# ASC 815-932-55: Derivatives and Hedging — Extractive Activities—Oil and Gas — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 815-932-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/815/932/#55-implementation-guidance-and-illustrations)

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#### Gas-Balancing Arrangements

##### [815-932-55-1](https://asc.understandingaccounting.org/asc/815/932/#815-932-55-1)

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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](https://asc.understandingaccounting.org/glossary/p/#production "Production involves lifting the crude oil and natural gas to the surface, extracting saleable hydrocarbons, in the solid, liquid, or gaseous state from oil sands, shale, coalbeds, or other nonrenewable natural resources that are intended to be upgraded into synthetic oil or gas, gathering, treating, field processing (as in the case of processing gas to extract liquid hydrocarbons), and field storage. The oil and gas production function shall be regarded as ending at a terminal point, which is the outlet valve on the lease or field storage tank. If unusual physical or operational circumstances exist, it may be appropriate to regard the terminal point for the production function as: The first point at which oil, gas, or gas liquids, natural or synthetic, are delivered to a main pipeline, a common carrier, a refinery, or a marine terminal In the case of natural resources that are intended to be upgraded into synthetic oil or gas, if those natural resources are delivered to a purchaser before upgrading, the first point at which the natural resources are delivered to a main pipeline, a common carrier, a refinery, a marine terminal, or a facility that upgrades such natural resources into synthetic oil or gas.") 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](https://asc.understandingaccounting.org/asc/815/932/#815-932-55-2)

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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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) (as further clarified by the guidance in paragraphs

[815-10-55-5 through 55-7](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-5)

) with respect to a notional amount, even though it may meet the criterion in paragraph [815-10-15-99](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#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.