to the decisions of the Tax Court to identify factors which the courts have held determinative of whether an economic interest exists.

Professors Kahn, Krausz, and Schiff present results of a research project in which they examined the reports of reserve data of 30 oil and gas producing companies. The authors conclude that, contrary to a report by Larry Walther and Mary Kay Evans in the Fall/Winter 1982 issue of the Journal, published reserve estimates may be unreliable. (Dr. Walther responds to this article on page 115).

The Resource Conservation and Recovery Act of 1976 and the Comprehensive Environmental Response, Compensation, and Liability Act (the so-called Superfund) of 1980 provide bases for lawsuits against firms that mismanage hazardous materials. While lawsuits alleging illegal activities cannot generally be anticipated, a case can be made for investors anticipating hazardous waste lawsuits against firms in the petrochemical industry. This paper examines abnormal returns to stock ownership to see whether investors are effectively discounting stock prices of firms in the petrochemical industry.

Dr. Klingstedt reviews several aspects of the oil and gas industry affected by the 1984 Tax Act. The topics include tax shelters, depletion, windfall profit taxes, and corporations. Much of the article deals with changes in partnership tax rules.

The authors analyze the special problems of applying SFAS No. 106 compensation rules to oil and gas firms employing joint interest accounting methods. The authors present an overview of SFAS No. 106, then analyze the results of a survey concerning how joint interest companies currently handle post-retirement benefits and discuss alternative methods by which joint interest accounts might handle these benefits.

The 1986 Tax Reform Act initiated a single, uniform comprehensive set of cost capitalization criteria. Included is a requirement that costs (including overhead) attributable to producing or acquiring inventory or other property must be capitalized. In addition, interest incurred by a taxpayer with respect to produced property must be capitalized to the extent paid or incurred during the construction period. In this article, the authors discuss some of the uncertainties surrounding these requirements and their application to independent producers of oil and gas.

In this article Ms. Wright reviews the basic accounting principles underlying the idea of applying a "ceiling" on capitalized costs of oil and gas assets. Then the author presents the results of a survey of 22 public accountants with oil and gas expertise conducted by the Extractive Industries Accounting Research Institute.

Because of the plunge in oil and gas prices in the last 18 months resulting in a decline in value of oil and gas reserves, many companies using the successful-efforts method have considered applying a ceiling on capitalized costs of proved reserves. This article reports on a survey conducted by the Institute of Petroleum Accounting to determine the experiences of companies in applying a cost ceiling and to gather the opinions of respondents of whether a ceiling is appropriate and how it should be computed and applied.

In September 1983, the SEC amended its rules relating to the exclusion of unevaluated costs in calculating amortization of the full cost pool. This survey of a limited number of oil and gas company and public accountants seeks to gather interpretations of certain aspects of the new rules.

Binding arbitration agreements can help both operators and nonoperators in joint ventures settle disputes and avoid litigation. The process is usually faster and less expensive, and the conclusion, rendered by neutral arbitrators having specialized experience and knowledge in the subject matter of the dispute, may be more equitable to the parties involved.

This article investigates the relation between CEO compensation and accounting performance measures in the oil and gas industry relative to other industries.

Dr. Deakin reviews the historical and economic evidence and concludes that the windfall profit tax is based on profits. He discusses the definition of profit, and the Congressional history of the WPT, placing particular emphasis on the objectives of the tax. The author also uses other sources to support this arguments for the profits-based nature of the WPT, an approach used by several states in disallowing the WPT as a deduction in computing the state income tax.

Corporate distributions are generally not taxable as dividends if there is no positive E&P at the time of distribution. An error in calculated E&P may lead to an unpleasant and expensive surprise. This article presents a simplified case study to illustrate that the absence of retained earnings does not mean the absence of E&P.

Much attention has recently been focused on fraud committed by business executives and—consequently—on the accounting firms that failed to detect the financial statement-related fraud. Transparency in financial accounting should serve as a deterrent to fraud and financial manipulation. However, the recent crisis in the financial markets has left many questioning the extent to which business managers are able to manipulate their financial accounting numbers and in doing so inflate their bonuses and mislead their investors and creditors. The purpose of this paper is to explore fraud-related accounting research to identify information which would be relevant to oil and gas accountants in developing procedures for fraud-risk assessment.

Proved O&G reserves represent the primary operating assets of O&G producing firms. Based on the historical costs incurred in finding and developing O&G reserves, these assets are accounted for using either the full cost method or the successful efforts method. However, regardless of the accounting method used—or the degree of conservatism imbedded in accounting rules and estimates—movements in O&G prices (as well as revisions to reserve estimates and changes in development and production costs) may lead to significant changes in the level of accounting conservatism applied to O&G assets. Under certain circumstances, this may result in aggressive accounting treatments by both FC and SE firms.

This article presents a blueprint to predict the future or at least a reasonable and logical method of calculating asset retirement obligations for the oil and gas industry.

Proper recognition of asset retirement obligations requires a careful review and analysis of the specific facts and circumstances pertaining to each situation. Obligations incurred during the operating life of the long-lived asset present additional complexities. Care must be exercised to ensure that supportable assumptions are used to recognize these liabilities. While implementation issues should have been addressed upon adoption of FAS 143, over time complexities have arisen (e.g., layers of obligations recorded at different discount rates) that require careful attention by financial statement preparers.

When preparing financial reports, there is a problem in attempting to identify those items that are considered important for disclosure purposes from the myriad of possibilities. Disclosing items that are not useful results in excess costs while failing to disclose information deemed important results in investor dissatisfaction. This paper compares the items disclosed by oil and gas companies with the information deemed important by users. The results are quite interesting.

