ASC

ASC 815-932

Extractive Activities—Oil and Gas

815 Derivatives and Hedging

Download JSONDownload Markdown5 paragraphs · 4 sectionsJump to summary

Source downloaded: .Record version 8cbd4da8cdd5. Effective date must be checked in the source.

In brief

AdvancedDerivatives and hedgingIndustry-specificDisclosureRecognition

This subtopic addresses whether gas-balancing arrangements between working-interest partners in a gas well are derivative instruments under Topic 815. When one partner (the overtaker) takes more than its share of production, the undertaken partner has a right to make up the imbalance in kind, with gas from another well, or in cash; the terms of each arrangement must be analyzed against the definition of a derivative. Even where the arrangement is a derivative whose settlement price leaves it at a fair value of zero, the Section 815-10-50 disclosures still apply, and the option feature cannot use the normal purchases and normal sales exception.

Key points (6)
  • A gas-balancing arrangement arises when one well partner (the overtaker) takes all production for a period and the other partner later has the right to take makeup gas, receive gas in kind from another well, or receive cash (815-932-55-1).
  • The arrangement's terms must be analyzed to determine whether it meets the definition of a derivative instrument under Topic 815 (815-932-55-2).
  • The option in the agreement may fail the notional amount criterion in paragraph 815-10-15-83 (as clarified by 815-10-55-5 through 55-7), even though it may satisfy 815-10-15-99 because the gas is readily convertible to cash (815-932-55-2).
  • Even if the arrangement is a derivative, the cash price used in settlement may cause it to always have a fair value of zero, but the Section 815-10-50 disclosures are still required (815-932-55-2).
  • The option feature cannot qualify for the normal purchases and normal sales exception in paragraph 815-10-15-15 because it is an option contract and it is not probable at inception and throughout the term that the contract will not settle net and will always result in physical delivery (815-932-55-2).
  • Scope follows the Overall Subtopic scope in Section 932-10-15 (815-932-15-1).

For students. This is a narrow but classic illustration of applying the three-part derivative definition (underlying/notional, no or small initial net investment, net settlement) to a physical commodity arrangement. The common mistake is assuming that a zero fair value means no accounting consequence — the instrument still must be disclosed, and the option feature can never be scoped out as a normal purchase or normal sale.

gas-balancing arrangementovertake and makeup gasdefinition of a derivative instrumentnotional amountnet settlementreadily convertible to cashnormal purchases and normal sales exceptionfair value of zero

Machine-generated study aid for ASC 815-932. Check the source paragraphs below.

815-932-00Status

Source downloaded: .Record version 70ffe7f966ae. Effective date must be checked in the source.

815-932-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
ProductionAmendedAccounting Standards Update No. 2010-0301/06/2010

815-932-05Overview and Background

Source downloaded: .Record version 92ff8d7671e8. Effective date must be checked in the source.

815-932-05-1
This Subtopic provides guidance on gas-balancing arrangements.

815-932-15Scope and Scope Exceptions

Source downloaded: .Record version de253e60a44c. Effective date must be checked in the source.

Overall Guidance

815-932-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 932-10-15.

815-932-55Implementation Guidance and Illustrations

Source downloaded: .Record version 403a133f0e2a. Effective date must be checked in the source.

Gas-Balancing Arrangements

815-932-55-1
A gas-balancing arrangement is a situation where Entities A and B are partners in a gas well. During the current period, Entity B may decide not to sell any gas because it does not have a purchaser or because market conditions are unfavorable. Accordingly, Entity A (the overtaker) agrees to take all the gas production for the period and sells it to its customer. In the future, Entity B has the right to take more gas than its interest would otherwise allow to make up for Entity A's overtake. Alternatively, A may make payment in kind (using gas from a different well) or pay cash to Entity B.
815-932-55-2
The terms of a gas-balancing arrangement should be analyzed to determine whether it meets the definition of a derivative instrument under Topic 815. In particular, the option in the agreement may not meet the criterion in paragraph 815-10-15-83 (as further clarified by the guidance in paragraphs
815-10-55-5 through 55-7
) with respect to a notional amount, even though it may meet the criterion in paragraph 815-10-15-99, in part because the gas is readily convertible to cash. Even if the gas-balancing arrangement meets the definition of a derivative instrument, the cash price used in settlement may result in the derivative instrument always having a fair value of zero. Nevertheless, the disclosures specified in Section 815-10-50 would still be required. The option feature of the agreement, if it meets the definition of a derivative instrument, could not qualify for the normal purchases and normal sales exception in paragraph 815-10-15-15 because the gas-balancing arrangement is an option contract and it is not probable at inception and throughout the term of the arrangement that the contract will not always settle net and will always result in physical delivery.

Related subtopics