Federal Register: November 4, 2009 (Volume 74, Number 212)
DOCID: fr04no09-5 FR Doc E9-26525
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
CFR Citation: 17 CFR Part 211
NOTICE: RULES
DOCID: fr04no09-5
DOCUMENT ACTION: Publication of staff accounting bulletin.
SUBJECT CATEGORY:
Staff Accounting Bulletin No. 113
DATES: Effective Date: November 4, 2009.
DOCUMENT SUMMARY:
This Staff Accounting Bulletin (SAB) revises or rescinds
portions of the interpretive guidance included in the section of the
Staff Accounting Bulletin Series titled ``Topic 12: Oil and Gas
Producing Activities'' (Topic 12) and revises a technical reference in
``Topic 3: Senior Securities'' (Topic 3). This update is intended to make the relevant interpretive guidance consistent with
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current authoritative accounting and auditing guidance and Commission
rules and regulations. The principal changes involve revision or
removal of material due to recent Commission rulemaking. Specifically,
the staff is updating the Series in order to bring existing guidance
into conformity with the contents of Financial Reporting Release No. 78
(Release No. 338995), Modernization of Oil and Gas Reporting, issued
December 31, 2008 (FR78), and, in the case of the technical amendment
to SAB Topic 3, Financial Reporting Release No. 79 (Release Nos. 33
9026; 3459775), Technical Amendments to Rules, Forms, Schedules and
Codification of Financial Reporting Policies (FR79), issued April 15,
2009. This SAB also updates related interpretive responses and examples
in Topic 12. The staff expects registrants to apply the updated
guidance in this SAB related to Topic 12 on a prospective basis in
conjunction with the application of FR78 and retroactively for the
technical amendment to Topic 3 in conjunction with the effective date
of FR79. FR78 is effective for registration statements filed on or
after January 1, 2010, and for annual reports on Forms 10K and 20F
for fiscal years ending on or after December 31, 2009. FR79 is
effective as of April 23, 2009.
SUMMARY:
Staff Accounting Bulletin (No. 113)
SUPPLEMENTAL INFORMATION
The statements in staff accounting bulletins
are not rules or interpretations of the Commission, nor are they
published as bearing the Commission's official approval. They represent
interpretations and practices followed by the Division of Corporation
Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws.
Dated: October 29, 2009.
Elizabeth M. Murphy,
Secretary.
PART 211[AMENDED]
Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is
amended by adding Staff Accounting Bulletin No. 113 to the table found in Subpart B.
Staff Accounting Bulletin No. 113
This staff accounting bulletin revises or rescinds portions of the interpretive guidance in Topic 12, ``Oil and Gas Producing Activities,'' included in the Staff Accounting Bulletin Series, in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and Financial Reporting Release No. 78 (Release No. 338995), Modernization of Oil and Gas Reporting, issued December 31, 2008 (2008 Oil & Gas Release). This SAB also updates related interpretive responses and examples. This SAB also includes an amendment to Topic 3 ``Senior Securities,'' for a technical reference revision to conform to Financial Reporting Release No. 79 (Release Nos. 339026; 3459775), Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies, issued April 15, 2009.
The following describes the changes made to the Staff Accounting Bulletin Series that are presented at the end of this release: Topic 3: Senior Securities
Topic 3.C, the introductory facts are amended to replace the reference ``Rule 502.28 of Regulation SX'' with ``Rule 502.27 of Regulation SX'' to conform to paragraph numbering amendments made by FR79.
Topic 12: Oil and Gas Producing Activities
a. Topic 12 is amended to update authoritative accounting literature references to the FASB's Accounting Standards Codification (FASB ASC) throughout.
b. Topic 12.A.1, the introductory facts have been amended, and questions 1, 2, and 3 are removed, leaving question 4 in place (without a numerical designation). Questions 1 and 2 are no longer applicable to the amended definition of ``reliable technology'' in Rule 410 of Regulation SX. Question 3 is removed to conform to Instruction 1 of Item 1204 of Regulation SK, which no longer addresses reserves attributable to production from processing plant ownership as previously included in Instruction B of Item 3 of former Industry Guide 2.
