International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 662
be an indicator of impairment (see 11.1 above). An impairment test would need to be
conducted and if the recoverable amount of the CGU is less than the carrying amount,
an impairment loss would need to be recognised.
While the asset remains in care and maintenance, expenditures are still incurred but
usually at a lower rate than when the mine or gas plant is operating. A lower rate of
depreciation for tangible non-current assets is also usually appropriate due to reduced
wear and tear. Movable plant and machinery would generally be depreciated over its
useful life. Management should consider depreciation to allow for deterioration. Where
depreciation for movable plant and machinery had previously been determined on a
units of production basis, this may no longer be appropriate.
Management should also ensure that any assets for which there are no longer any future
economic benefits, i.e. which have become redundant, are written off.
The length of the closure and the associated care and maintenance expenditure may be
estimated for depreciation and impairment purposes. However, it is not appropriate to
recognise a provision for the entire estimated expenditure relating to the care and
maintenance period. All care and maintenance costs are to be expensed as incurred.
Development costs amortised or depreciated using the units of production method
would no longer be depreciated. Holding costs associated with such assets should be
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expensed in profit or loss in the period they are incurred. These may include costs such
as security costs and site property maintenance costs.
The costs associated with restarting a mine or gas plant which had previously been on
care and maintenance should only be capitalised if they improve the asset beyond its
original operating capabilities. Entities will need to exercise significant judgement when
performing this assessment.
15.4 Unitisations and redeterminations
15.4.1 Unitisations
A unitisation arrangement is ‘an agreement between two parties each of which owns
an interest in one or more mineral properties in an area to cross-assign to one
another a share of the interest in the mineral properties that each owns in the area;
from that point forward they share, as agreed, in further costs and revenues related
to the properties’.123 The parties pool their individual interests in return for an
interest in the overall unit, which is then operated jointly to increase efficiency.124
Once an area is subject to an unitisation arrangement, the parties share costs and
production in accordance with their percentages established under the unitisation
agreement. The unitisation agreement does not affect costs and production
associated with non-unitised areas within the original licences, which continue to
fall to the original licensees.125
IFRS does not specifically address accounting for a unitisation arrangement.
Therefore, the accounting for such an arrangement depends on the type of asset that
is subject to the arrangement. If the assets subject to the arrangement were E&E assets,
then the transaction would fall within the scope of IFRS 6, which provides a
temporary exemption from IAS 8 (see 3.2.1 above). An entity would be permitted to
develop an accounting policy for unitisation arrangements involving E&E assets that
is not based on IFRS. However, unitisations are unlikely to occur in the E&E phase
when technical feasibility and commercial viability of extracting a mineral resource
are not yet demonstrable.
For unitisations that occur outside the E&E phase, as there is no specific guidance in
IFRS, an entity will need to develop an accounting policy in accordance with the IAS 8
hierarchy. The first step in developing an accounting policy for unitisations is setting
criteria for determining which assets are included within the transaction. Particularly
important is the assessment as to whether the unitisation includes the mineral reserves
themselves or not. The main reason for not including the mineral reserves derives from
the fact that they are subject to redetermination (see 15.4.2 below).
The example below, which is taken from the IASC’s Issues Paper, illustrates how a
unitisation transaction might work in practice.
