Depletion-GAAP

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Depletion-GAAP

Depletion – GAAP is an optional part of the General Ledger system.  This module is used to generate General Ledger entries to adjust the Net Book Value via the asset's accumulated depletion account(s).

The Depletion – GAAP module pulls information from the General Ledger which may originate from other Pak Accounting modules.  The three that will be focused on include Accounts Payable, Check Stub, and the General Ledger modules.  First, in Accounts Payable the investor typically enters the Leasehold costs, as well as other costs, that were incurred to get the well operational.  These entries help establish the asset balances.  

After the well becomes operational the investor begins receiving revenue checks from the operator.  These are entered into the General Ledger system using the Check Stub module. The information that is used from this data entry includes the Production data and the Gross Revenue quantity.

The use of the General Ledger is to update Pak Accounting to the latest values of accumulated depletion for assets that were being depleted prior to using the new Depletion – GAAP module.  

 

 

GAAP

hmtoggle_plus1Depletion-GAAP Accounting Concepts and Terms

Accounting Concepts

In summary, using the Successful Efforts methods of capitalizing costs associated with drilling a well, capitalized costs are depleted based on the number of units produced.  For some costs, the depletion is based on the Proved Reserves while others are depleted using the Proved Developed Reserves.  

 

The Flow

The big picture of steps surrounding the Depletion – GAAP update.

 

1.Accounts Payable – enter the invoice/JIB received

2.Check Stub Entry – record the revenue detail for each stub by asset (well) and production date

3.Update the Accumulated Depletion for the desired month.

 

Step

Cash
1010

Asset by property - 1400

Accm. Depl by
Property - 1409

A/P by Vendor
2010

Oil Sales
9601

Depl. Expense
5910

1. Accounts Payable

 

+

 

-

 

 

2. Check Stub

+

 

 

 

-

 

3. Update Accum. Depl.

 

 

-

 

 

+

 

 

Quantity

The volume produced in a given time frame.

Reserves

The reasonably calculated amount of product that can be recovered by the well.

Leasehold Asset Account(s)

The costs to acquire the lease.  This may include property rentals, lease bonuses, title fees, broker’s fees, recording costs, etc.

Intangible Asset Account(s)

The costs to develop an oil & gas well that are related to drilling and completion, but doesn’t include the equipment.  For example: survey work, ground clearing, drainage, wages, fuel, repairs, supplies, etc. (just not the physical equipment).

Tangible Asset Account(s)

The equipment that goes into the drilling and completion of a well.  This would include the support beams, derricks, drill bits, generators, etc.

P & A (Plugging and Abandonment) Asset Account(s)

This is the estimated cost of plugging and abandoning the well that is created at the beginning of the life of the asset.  Since this is not a physical cash transaction until the well has been completely depleted the offset to this account is a liability account to reveal the future cost on the balance sheet.

 

hmtoggle_plus1Calculation Methods

Each Asset Account Type will have a corresponding Accumulated Depletion Account.  For Example:  If there are 2 different Intangible Asset Accounts (Intangible Completion and Intangible Drilling) there will be one Intangible Accumulated Depletion account.
 
The calculation method utilized by Pak Accounting’s GAAP Depletion Module is as follows:

1)Compute the Depletion Base – (Leasehold accounts – accumulated leasehold depletion) + (Intangible Accounts – accumulated intangible depletion) + (P&A accounts – accumulated P&A depletion) + (Tangible Accounts – accumulated Tangible depletion) = Depletion base
 

2)Compute the Unit Depletion Rate – Current Period Production / Current Reserves
 

3)Charge the depletion based on units of production for the current period – Depletion Base x Unit Depletion Rate

New reserve studies can be entered monthly, quarterly, semi-annually, or yearly.  The system will make adjustments to the “Unit Depletion Rate” based on those updated reserve studies to keep the Depletion expense accurate.  When changes are made to the asset accounts, those changes will also impact the “Unit Depletion Rate”.

 

hmtoggle_plus1Depletion-GAAP Setup Checklist

1. Set up Depletion Accounts.

 

2. Set up Depletion-GAAP in Master File Maintenance > Company.

 

3. Enter / Import Reserve Studies in Maintenance > Property.

 

4. Calculate Depletion in Update > Calculate Depletion.

 

5. Review posted entries in View Trend (F4).

 

hmtoggle_plus1Chart of Accounts

Review Pak Accounting’s Quick Start Chart of Accounts. The diagram below shows an example Chart of Accounts, summarized by account range.

COA Diagram

 

Make sure that the chart of accounts includes at least:

•one asset account for each type of asset (Intangible, Leasehold, P&A, and Tangible)

•only one accumulated depletion account for each Asset Type

•one or more depletion expense accounts depending on desired impact on the Income Statement

o Pak Accounting only requires 1 Depletion Expense Account, but there could be 1 account per asset type

oThe corresponding revenue accounts for the products included in your reserve studies.  