c. Topic 12.A.2, the facts and the interpretive response to question 1 are amended to conform to changes made by the 2008 Oil & Gas Release by replacing the use of a yearend price when determining reserve quantities with the use of the average price during the 12 month period prior to the ending date of the period covered by the balance sheet, determined as the unweighted arithmetic average of the firstdayofthemonth market price within such period for that oil and gas (the average price). Questions 2 and 3 are removed because the average price is applied in all cases where contractual prices do not exist as specified under Rule 410(a)(22) of Regulation SX.
d. Topic 12.A.3.b is removed to conform to the 2008 Oil & Gas Release which permits the disclosure of probable and possible reserve quantities but does not provide a basis to present estimated values attributed to those reserve quantities.
e. Topic 12.A.3.c, the facts are amended to remove references to Industry Guide 2, which has been replaced by amendments to Regulation SK and to remove unnecessary references to Regulation SX and Financial Accounting Standards Board (FASB) Statement No. 69. The interpretive response is amended to replace the term ``merger'' with the term ``business combination'' and replace the term ``combined'' with the term ``consolidated or combined''.
f. Topic 12.A.3.d is removed to conform to the Commission's rules and regulations which do not require (and the Division of Corporation Finance no longer requests) a balance sheet of the general partner to be included in a registration statement for an offering of limited partnership interests.
g. Topic 12.C.1, the facts are amended to remove a reference to FASB Statement No. 25, which is not included in the FASB ASC. In addition, nonsubstantive editorial changes are made to Topic 12.C.2.
h. Topic 12.D.1, nonsubstantive editorial changes are made to question 1 and question 2 is amended to simplify the illustrative example in the interpretive response and thereby promote a clearer understanding of the calculation using the ``shortcut'' method for determining the tax effects in computing the full cost ceiling limitation and the resulting gross writeoff attributed to the full cost pool.
i. Topic 12.D.3.b is amended to conform to changes made by the 2008
Oil & Gas Release by replacing the use of a yearend spot price when
determining reserve quantities with the use of the average price during
the 12month period prior to the ending date of the period covered by
the balance sheet, determined as the unweighted arithmetic average of
the firstdayofthemonth market price within such period for that oil and gas. Additionally,
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the interpretive response is amended to remove unnecessary references
to guidance in FASB Statements 52 and 80, which is now provided in FASB
ASC Topic 815, Derivatives and Hedging, and to add a reference to
Financial Reporting Release No. 72 (Release Nos. 338350; 3448960),
Commission Guidance Regarding Management's Discussion and Analysis of
Financial Condition and Results of Operations, which is more recent
guidance pertinent to Management's Discussion and Analysis disclosures.
j. Topic 12.D.3.c is amended to conform to changes made by the 2008 Oil & Gas Release by removing the provision to apply a recovery of oil and gas prices subsequent to periodend, when assessing whether a writeoff computed under the full cost ceiling limitation should be recognized. As stated in the 2008 Oil & Gas Release, this guidance is no longer necessary because use of the average price would effectively eliminate anomalies caused by the singleday periodend price.
k. Topic 12.D.4, Footnote 1 is removed to eliminate unnecessary references specifically related to the adoption of FASB Statement 143, which is now referenced to FASB ASC Subtopic 41020, Asset Retirement and Environmental ObligationsAsset Retirement Obligations. Footnotes previously numbered 2, 3 and 4 are renumbered 1, 2 and 3, respectively.
l. Topic 12.D.4.a, question 1 and the facts and interpretive response related to question 1 are amended and question 2 is removed to eliminate unnecessary references and guidance specifically related to the adoption of FASB Statement 143.
m. Topic 12.D.4.b, the facts, question and interpretive response are amended to eliminate unnecessary references and guidance specifically related to the adoption of FASB Statement 143.
n. Topic 12.D.4.c is removed to eliminate unnecessary transition guidance specifically related to the adoption of FASB Statement 143.
o. Topic 12.F, Footnote 4 is added to reference the definition of current prices used in Rule 410(c) of Regulation SX, which was amended to conform to the 2008 Oil & Gas Release. As amended, Rule 4 10(c)(8) of Regulation SX defines current price as the average price during the 12month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the firstdayofthemonth price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
p. Topic 12.G and Footnotes 5 and 6 are removed to conform to changes made by the 2008 Oil & Gas Release. This conforming change reflects the fact that, under amended Rule 410(a)(16) the definition of ``oil and gas producing activities'' includes the extraction of natural gas from coal beds.
Note: The text of SAB 113 will not appear in the Code of Federal Regulations.
