Question 4 a.) Friends Oil Limited has been operating in the upstream oil and gas sector for many years. It is transitioning to IFRS in 20X7 with a transition date of 1 January 20X6. Management has decided to adopt IFRS 6 to take advantage of the relief it offers for capitalisation of exploration costs and the impairment testing applied. Friends Oil Limited has followed a policy of expensing geological and geophysical costs under its previous GAAP. The geological and geophysical studies that Friends has performed do not meet the Framework definition of an asset in their own right, however management has noted that IFRS 6 permits the capitalisation of such costs [IFRS 6 para 9(b)]. 13 Can Friends Oil management change their accounting policy on transition to IFRS to capitalize geological and geophysical costs? Explain by making reference to the relevant aspects of the IFRS 6 requirements (3 Marks) b.) Family Company Limited operates in the upstream oil and gas sector and has chosen to develop accounting policies for exploration and evaluation expenditures that are fully compliant with the requirements of the IFRS Framework rather than continue with its previous accounting policies. It also chooses not to group exploration and evaluation assets with producing assets for the purposes of impairment testing. Family has acquired a transferable interest in an exploration licence. Initial surveys of the licence area already completed indicate that there are hydrocarbon deposits present but further surveys are required in order to establish the extent of the deposits and whether they will be commercially viable. Management are aware that third parties are willing to pay a premium for an interest in an exploration licence if additional geological and geophysical information is available. This includes licences where the additional information provides evidence of where further surveys would be unproductive. Can Family capitalise the costs of a survey if it is probable before the survey is undertaken that the results of the survey will increase the fair value of the licence interest regardless of the survey outcome? (3 Marks) c.) Explain 4 main relevance of reserve data to any upstream oil and gas company. (2 Marks) d.) In any Joint Venture operations, there are duties that are performed by both the operator and nonoperating partners. Explain three (3) main duties of the operator and two (2) main duties of the nonoperating partners. (5 Marks) e.) Explain the difference between Unitisations and Redetermination. Explain three critical implications of redetermination (5 Marks) f.) In 2018 Magnificent Company Limited leased the mineral rights in a property in Nyamekye Community, agreeing to a 20% royalty. The joint working interest in the property is owned by the following companies: Company Working Interest Magnificent Company Limited 55% Beautiful Company Limited 35% Intelligent Company Limited 10% 14 In 2019, a successful exploratory well was drilled on the property. On December 31, 2020, the property was producing. On that date, total proved reserves are estimated to be 1,400,000 barrels, and total proved developed reserves are estimated to be 580,000 barrels. Total production during 2020 was 100,000 barrels. You are required to: i.) Compute the proved reserves and proved developed reserves that belongs the working interest and royalty interest owners. (5 Marks) ii.) Determine the production that each of the working interest owners would use in computing DD&A (2 Marks)

SUBJECT: OIL AND GAS ACCOUNTING