Fewer audit providers and more audit responsibilities have combined to increase audit fees. Less certain, however, is the nature of the resulting audit fee structure for clients in the energy sector. In the current audit services market, do energy firms pay more for a Big Four auditor because of the brand name and expertise that the auditor can provide? Are there differences among the Big Four in the audit fees they charge their energy clients?

In today's global market, most major petroleum companies have to contend with multiple fiscal regimes encompassing a broad range of cultural, political, and economic systems. As a result, audits can become quite complicated; the best way to forestall some of these complexities is exhaustive documentation and early stringent control.

Both shortages and oversupplies of equipment, materials and supplies have significant impacts on prices of those items. Frequently the operator of Joint Accounts must pay "premium prices" for materials or may have inventories carried at costs in excess of current prices. Mr. Patrick discusses the impact of these price variations on the job of the Joint Account auditor.

Professor File examines authoritative pronouncements on audit requirements relating to oil and gas reserves. He then articulates an audit approach to reserves. In the appendix to this article, a suggested audit program and the risk levels associated with different reserve estimation processes are presented.

This study explores the likelihood of companies receiving qualified opinions to switch auditors, whether the selection of a new auditor leads to the receipt of an unqualified opinion, and whether a change in accounting method accompanies the auditor and opinion changes. Also examined are the questions of whether switches after qualifications tend to be to non-Big Six firms and whether non-Big Six firms are more likely to give unqualified opinions.

Mergers, acquisitions, and bankruptcies over the past two decades have significantly altered the oil and gas industry. At the same time, increased specialization in the accounting profession has resulted in fewer firms providing services to any one particular industry. This article examines the concentration and assesses the competitiveness of the audit firms that service the oil and gas industry.

This article discusses the common accounting and disclosure mistakes and oversights of smaller SEC reporting companies engaged in oil and gas activities.

Messrs. Mark and Robison discuss the web of complex rules that were enacted as part of the Bankruptcy Tax Act of 1980 and their impact on oil and gas companies that have debt restructuring under such circumstances the general rules for income recognition and basis adjustment under Title II of insolvency situations are explained. and the election to first reduce the basis of depreciable assets is analyzed. Then the authors discuss the rules for computing depreciation and recapture after bankruptcy occurs and give a comprehensive example illustrating the effects of different elections.

The distress facing the oil industry as a result of the substantial decline in oil prices has forced a number of companies to file for bankruptcy. Mr. Johnson reviews the provisions of the bankruptcy law with an eye to providing guidance to companies who must consider this action as well as to investors and creditors in bankrupt companies.

This year's benchmarking study concentrates on the performance ratios of independent oil and gas companies. In addition to an overview of differences in key benchmark ratios for 1999 and 2000, the authors also compare these ratios by sales quartile. The final section compares these ratios by performance quartile, i.e., the actual ratio from lowest to highest regardless of firm size.

Shell's decision to dispose of its Brent Field Spar oil platform in a seabed grave off the Outer Hebrides exploded into a environmental public relations nightmare causing a rift in international relations between the UK and Germany, severe embarrassment to the British government, and multimillion dollar losses to the Royal Dutch Shell group as a result of consumer boycotts of its products. This article analyzes the implications this case has for the oil industry, stressing the necessity of developing clear strategies for dealing with environmental issues.

For the past two decades the exploration end of the oil and gas business has been notoriously unprofitable. Part of the reason is that the industry has been plagued by chronic over-bidding that has shaped the market for exploration acreage and projects. From the point of view of most governments, this a healthy environment. However, it has not been healthy for most companies. Bidding and/or negotiations in the industry have been strongly influenced by both increased competition and over-optimistic estimates of oil prices, costs, prospect sizes, and success ratios.

A study of the impact of different accounting systems (full cost or successful efforts) on bond rating and bond yield decisions.

The author discusses the BP claims settlement and payment processes. Additionally, the author discusses controversial issues for further consideration.

Why is exception-based electronic document management important? What it could mean to the bottom line of your company? By the time you reach the end of this article, you should have enough information to calculate the dollar impact that these two measures could have on your specific organization.

The purpose of this article is to present and understand the importance of the cash-to-cash cycle (C2C) in business, offer oil and gas industry C2C benchmarks over time, and discuss opportunities for companies to increase efficiencies and profitability.

In this article, Messrs. Adkerson and Moore interpret the SEC's Financial Reporting Release No. 14, issued September 16, 1983, which amended the existing rules governing exclusions of costs from amortization by companies using the full-cost method. Illustrations of the "impairment test" to be applied to unevaluated properties are given and the impact on interest capitalization is discussed.

Trade and investment in energy, especially oil, gas and electricity, has been a contentious issue for Canada and the U.S. for over forty years. The Canada-U.S. Free Trade Agreement, ratified on January 1, 1989, after several years of negotiation and sometimes acrimonious debate in both countries, is designed to achieve an open market for trade and investment between the two countries by the end of 1998.

Mr. Lawrie summarizes a Guideline for Canadian enterprises who use the full cost accounting method recently issued by the Canadian Institute of Chartered Accountants. Although the basic rules adopted in the Guideline are almost identical to those required in the United States, the approach to computing the cost ceiling may be significantly different.

In this article Mr. Brooks discusses capital budgeting procedures and reports for an oil and gas company and illustrates different approaches to ranking investment opportunities

To secure a stream of benefits for the future, informed decisions with long-term implications involving the outlay of current funds are sometimes necessary. This is especially true in the oil and gas industry. Besides the capital intensive nature of the industry, there are other features which suggest that capital budgeting may be more sophisticated than that found in other sectors.

The authors report on a study they have made of the procedures being used by successful-efforts companies in capitalizing interest related to assets used in oil and gas activities. They conclude that the range of practices is so wide that guidelines for capitalization should be issued by an authoritative body.