ICAI’s Guidance Note on Accounting for Oil and Gas Producing Activities (applicable for entities under ‘Ind AS’ for accounting periods commencing on or after 1 April, 2017)
Realising the need to provide specific guidance for entities in Oil and gas sector, the ICAI had formulated a Guidance Note on Accounting for Oil and Gas Producing Activities. However, in the Indian Accounting Standards (Ind AS) scenario, though Ind AS 106 Exploration for and Evaluation of Mineral Resources provides guidance for the exploration and evaluation phase of the upstream oil and gas industry, a need was felt for formulation of Guidance Note to provide guidance to the companies whose financial statements have been prepared and presented in accordance with Ind AS.
The Guidance Note formulated in accordance with Ind AS continues to deal with the accounting of upstream oil and gas operations viz., acquisition, exploration, development and production activities. It is, thus, a comprehensive guidance for all the four phases of the upstream oil and gas operations also termed as the Exploration and Production (E&P) industry. The Guidance Note provides guidance in accordance with the principles contained in Ind AS. It includes guidance on what constitute oil and gas assets for the purpose of applying unit of production (UOP) method, accounting for abandonment costs in accordance with principles laid down in Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. The guidance on testing for impairment of exploration and evaluation assets is provided in accordance with the principles laid down in Ind AS 106 while that for development and production assets is in accordance with Ind AS 36, Impairment of Assets. It also includes guidance on accounting for interests in joint ventures in accordance with Ind AS 111, Joint Arrangements, since many entities engaged in upstream oil and gas operations enter into joint venture agreements. Further, E & P entities often undertake transactions in different currencies and accordingly, guidance for determination of functional currency in accordance with the principles laid down in Ind AS 21, The Effects of Changes in Foreign Exchange Rates is also contained in the Guidance Note. It also includes guidance on presentation and certain additional disclosures to be made by an upstream oil and gas entity
Compliance with the ICAI’s Guidance Note on ‘Accounting for Oil and Gas Producing Activities (Ind AS)’ shall be mandatory in respect of accounting periods commencing on or after 1 April 2017, however its earlier application is voluntary.