The oil and gas sector is characterized by the need for big upfront investment, often with great uncertainty about outcomes over the long-term. The geopolitical, environmental, energy and natural resource supply and trading challenges, combined with complex stakeholder and business relationships, mean the transition to International Financial Reporting Standards (IFRS) will require complex judgements on how to implement the new standards.
Key differences between IFRS and Canadian GAAP
Some of the significant accounting differences for the oil and gas sector are particularly acute for those companies in Canada that currently follow the full-cost method of accounting. The impact of IFRS is felt all along the oil and gas value chain, but many of the key dilemmas and judgments are greatest during the exploration and production stage.
At the very start of the value chain, the practice of full-cost accounting is limited under IFRS 6: Exploration and Evaluation of Mineral Resources, to exploration and evaluation activities. Most global integrated oil and gas companies, as well as many smaller upstream companies, use the successful efforts method of accounting for oil and gas activities. Many of these companies in Canada have historically used the full-cost method of accounting, whereby all costs incurred in searching for, acquiring and developing the reserves in a large geographic cost centre, as opposed to individual fields, are capitalized. Full-cost accounting as applied under Canadian Generally Accepted Accounting Principles (GAAP) in the past is not allowed beyond the exploration and evaluation phase under IFRS.
Other challenging business issues for Canada’s oil and gas companies that will make IFRS conversion a difficult knot to untangle include:
- The undertaking of high-risk, capital-intensive projects with long lead time—the future success of which is difficult for many companies to determine
- The use of various kinds of risk-sharing arrangements, such as joint ventures, production sharing contracts, undivided interests and co-located assets
- Industry-specific taxes
- Co-operation in operating patterns leading to overlift and underlift
- Significant environmental obligations, such as decommissioning requirements
How PwC can help
For a more in depth analysis of the industry-specific issues:
PwC has global experience to address these and other challenges facing the Canadian oil and gas industry with its conversion to IFRS. We have already helped many of the world’s largest public companies across a wide range of sectors adopt this new accounting standard.
Contact our oil and gas industry professionals to see how we can help with your IFRS conversion process.