* * * * *
TOPIC 3: SENIOR SECURITIES
* * * * *
C. Redeemable Preferred Stock
Facts: Rule 502.27 of Regulation SX states that redeemable
preferred stocks are not to be included in amounts reported as
stockholders' equity, and that their redemption amounts are to be shown
on the face of the balance sheet. However, the Commission's rules and
regulations do not address the carrying amount at which redeemable
preferred stock should be reported, or how changes in its carrying
amount should be treated in calculations of earnings per share and the
ratio of earnings to combined fixed charges and preferred stock dividends.
* * * * *
TOPIC 12: OIL AND GAS PRODUCING ACTIVITIES
A. Accounting Series Release 257Requirements for Financial Accounting
and Reporting Practices for Oil and Gas Producing Activities 1. Estimates of Reserve Quantities
Facts: Rule 410 of Regulation SX contains definitions of possible reserves, probable reserves, and proved and developed oil and gas reserves to be used in determining quantities of oil and gas reserves to be reported in filings with the Commission.
Question: What pressure base should be used for reporting gas and production, 14.73 psia or the pressure base specified by the state?
Interpretive Response: The reporting instructions to the Department of Energy's Form EIA28 specify that natural gas reserves are to be reported at 14.73 psia and 60 degrees F. There is no pressure base specified in Regulation SX or SK. At the present time staff will not object to natural gas reserves and production data calculated at other pressure bases, if such pressure bases are identified in the filing. 2. Estimates of Future Net Revenues
Facts: U.S. GAAP requires the disclosure of the standardized measure of discounted future net cash flows from production of proved oil and gas reserves.
Question: For purposes of determining reserves and estimated future net revenues, what price should be used for oil and gas which will be produced after an existing contract expires or after the
redetermination date in a contract?
Interpretive Response: The price to be used for oil and gas which
will be produced after a contract expires or has a redetermination is
the average price during the 12month period prior to the ending date
of the period covered by the balance sheet, determined as an unweighted
arithmetic average of the firstdayofthemonth price for each month
within such period for that oil and gas. This average price, which
should be based on the firstdayofthemonth market prices, may be
increased thereafter only for additional fixed and determinable
escalations, as appropriate. A fixed and determinable escalation is one
which is specified in amount and is not based on future events such as rates of inflation.
3. Disclosure of Reserve Information
a. Removed by SAB 103
b. Removed by SAB 113
c. Limited Partnership 10K Reports
Facts: Item 1201(a) of Regulation SK contains an exemption from the requirements to disclose certain information relating to oil and gas operations for ``limited partnerships or joint ventures that conduct, operate, manage, or report upon oil and gas drilling income programs that acquire properties either for drilling and production, or for production of oil, gas, or geothermal steam. * * *
Limited partnership agreements often contain buyout provisions under which the general partner agrees to purchase limited partnership interests that are offered for sale, based upon a specified valuation formula. Because of these arrangements, the requirements for disclosure of reserve value information may be of little significance to the limited partners.
Question: Must the financial statements of limited partnerships included in reports on Form 10K contain the disclosures of estimated future net revenues, present values and changes therein, and supplemental summary of oil and gas activities specified in paragraphs 23 through 36 of FASB Accounting Standards Codification (FASB ASC) Section 93223550, Extractive ActivitiesOil and GasNotes to Financial StatementsDisclosure?
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Interpretive Response: The staff will not take exception to the
omission of these disclosures in a limited partnership Form 10K if
reserve value information is available to the limited partners pursuant
to the partnership agreement (even though the valuations may be
computed differently and may be as of a date other than year end).
However, the staff will require all of the information listed in paragraphs 23 through 36 of FASB ASC Section 93223550 for
partnerships which are the subject of a business combination or
exchange offer under which various limited partnerships are to be consolidated or combined into a single entity.
d. Removed by SAB 113
e. Rate Regulated Companies
Question: If a company has costofservice oil and gas producing properties, how should they be treated in the supplemental disclosures of reserve quantities and related future net revenues provided pursuant to paragraphs 29 through 36 of FASB ASC Section 93223550, Extractive ActivitiesOil and GasNotes to Financial StatementsDisclosure?
