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. The depletion is based on the Proved Reserves for some costs 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.

Each Asset Account Type will have a corresponding Accumulated Depletion Account. For Example, if there are two 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”.

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).

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

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 the desired impact on the Income Statement
  • Pak Accounting only requires 1 Depletion Expense Account, but there could be 1 account per asset type
  • The corresponding revenue accounts for the products included in your reserve studies.

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

More than one account may be defined for each type of Sale (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).

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 the 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 to the Reserves tab (the last tab in the Property Maintenance), and then click on the green “+” sign (see below):

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, add 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 must be coded in the LeaseNum field and must be a fixed allocation.

Mass Delete

This button allows you to remove reserves for a specified effective date (or date range) from the Property Maintenance > Reserves tab. Exercise caution when using this utility.

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, the number of G/L entries created, and the location of the Excel spreadsheet created (see below):

Once the process is completed for the period, you can review the entries the system created by going to  View/Trend [F4].

After the entries have been posted, if you have 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 in the "Results” section upon generation. The Excel file will provide one tab for each account type.

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