Example 39.10: Unitisation126
Entities E and F have carried out exploration programs on separate properties owned by each in a remote area
near the Antarctic Circle. Both entities have discovered petroleum reserves on their properties and have begun
development of the properties. Because of the high operating costs and the need to construct support facilities,
such as pipelines, dock facilities, transportation systems, and warehouses, the entities decide to unitise the
properties, which mean that they have agreed to combine their properties into a single property. A joint
3346 Chapter 39
operating agreement is signed and entity F is chosen as operator of the combined properties. Relevant data
about each entity’s properties and costs are given as follows:
Party E
Prospecting costs incurred prior to property acquisition
€8,000,000
Mineral acquisition costs
€42,000,000
Geological and geophysical exploration costs (G&G)
€12,000,000
Exploratory drilling costs:
Successful
€16,000,000
Unsuccessful
€7,000,000
Development costs incurred
€23,000,000
Estimated reserves, agreed between parties (in barrels)
30,000,000
Party F
Prospecting costs incurred prior to property acquisition
€3,000,000
Mineral acquisition costs
€31,000,000
Geological and geophysical exploration costs (G&G)
€17,000,000
Exploratory drilling costs
Successful
€24,000,000
Unsuccessful
€4,000,000
Development costs incurred
€36,000,000
Estimated reserves, agreed between parties (in barrels)
70,000,000
Ownership ratio in the venture is to be based on the relative quantity of agreed-upon reserves contributed
by each party (30% to E and 70% to F). The parties agree that there should be an equalisation between
them for the value of pre-unitisation exploration and development costs that directly benefit the unit, but
not for other exploration and development costs. That is, there will be a cash settlement between the
parties for the value of assets (other than mineral rights) or services that each party contributes to the
unitisation. This is done so that the net value contributed by each party for the specified expenditures
will equal that venturer’s share of the total value of such expenditures at the time unitisation is
consummated. Thus, the party contributing a value less than that party’s share of ownership in the total
value of those costs contributed by all the parties will make a cash payment to the other party so that each
party’s net contribution will equal that party’s share of total value. The agreed amounts of costs to be
equalised that are contributed by E and F are:
Expenditures made by:
E
Total
€
€
€
Successful exploratory drilling 12,000,000
12,000,000
24,000,000
Development costs
18,000,000
30,000,000
48,000,000
Geological and geophysical exploration
4,000,000
14,000,000
18,000,000
Total expenditure
34,000,000
56,000,000
90,000,000
As a result of this agreement, F is obliged to pay E the net amount of €7,000,000 to equalise exploration and
development costs. This is made up of the following components:
(a) €4,800,000 excess of value of exploratory drilling received by F (€16,800,000 = 70% × €24,000,000) in
excess of value for successful exploratory drilling contributed (€12,000,000); plus
(b) €3,600,000 excess of value of development costs received by F in the unit (€33,600,000 = 70% ×
€48,000,000) in excess of the value of development costs contributed by F (€30,000,000); and less
(c) €1,400,000 excess of value of G&G costs contributed by F (€14,000,000) over the value of the share of
G & G costs owned by F after unitisation (€12,600,000 = 70% × €18,000,000).
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Although the reserves are unitised in the physical sense (i.e. each party will end up
selling oil or gas that physically came out of the reserves of the other party), in volume
terms the parties remain entitled to a quantity of reserves that is equal to that which
they contributed. However, the timing of production and the costs to produce the
reserves may be impacted by the unitisation agreement. The example below explains
this in more detail.
Example 39.11: Reserves contributed in an unitisation
Entities A and B enter into a unitisation agreement and contribute Licences A and B, respectively. The table below
shows the initial determination, redetermination and final determination of the reserves in each of the fields.
Initial determination
Redetermination
Final determination
mboe mboe
mboe
Licence A
20 40.0%
19
37.3%
21
38.9%
Licence B
30 60.0%
32
62.7%
33
61.1%
50
100.0%
51
100.0%
54
100.0%
Although Licences A and B were unitised, ultimately Entity A will be entitled to 21 mboe and Entity B will
be entitled to 33 mboe, which is exactly the same quantity that they would have been entitled to had there
been no unitisation.
To the extent that the unitisation of the mineral reserves themselves lacks commercial
substance (see 6.3.2 above), it may be appropriate to exclude the mineral reserves in
accounting for an unitisation. Where the unitisation significantly affects the risk and
timing of the cash flows or the type of product (e.g. an unitisation could lead to an
exchange of, say, gas reserves for oil reserves) there is likely to be substance to the
unitisation of the reserves.
If the assets subject to the unitisation arrangement are not E&E assets, or not only E&E
assets, then it is necessary to develop an accounting policy in accordance with the
requirements of IAS 8. Unitisation arrangements generally give rise to joint control over
the underlying assets or entities:
(a) if the unitisation arrangement results in joint control over a joint venture then the
parties should apply IFRS 11 (see Chapter 12) and IAS 28 (see Chapter 11) and
provide the relevant disclosures in accordance with the requirements contained in
IFRS 12 (see Chapter 13); or
(b) if the unitisation arrangement gives rise to a joint operation or results in a swap of
assets that are not jointly controlled, then each of the parties should account for
the arrangement as an asset swap (see 6.3 above).