Currently GAAP depletion supports Oil Sales/Gas Sales/Product Sales.  However, it is only necessary to define sales accounts for the products that are included in your reserve studies.  

More than one account may be defined for each type of Sales (For example: Oil Sales – Working Interest., Oil Sales – Royalty Interest, and Oil Sales – Override Interest).
 

Below is an example of Accounts that might be utilized (Note that they all have the Property Sub-Table: 50, attached).

DEPL1

 

hmtoggle_plus1Maintenance / Property

PR (Proved Reserves) vs PD (Proved Developed Reserves) – these are both bases that are utilized for calculating depletion.  By default the Leasehold Asset accounts look to the reserve study for PR (Proved Reserves).  The remaining asset types (Intangible, P&A, and Tangible) look to the PD (Proved Developed Reserve) study. The basis options for the Asset types are system defined meaning that the basis may not be overridden. However, if there are leasehold costs that need to be depleted based on PD (Proved Developed Reserve) study, include those Leasehold Accounts in another asset type other than the “Leasehold” accounts. However, if there is no “Proved Reserve” Study available, then all asset accounts should be reflected on the Intangible, P&A, and Tangible rows.

To add a new reserve study, go the to the Reserves tab (last tab in the Property Maintenance), and then click on the green “+” sign (see below):

DEPL 5

 

Enter each reserve study for the property, the effective date of the reserve study, and the corresponding reserve and product values.

Once the data is entered click on “Save” or press the F10 hotkey on your keyboard to save.  If there are multiple reserve studies, then add in multiple rows of entries.

Import Reserves

Reserves can also be imported from Excel. Supported formats are XLS, XLSX, or CSV. The required fields are LeaseNum and EffDate. The EffDate must be the end of a fiscal period. When importing reserves for Proved or Proved Developed, the effective date must be different if there are reserves that already exist. In addition, the effective date must be on the last day of a fiscal period (month, quarter, year).

Reserves can also be imported to a fixed #Allocation. The #Allocation will need to be coded in the LeaseNum field and must be a fixed allocation.

 

Mass Delete

This button provides the ability to remove reserves for a specified effective date (or date range) from the Property Maintenance / Reserves tab. It is recommended to create a Pak Accounting backup first. Exercise caution when using this utility.

 

hmtoggle_plus1Update > Calculate Depletion

After the Oil and Gas income and asset adjustment entries are completed for the period, go to Depletion-GAAP module > Update > Depletion Reserves and enter in the General Ledger effective month and year (MM/YYYY) that is ready to be updated and click “OK.”

 

Once the data finishes processing the screen will populate with the number of reserves processed, number of G/L entries created, and location of the excel spreadsheet created (see below):

DEPL 6

 

Once the process is completed for the period, review the entries the system created by going to the View/Trend (F4).  

DEPL 7

 

After the entries have been posted, for any questions about the values, review the Excel workbook that was created to show the calculation steps.  The location of the Excel workbook is provided on the "Results” section upon generation. The excel file will provide one tab for each account type.  

 

hmtoggle_plus1Reports

Depletion Schedule

Displays assets production that can be depleted, reserves, asset costs, accumulated depletion, and net book value for the specified period of time.

Reserve Listing

Displays the reserve balances for depletable assets that are effective for the time period(s) defined.

Depletion Group Listing

Displays a listing of properties that are contained within a particular Depletion Group or range of Depletion Groups.

 

hmtoggle_plus1Master File Maintenance / Company

Once all necessary accounts have been created, set up the Depletion-GAAP Company Maintenance.

 

DEPL 3

 

 

Unit of Measure

The measurement that all volumes will be converted to.  For the example above the Unit of Measure will be BOE (BBL equivalent – all volumes will be converted to BBL).  This field will hold up to 10 characters.

GL Journal

The journal that will be utilized when posting the Depletion Entries.

Depletion Group Sub-Table

Defining a Depletion Group Sub-Table will allow you to have a Sub-Account drop down option in the Property Maintenance > Reserve tab. This will allow multiple properties to be linked together for depletion calculations. DEPL 8

Oil Conversion Factor

Amount that the volume needs to be multiplied by to reach the “Unit of Measure”.  In the example below we are converting to BOE, so there is no need to convert the BBL.  Entering a 1.000000 will keep the volume from changing.

Gas Conversion Factor

Amount that the volume needs to be multiplied by to reach the “Unit of Measure”.  When using the industry standard to convert from BBL to MCF the factor is 6.0, but this is a user defined factor that can be taken out to 6 decimal places.

