Transcript Document
3rd QUARTER
OIL & GAS UPDATE
Breakfast Seminar October 6, 2005
Agenda
• • • • • • • • Introduction Trust Financial Reporting Issues —Murray Suey Current Developments —Michael McKerracher New Auditing Standards —John Gordon Proposal on Accounting for Taxes —Chris Post Future of Income Trusts —Chris Post Scientific Research and Experimental Development —Gregory Brennan Transfer Pricing —Michael Hoffman © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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New Partners
• Audit: – Jason Brown, Partner • Tax: – Curtis Lester, Partner – Jodi Roworth, Associate Partner © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Trust
Financial Reporting
Issues
Murray Suey
403.691.8474
Trust Financial Reporting Issues
• • • • • Desire for more meaningful information about financial results Disclosure of terms of royalty and trust agreements and obligations (CICA 1540.55) Clarification of distributable income and distributable cash Distributions as return of capital vs income Presentation of cumulative distributions as separate component of equity © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Trust Financial Reporting Issues
• • • Disclosure of terms of all classes of equity Accounting for options with decreasing exercise prices Update on accounting for exchangeable shares – Draft changes to EIC 151 posted on CICA website © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Current Developments
Michael McKerracher
403.691.8056
Comprehensive Income, Equity, Financial Instruments and Hedges
• • Harmonize Canadian GAAP with US standards Comprehensive Income – – Separate financial statement Includes items that are recognized in comprehensive income but excluded from net income • Equity – Incorporates amendments to be consistent with the other new sections – Replaces Surplus © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Comprehensive Income, Equity, Financial Instruments and Hedges
• • • • Financial Instruments – All financial instruments are included on the balance sheet at fair value – All financial instruments classified into five categories which determine measurement Hedges – Specify when hedge accounting is permissible – – Inadequate documentation = no hedge accounting Ineffective portion of hedge is recognized in net income Effective —Fiscal years beginning after October 1, 2006.
Early adoption —must adopt all four standards © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Accounting For Stock Based Compensation (FASB 123R)
• US standard on Stock Based Compensation – – Equity awards are measured at the grant date fair value Liability awards are measured at the grant date fair value and then re-measured at each balance sheet date • • • No preference between Black-Scholes-Merton or Lattice model Must consider forfeitures in fair value calculation Should be rare in practice that a fair value of an award cannot be determined • There are differences between Canadian and US GAAP which will cause reconciling items •
Effective: Annual periods beginning after June 15, 2005
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Accounting for Conditional Asset Retirement Obligations (EIC D54)
• • Based on US standard —FIN 47 Clarifies “conditional asset retirement obligation” – Refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity – The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement •
Effective
—
US fiscal years after December 15, 2005; Canada
—
fiscal years ending after March 31, 2006, retroactively
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Accounting For Business Combinations (ED)
• • • • • • Definition of a Business —expanded All Business Combinations measured at 100% with a minority interest —even if less that 100% is bought Equity Instruments —measured at closing rather than date of announcement Acquisition costs —expensed as incurred Comment Period ends October 28, 2005
Effective
—
January 1, 2007
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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New Auditing Standards
John Gordon
403.691.8118
New Auditing Standards
• • • Quality Control Standards (CICA 5030) Audit Risk Standards (CICA 5095, 5141, 5143, 5300)) Planning and Documentation Standards (several) More time will be required by all parties involved © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Quality Control Standards
• • Our quality control standards Firm level standards – Leadership, Human Resources, client acceptance, monitoring Engagement level standards – Expand responsibilities of the engagement partner and others for matters such as compliance with quality control and independence standards © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Audit Risk Standards
To enhance how auditors assesses and respond to risks of error and fraud • Obtain and document an expanded understanding of: – – – – – Entity and its environment and business risks Governance processes Information systems Significant risks, and associated controls Design and implementation of certain internal controls, even when a substantive approach is anticipated © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Planning and Documentation Standards
•
Planning
Engagement acceptance, planning and communication with management and the audit committee • • • •
Documentation
Guidance on documentation of significant issues and findings Documentation of matters inconsistent or contradictory with final conclusions Documentation required on “report release date” Explicit documentation on items tested © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Proposal on Accounting for Taxes
Christopher R. Post
403.691.8434
Proposal on Accounting For Tax Uncertainties
• • • Required to assume that an uncertain position will be subject to review, and that the position is
probable
of being sustained –
Probable
is higher than
more likely than not
Evidence that may support a conclusion – Unambiguous tax law – – Unqualified
should