Interpretive Response: Rule 410 provides that registrants may give
effect to differences arising from the ratemaking process for costof
service oil and gas properties. Accordingly, in these circumstances,
the staff believes that the company's supplemental reserve quantity
disclosures should indicate separately the quantities associated with
properties subject to costofservice ratemaking, and that it is
appropriate to exclude those quantities from the future net revenue
disclosures. The company should also disclose the nature and impact of
its costofservice ratemaking, including the unamortized cost included in the balance sheet.
4. Removed by SAB 103
B. Removed by SAB 103
C. Methods of Accounting by Oil and Gas Producers
1. FirstTime Registrants
Facts: In ASR 300, the Commission announced that it would allow registrants to change methods of accounting for oil and gas producing activities so long as such changes were in accordance with GAAP. Accordingly, the Commission stated that changes from the full cost method to the successful efforts method would not require a preferability letter. Changes to full cost, however, would require justification by the company making the change and filing of a preferability letter from the company's independent accountants.
Question: How does this policy apply to a nonpublic company which changes its accounting method in connection with a forthcoming public offering or initial registration under either the 1933 Act or 1934 Act?
Interpretive Response: The Commission's policy that firsttime registrants may change their previous accounting methods without filing a preferability letter is applicable. Therefore, such a company may change to the full cost method without filing a preferability letter. 2. Consistent Use of Accounting Methods Within a Consolidated Entity
Facts: Rule 410(c) of Regulation SX states in part that ``[a] reporting entity that follows the full cost method shall apply that method to all of its operations and to the operations of its subsidiaries * * *''
Question 1: May a subsidiary of the parent use the full cost method if the parent company uses the successful efforts method of accounting for oil and gas producing activities?
Interpretive Response: No. The use of different methods of accounting in the consolidated financial statements by a parent company and its subsidiary would be inconsistent with the full cost requirement that a parent and its subsidiaries all use the same method of accounting.
The staff's general policy is that an enterprise should account for all its like operations in the same manner. However, Rule 410 of Regulation SX provides that oil and gas companies with costofservice oil and gas properties may give effect to any differences resulting from the ratemaking process, including regulatory requirements that a certain accounting method be used for the costofservice properties.
Question 2: Must the method of accounting (full cost or successful efforts) followed by a registrant for its oil and gas producing activities also be followed by any fifty percent or less owned companies in which the registrant carries its investment on the equity method (equity investees)?
Interpretive Response: No. Conformity of accounting methods between
a registrant and its equity investees, although desirable, may not be
practicable and thus is not required. However, if a registrant
proportionately consolidates its equity investees, it will be necessary to present them all on the same basis of accounting.
D. Application of Full Cost Method of Accounting
1. Treatment of Income Tax Effects in the Computation of the Limitation on Capitalized Costs
Facts: Item (D) in Rule 410(c)(4)(i) of Regulation SX provides that the income tax effects related to the properties involved should be deducted in computing the full cost ceiling.
Question 1: What specific types of income tax effects should be considered in computing the income tax effects to be deducted from estimated future net revenues?
Interpretive Response: The rule refers to income tax effects generally. Thus, the computation should take into account (i) the tax basis of oil and gas properties, (ii) net operating loss carryforwards, (iii) foreign tax credit carryforwards, (iv) investment tax credits, (v) alternative minimum taxes on tax preference items, and (vi) the impact of statutory (percentage) depletion.
It may often be difficult to allocate a net operating loss (NOL) carryforward between oil and gas assets and other assets. However, to the extent that the NOL is clearly attributable to oil and gas operations and is expected to be realized within the carryforward period, it should be added to tax basis.
Similarly, to the extent that investment tax credit (ITC) carryforwards and foreign tax credit carryforwards are attributable to oil and gas operations and are expected to be realized within the carryforward period, they should be considered as a deduction from the tax effect otherwise computed. Consideration of NOL and ITC or foreign tax credit carryforwards should not, of course, reduce the total tax effect below zero.
Question 2: How should the tax effect be computed considering the various factors discussed above?
Interpretive Response: Theoretically, taxable income and tax could be determined on a yearbyyear basis and the present value of the related tax computed. However, the ``shortcut'' method illustrated below is also acceptable.
FOR FURTHER INFORMATION CONTACT
Jonathan W. Duersch, Assistant Chief Accountant, Office of the Chief Accountant, at (202) 5513719, Doug Parker, Professional Accounting Fellow, Office of the Chief Accountant, at (202) 5515316 or Leslie A. Overton, Associate Chief Accountant, Division of Corporation Finance, at (202) 5513518, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549.