Product Conversion Factor

Amount that the volume needs to be multiplied by to reach the “Unit of Measure”.  When using the industry standard to convert GAL to BOE the factor is 42.0, but this is a user defined factor that can be taken out to 6 decimal points, and the measurements for products are not always based on a gallon.  In the example above, products have their volume reported in gallons, so the factor to multiply by to reach the “Unit of Measure” is 42.0.

Oil / Gas / PRD Sales Accts

NOTE: the Oil/Gas/Prd Sales Accounts - The sales accounts should be the same level as the reserves. If reserves are the 100% (8/8ths) numbers then use the 9XXX accounts. If reserves are based on the company's ownership percentage use the 4XXX accounts.

 
Oil Sales Accts – The accounts that oil sales volumes are recorded in for the properties’ operating statement.  When using Pak Accounting's Quick Start feature this account is defined as 9601.

 

To add accounts click on the “Select” button to the right of the “Oil Sales Accts.”  Next, a grid will appear that contains a “List of All Accounts” on the left side and a “List of Selected Accounts” on the right side.  To move accounts from one side or the other, select the account(s) that need to be moved by clicking on each account once.  Then, use the red arrows in between the two grids to move the account(s) back and forth.

 

Gas Sales Accts – The accounts that gas sales volumes are recorded in for the properties’ operating statement.  When using the QuickStart feature this account is defined as 9621.  Follow the same selection process from Oil Sales Accts.

 

Prd Sales Accts - The accounts that gas sales volumes are recorded in for the properties’ operating statement.  When using the QuickStart feature, this account is defined as 9631.  Follow the same selection process from Oil Sales Accts. If you do not use Product volumes in your reserves or take them into consideration when calculating depletion, these accounts would remain undefined.  Only define these accounts, if they are being utilized to calculate Depletion

Grid Accounts (below)

While only 4 types of accounts may be defined, not all four rows are required to be defined.  If the company in question only has 1 Accumulated Depletion account, then, all Asset Accounts would be included in the “Asset Accts” section for the row that best suits the needs for that particular company.  If the company has 2 Accumulated Depletion accounts, then, the Asset Accounts would be divided between two separate rows based on relevance.

Separate Depletion Expense accounts may be used for each row, but we do not require the user to define multiple Depletion Expense accounts.  The same account is allowed to be used on each row, if that is the desired output of the user.

Intangible Accounts

This includes the Assets Account(s), Accumulated Depletion Account, and Depletion Expense Account.  The grid works like the grid for the volume accounts in the Oil Sales Accts, Gas Sales Accts, and Prd Sales Accts. However, there are 3 different types of accounts to define. The system will allow multiple Asset Accounts, but those asset accounts should tie to ONE accumulated depletion account.  The same Depletion Expense account may be utilized for all four account types, but the other two columns “Asset Accts” and “Accum Depl” may only be used with one account type.  For example, asset accounts 1410 and 1415 tie to the Accumulated Depletion account-1419, and then, the same Depletion Expense account-5910 is used for all Asset Types.

Leasehold Accounts

This includes the Assets Account(s), Accumulated Depletion Account, and Depletion Expense Account.  The grid works like the grid for the volume accounts in the Oil Sales Accts, Gas Sales Accts, and Prd Sales Accts , but there are 3 different types of accounts to define. The system will allow multiple Asset Accounts, but those asset accounts should tie to ONE accumulated depletion account.  The same Depletion Expense account may be utilized for all four account types, but the other two columns “Asset Accts” and “Accum Depl” may only be used with one account type.  For Example, asset accounts 1400 and 1405 tie to the Accumulated Depletion account- 1409, and then, the same Depletion Expense account-5910 is used for all Asset Types.

P&A Accounts

This includes the Asset Account(s), Accumulated Depletion Account, and Depletion Expense Account.  The grid works like the grid for the volume accounts in the Oil Sales Accts, Gas Sales Accts, and Prd Sales Accts. , but there are 3 different types of accounts to define.  The system will allow multiple Asset Accounts, but those asset accounts should tie to ONE accumulated depletion account.  The same Depletion Expense account may be utilized for all four account types, but the other two columns “Asset Accts” and “Accum Depl” may only be used with one account type.  For example, asset account 1430 ties to the Accumulated Depletion account-1439, and then, the same Depletion Expense account-5910 is used for all Asset Types.

Tangible Accounts

This includes the Assets Account(s), Accumulated Depletion Account, and Depletion Expense Account.  The grid works like the grid for the volume accounts in 6-8, but there are 3 different types of accounts to define.  The system will allow multiple Asset Accounts, but those asset accounts should tie to ONE accumulated depletion account.  The same Depletion Expense account may be utilized for all four account types, but the other two columns “Asset Accts” and “Accum Depl” may only be used with one account type.  For example,  Asset Accounts 1420 and 1425 tie to the Accumulated Depletion account-1429, and then, the same Depletion Expense account- 5910 is used for all Asset Types.