CHAPTER 5 ACCOUNTING PROCEDURES FOR JOINT MINING OPERATIONS
| Jurisdiction | United States |
(May 1979)
ACCOUNTING PROCEDURES FOR JOINT MINING OPERATIONS
Arthur Anderson & Co.
Denver, Colorado
ACKNOWLEDGEMENT
The writer wishes to acknowledge the assistance in preparing this paper of Mr. James R. TenBrook and Mr. Lowell A. Hare of Arthur Andersen & Co.
TABLE OF CONTENTS
Page
INTRODUCTION
I. GENERAL PROVISIONS
A. Required Accounting Records
B. Statements and Billings
C. Payments by Nonoperators
D. Audits
E. Definitions
II. ALLOCABLE JOINT OPERATIONS CHARGES
A. Rentals and Royalties
B. Labor Costs
C. Materials, Equipment and Supplies (ME&S)
D. Transportation
E. Services/Operator Furnished Equipment
F. Damages and Losses to Joint Property and Equipment
G. Legal Expenses
H. Taxes
I. Insurance
J. District and Camp Expenses
K. Administrative Overhead
L. Other Expenditures
III. TERMINATION OF JOINT OPERATING AGREEMENT AND/OR DISPOSAL OF MATERIALS, EQUIPMENT AND SUPPLIES
A. Provisions for Termination
B. Shut-Down Costs
C. Other Costs
D. Disposition of Assets
E. Other Areas for Consideration
IV. INTERNAL ACCOUNTING CONTROLS
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V. CONSIDERATIONS FOR A JOINT VENTURE TREATED AS A SEPARATE ENTITY
A. Separate Accounting Records
B. Depreciation, Depletion and Amortization
C. Income Taxes
VI. ACCOUNTING PROCEDURE CHECKLIST FOR USE IN CONNECTION WITH MINING JOINT OPERATING AGREEMENTS APPENDIX/5-21
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INTRODUCTION
During the past decade, there has been significant reemphasis in developing alternative energy sources resulting from increased energy demands, changes in end-use of energy, the need to discover new reserves and the change in the relative pricing among energy types. This reemphasis has created a significant increase in mining activities, specifically (at least in this part of the country) those related to the exploration for, and development of, coal and uranium reserves. Existing mining companies have increased their mining capabilities, while new companies and ventures have been lured to the mining industry. Major oil and gas companies have continued to strengthen and diversify their operations into the mining industry and utility companies have increased their efforts to seek captive supplies of coal and uranium for expected future demand, in many cases as a participant with other parties in a joint venture or in joint operating agreements.
Recognizing the extensive capital requirements associated with the exploration, development and ultimate production of reserves, joint operating agreements similar in concept to oil and gas joint operating agreements have been utilized with increased frequency. As an example, established mining companies which offer a wide range of technical talents to evaluate prospects and to direct the exploration and development phases have joined forces with other parties possessing financial resources available for investment in the mining industry.
Joint operating agreements have been a way of life within the oil and gas industry for years and have covered operations all the way from land and lease acquisition through disposition of the produced product. While within the mining industry the utilization of joint operating agreements has been extensive, the development of standardized accounting procedures for such agreements has developed more slowly.
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It appears that we will see increased standardization of the accounting provisions in mining joint operating agreements similar to the COPAS (Council of Petroleum Accountants Societies of North America) form used for oil and gas joint operations.
A joint venture or joint operation is one in which the parties to the agreement may participate, directly or indirectly, in the overall management of the operations or venture. Thus, parties to the joint operating agreement oftentimes have an interest or relationship other than as passive investors. For purposes of this paper an important distinction is made between the joint venture and the joint operations. Joint ventures may exist in corporate or partnership form, wherein parties to the agreement own stock or a partnership interest in a separate entity created to handle the joint venture. On the other hand, joint operations may exist through an agreement whereby each party takes an undivided interest in the properties of the joint operations and agrees to share in a certain portion of the revenues and bear a certain portion of the costs of the joint operations, conducted by the designated operator within the framework of the operator's organization. It is with respect to the latter situation that the COPAS form has become widely used in the oil and gas industry and to which this paper is primarily directed with respect to the mining industry.