Under both (a) and (b) above, a party to an unitisation agreement would report a gain (or
loss) depending on whether the fair value of the interest received is higher (or lower)
than the carrying amount of the interest given up.
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15.4.2 Redeterminations
The percentage interests in an unitisation arrangement are based on estimates of the
relative quantities of reserves contributed by each of the parties. As field life
progresses and production experience is gained, many unitisation agreements require
the reserves to be redetermined, which often leads the parties to conclude that the
recoverable reserves in one or perhaps both of the original properties are not as
previously estimated. Unitisation agreements typically require one or more
‘redeterminations’ of percentage interests once better reservoir information becomes
available. In most cases, the revised percentage interests are deemed to be effective
from the date of the original unitisation agreement, which means that adjustments
are required between the parties in respect of their relative entitlements to
cumulative production and their shares of cumulative costs.127
Unitisation agreements normally set out when redeterminations need to take place and
the way in which adjustments to the percentage interests should be effected. The former
OIAC SORP described the process as follows:
‘(a) Adjustments in respect of cumulative “capital” costs are usually made immediately
following the redetermination by means of a lump sum reimbursement, sometimes
including an “interest” or uplift element to reflect related financing costs.
(b) Adjustments to shares of cumulative production are generally effected
prospectively. Participants with an increased share are entitled to additional
“make-up” production until the cumulative liftings are rebalanced. During this
period adjusted percentage interests are applied to both production entitlement
and operating costs. Once equity is achieved the effective percentage interests
revert to those established by the redetermination.’128
An adjustment to an entity’s percentage interest due to a redetermination is not a prior
period error under IFRS. [IAS 8.5]. Instead, the redetermination results from new
information or new developments and therefore should be treated as a change in an
accounting estimate. Accordingly, a redetermination should not result in a fully
retrospective adjustment.
Redeterminations give rise to some further accounting issues which are discussed below.
15.4.2.A
Redeterminations as capital reimbursements
Under many national GAAPs, redeterminations are accounted for as reimbursement of
capital expenditure rather than as sales/purchases of a partial interest. Given that this
second approach could result in the recognition of a gain upon redetermination,
followed by a higher depreciation charge per barrel, it has become accepted industry
practice that redeterminations should be accounted for as reimbursements of capital
expenditure under IFRS. Both approaches are illustrated in Example 39.12 below.
In addition a redetermination gives rise to a number of questi
ons, for example, how
should the entities account for:
• the adjustment of their share in the remaining reserves;
• the ‘make-up’ oil obligation; and
• their revised shares in the decommissioning liabilities.
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The ‘make-up’ oil obligation and the revised shares in the decommissioning liabilities
are discussed further following the example below.
Example 39.12: Redetermination (1)
Entities A and B have a 10% and 90% percentage interest in a unitised property, respectively. On 1 January 2018,
after three years of operations, their interests in the property are redetermined. The relevant data about each entity’s
interest in the property are as follows:
A
B
Total
Percentage interest after initial determination
10%
90%
100%
Percentage interest after redetermination
8%
92%
100%
Initial reserves at 1/1/2018 (million barrels of oil equivalent)
100 mboe
900 mboe
1000 mboe
Total production from 2015 to 2017
30 mboe
270 mboe
300 mboe
Remaining reserves at 31/12/2017 before redetermination
70 mboe
630 mboe
700 mboe
Reserves after redetermination at 1/1/2018
56 mboe
644 mboe
700 mboe
‘Make-up’ oil: 300 mboe × (10% – 8%) =
–6 mboe
6 mboe
–
Total entitlement at 1/1/2018
50 mboe
650 mboe
700 mboe
$
$
$
Exploration and development asset at 1/1/2015
400
3,600 4,000
Units of production depreciation:
$400 ÷ 100 mboe × 30 mboe =
120
120
$3,600 ÷ 900 mboe × 270 mboe =