opinion Similar positions clearly presented in prior returns that have been accepted or not challenged – Similar positions taken by other taxpayers that were favorably resolved Amount to be recognized is best estimate of the amount that would be sustained (single best estimate —not probability weighted) © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Proposal on Accounting For Tax Uncertainties
• •
De-recognition
A previously recognized amount would continue to be recognized unless it fell below a
more likely than not
level De-recognition is different than a valuation allowance, which only related to realizability • • •
Potential impact of the proposed rules
Eliminates diverse practice Less flexibility around use of “cushion” to reflect uncertainty Earnings may be more volatile © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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The Future of Income Trusts
Christopher R. Post
403.691.8434
The Future of Income Trusts
• • • Department of Finance launches consultations on tax and other issues related to business income trusts —September 8, 2005 • Minister of National Revenue postpones providing advance tax rulings respecting income trusts —September 19, 2005 Reaction to these events Possible outcome © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Finance’s Consultation Paper
• • • • • Follow-up on previous budget promise Purpose is to promote discussion and third party input Submissions received up to December 31, 2005 Canadian Tax Foundation to host symposiums Issues for consideration: – – – – Impact of tax treatment on how businesses are organized Impact on federal tax revenues Potential role of tax-exempt investors Impact of tax treatment on the Canadian economy © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Advance Tax Rulings Postponed
• • Canadian Minster of Finance says while consultations are underway it would be “inappropriate” to issue advance tax rulings (September 19) Press Release indicates “Finance is closely monitoring the developments in the FTE (trust) market” and the government will “consider what, if any, transitional measures would be appropriate” © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Reactions
• • • Minor reaction to consultation exercise Significant reaction to halting advance tax rulings Market reaction 1 – – CDN$9 billion loss in value 5% to 10% decrease in trading price of conversion candidates • Created an environment of uncertainty and instability 1 National Post, September 28, 2005 © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Possible Outcome
• • • • Status quo Reduce tax on dividends from corporations Impose tax on trusts Eliminate duplication of corporate and personal taxes (i.e. achieve better integration) © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Scientific Research & Experimental Development
Gregory Brennan
403.691.8013
Headlines in the Technical Oil & Gas Journals
• • • • • Improved Reservoir Economics Incremental Hydrocarbon Recoveries More Profitable —Greater Efficiencies—Lower Cost Per Foot Environmental and Safety Issues Sustainable Development of Alberta’s Resource © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Scientific Research & Experimental Development —“SR&ED”
• • • • SR&ED is a Defined Term in the Income Tax Act Qualifying expenditures carried out on SR&ED projects in Canada earn the SR&ED Tax Credit 20% credit against Federal taxes payable —cash / equivalent Enhanced Deductions —SR&ED capital costs can be pooled and effectively written off 100% © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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What Qualifies for SR&ED?
• • • • • Conventional Oil & Gas Exploration Unconventional Gas Recovery IOR & EOR Applications In-Situ Recovery & Upgrading CO 2 Sequestration & Storage © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Obtaining SR&ED Tax Credits
• • • • • SR&ED application with Federal Income Tax return 18 month deadline Technical project description Separate SR&ED accounting —project Canada Revenue Agency review / audit © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Enhanced SR&ED Capabilities within KPMG
• Merger with Al Logan, Ph.D.
—International Technology Ventures (ITV) – Technical resources enhanced —additional to existing strong SR&ED team – Additional capabilities to KPMG clients © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Transfer Pricing Update
Michael Hoffman
403.691.7984
Impact of Transfer Pricing Adjustments
• Consider the initial impact of a $5 million transfer pricing adjustment.
Corporate income tax (suppose 37%) Interest on tax (4 years at 9%) Withholding tax on deemed dividend Interest on withholding tax (4 years at 9%) Transfer pricing penalty (if applied) Advisor fees and internal costs to taxpayer
Total initial impact of adjustment Amount % of Adjustment
$1,850,000 $750,000 $1,250,000 $500,000 $500,000 Varies
> $4,850,000
37% 15% 25% 10% 10%
> 97%
All amounts are in Canadian funds.
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Transfer Pricing Audit Environment
• • • Increased audit activity – CRA has been hiring more staff and providing more training Vast majority of audit adjustments are due to transfer pricing Important to have strong contemporaneous transfer pricing documentation in place – – Auditors ask for this documentation at start of audit Foreign-prepared documentation may not be sufficient for Canadian purposes – CRA is applying transfer pricing penalties when taxpayers have not met reasonable efforts standard for documentation © 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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Oil & Gas Transfer Pricing Issues
• • • • • • • Canada often has unique transfer pricing issues Functions and risks are inconsistent with transfer pricing policies Leasing charges and the treatment of repairs and maintenance and lost-in-hole assets Unintended and complex intangible property ownership Energy trading and the use of capital Arm’s length interest rates Management fees —what are you getting for these charges?
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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QUESTIONS?
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
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© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.