The intent of this paper is not to provide a standard form for use in documenting the accounting procedures of mining joint operating agreements, but rather to provide some guidelines involved with accounting alternatives and procedures that may be utilized in connection with the drafting of a joint operating agreement in a mining situation. Accordingly, the appendix to this paper sets forth a checklist of the more common accounting related provisions for possible inclusion in a mining joint operating agreement. In addition, examples of possible provisions or their implications are included in the appendix. This checklist has been prepared from an accountant's point of view and is intended to be a checklist and should not be considered as legal documentation of required accounting procedures or necessarily the most appropriate procedures in the circumstances. Each situation must be related to the particular facts inherent in each situation, whether it be a unique prospect involving a unique mining approach or the specific requirements of particular parties to the agreements or other factors. Decisions on various alternatives should, if combined with proper accounting and procedural controls, provide the accountability that the parties to the joint operating agreement would require.
The purpose of accounting procedures as they relate to joint operating agreements is to document the standards to
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be followed by the operator for accumulating all costs and expenses of the joint operations and to provide the basis for an equitable allocation of the income and billing of such charges among the parties to the agreement. In several of the alternative procedures, certain rates and percentages would need to be determined for each situation based on the operator's historical cost information, projected costs or the present economic and/or industry circumstances as they may exist at the time the joint operating agreement is executed.
The remainder of this paper is devoted to discussing the various provisions within the proposed accounting procedure checklist for a mining joint operating agreement, as mentioned above, and is structured from the perspective that each party to the agreement has an undivided interest in the properties and operations. The checklist (see the appendix) is likewise designed in that manner. In addition, a section of this paper (Section V) includes those matters that would be added to the checklist if the joint operations were to be conducted within the framework of a separate entity as a joint venture, possibly requiring separate management and cost allocation procedures. As an example, depreciation, depletion and amortization and income taxes (if in a corporate form) are some of the primary considerations that are dealt with in this section of the paper.
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I. GENERAL PROVISIONS
A. Required Accounting Records
Some guidance as to the accounting records and supporting documentation to be maintained by the operator as support for costs and expenses incurred is usually needed by the parties to the agreement. Required accounting records may be a part of the operator's existing records for other operations or may consist of subsidiary records of the operator. The nonoperators may request that the operator be required to retain such records as are required to meet Internal Revenue Code or other requirements of any party to the agreement, as such records may be required to substantiate operator or nonoperator tax or other treatment of such costs.
B. Statements and Billings
If adequate accounting records are maintained by the operator, periodic statements and billings to the nonoperators could be easily prepared. The format of the statements and billings and the required detail should be considered by the parties to the agreement. Those expenditures that relate to large capital additions or replacements, extraordinary and unusual charges and credits, such as damages and losses, expenditures in excess of a specified amount, etc., may require the specific approval of the nonoperators. Identifying such expenditures individually may also allow the nonoperators to review and approve such charges.
C. Payments by Nonoperators
While most joint operating agreements allow the operator to bill the nonoperators in advance of actual expenditures, it is seldom stated whether this procedure will, in fact, be followed. The accounting procedures in the joint operating agreement should specify either that the nonoperator will be billed in advance or billed subsequent to the operator's incurring costs. If the nonoperators are being billed after the expenditures are made, they should be expected to reimburse the operator within a reasonable period of time. In addition, the accounting procedures may require or provide for assessment of interest charges or collection costs if payments are not made on a timely basis.
D. Audits
The accounting procedures of a joint operating agreement should state whether or not a periodic audit is required to be performed by independent certified public accountants. The
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decision to require such audits may depend upon...
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