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International Financial Reporting Standards (IFRS)

IFRS at Oil&Gas industry from an SAP perspective


Specific issues in O&G that are different than standard IFRS IFRS background, and its impact on North American businesses
Key IFRS provisions

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Specific issues in O&G – IFRS vs U.S. GAAP
Full Cost Under U:S: GAAP, the full cost method requires that all costs incurred in prospecting, acquiring mineral interests, exploration, appraisal, development, and construction be capitalized in cost centers. IFRS 6 would permit full cost accounting during the exploration and evaluation phase. Unit of Accounts Under IFRS, expensing the costs of unsuccessful development wells is permitted, but depending on the unit of account selected, these same costs could be capitalized as part of the field costs. Successful Efforts Under successful efforts method, entity will generally consider each individual mineral lease, field, concession, or production sharing contract as cost center. When an entity applies the successful efforts method under IFRS, it will need to account for prospecting costs incurred before the exploration and evaluation phase under IAS 16 or IAS 38.Costs incurred to acquire undeveloped mineral rights (leasehold costs), however, should be capitalized under IFRS if an entity expects to receive future economic benefits. IFRS requires only relatively minor modifications to the successful efforts methods, and the essence of the approach –that costs are capitalized pending on evaluation-is retained under IRFS. Impairment (E&E asset) IAS 36 should be used to measure, present and disclose that impairment in the financial statements, subject to special requirements with respect tot the level at which impairment is assessed. Exception based on IFRS 6 (separate impairment testing “triggers” for E&E assets, cash generating units )
Source: Ernst & Young

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Specific issues in O&G that are different than standard IFRS IFRS background, and its impact on North American businesses Key IFRS provisions

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What is IFRS? What is the impact on North American Businesses?
IFRS are the International Financial Reporting Standards, set by the UKbased International Accounting Standard Board, (IASB), and first implemented in 2001 as International Accounting Standards (IAS). Over 100 countries, including Australia, Japan, China, Russia, India, and all of EU Europe including the UK, have adopted IFRS. IFRS is principle based (2,500 pages), whereas US GAAP is rule based (>25,000 pages). US SEC has already started accepting IFRS-based filings from foreign issuers. FASB timelines for US adoption range from 2012 to 2014, including ongoing progress to refine and align US GAAP with IFRS. Canadian GAAP is scheduled for conversion to IFRS in 2011.

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Key IFRS Provisions
Cash Flow Statements – Mandatory component of IFRS reporting. Business Combinations and Acquisition Accounting (IFRS3)
All transactions require identification of an acquirer and full measurement of fair value. Non-controlling interests and goodwill must be fully recognized.

Property, Plant and Equipment (IAS 16, IAS 23)
All values at cost--overhead can only be included under restricted circumstances. Revaluation surpluses always treated as equity, and losses as expense. All depreciation is straight line unless use can also be shown to be proportional.

Inventory/Stock (IAS2)
All inventory and stock to be valued at lowest of either cost or net realizable value, similar to US GAAP LOCOM, net of all costs to complete, transport and sell. LIFO is specifically not allowed, and FIFO can only be applied in limited circumstances. Costs are to include all costs of purchase, conversion and transportation, plus depreciation where applicable.

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Key IFRS Provisions
Receivables, Payables and Borrowing (IAS 36, IAS39, IAS46)
Obligations are always to be recorded at fair value, with subsequent assessments at amortized cost, with all items of a significant credit duration appropriately discounted. Defaults must be written down to recoverable amounts—either value in use, or fair value less costs to factor. All borrowing is recorded at amortized cost, using “effective interest rate” method to deduct borrowing costs from principal, and amortize amounts over the period of the debt.

Revenue (IAS18)
Revenue is always to be at fair value of receipt or receivable, and only recognized upon transfer of the risk/rewards of ownership. Services revenue is only recognized according to measurable extent of completion.

Employee Costs and Share-Based Payments (IAS19, IFRS2)
Employee costs are to be recognized during period in which service is rendered, and accruals are necessary for absences, holidays, vacations, profit sharing and bonuses. Shares and equity instruments must be accounted as expenses or assets, with options recorded at fair market value, and charged as an expense over their duration.
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Key IFRS Provisions
Income Taxes (IAS12)
Taxes payable must be recorded as a liability as of the Balance Sheet date, and all deferred tax liabilities must be recognized. Liabilities based on capital expenditures must be synchronized.

Leasing (IAS17)
All leases must either be treated as “finance leases” or “operating leases”, pending 11/08 discussion paper intended to eliminate options for operating leases entirely. Finance leases transfer all risks and rewards to the lessee, and are recorded as assets by lessees. (Lessors record them as liabilities). Operating leases, while still allowed, are entered as expenses over the lease term.

Valuations (IAS39, IAS39, IAS11)
Research costs are expenses, while development costs are capitalized upon feasibility. Marketable securities and hedge accounting require assignments to one of four holding categories which determine balance sheet placement and unrealized gain/loss treatment. Derivatives must be tracked at fair market value. Long term contracts are valued according to percent-of-completion (POC).
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SAP Approach to IFRS
Statements and reporting:
Built-in XBRL support Automated consolidation reports generation: Balance Sheet, Income Statement, Cash Flow Statement, Statement of Change in Equity, Segment reporting, etc.

Business Combinations and Acquisition Accounting (IFRS3)
Integrated Business Planning and Consolidation application + full ERP Financials Business Objects IFRS Starter Kits for enhanced consolidation and reporting

Property, Plant and Equipment (IAS 16, IAS 23)
Fully compliant asset accounting capabilities in SAP ERP Financials

Inventory/Stock (IAS2)
Comprehensive and fully IFRS compliant financial accounting, controlling, materials management and production planning capabilities in SAP ERP Financials Material ledger capability for storing multiple cost versions and WIP calculations

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