How do we treat DD & A in Upstream Industry
The term DD & A stands for Depreciation, Depletion & Amortization. Let me throw some light on DD & A in this blog.
We all know by regular definitions the terms are as follows:
- Depreciation is actually a reduction in the value of an asset with the passage of time, particularly due to wear and tear. For example: Depreciation for a building or plant or machinery, vehicle etc.
- Depletion means reduction in the number of registered quantity or its equivalent measure for a particular & identifiable thing. For example: Depletion for oil and gas wells i.e. Proved property costs are generally depleted using the UOP method.
- Amortization is the process of decreasing, or accounting for, an amount over a period i.e. Lease Amortization, Amortization of proved reserve etc.
Now we all probably agree that the meaning of all these three terms indicate similar pattern i.e. reduction in the value however these terms are being used for different purposes.
Let’s look at some typical example of assets involved in the Exploration & Production (E&P) Companies:
- Well Equipment
- IDC i.e. Intangible Drilling Cost
- Field Facilities
- ARO Assets
- Gas Plants
- Support facilities
- Deferred Tax
- Undeveloped Leasehold
- Capitalized Interest – Leasehold & Non – Leasehold
- Normal/Regular assets that are used i.e. Buildings, Vehicles, Plant, Machinery, Software, Hardware, Furniture etc.
How the DD&A come into application for the related assets:
Generally upstream majors utilize the DD & A for their respective assets or things in a way according to their prescribed guidelines, procedures and policies. Though it differs from organization to organization however the general practice noticed in this regard are enumerated below:
- Well Equipment – UOP (Unit of Production) depreciation method using the Proved Developed Reserve portion
- IDC – UOP depreciation method using the Proved Developed Reserve portion
- Platforms – UOP depreciation method using the Proved Developed Reserve portion
- Field Facilities – UOP depreciation method using the Proved Developed Reserve portion
- ARO Assets – UOP depreciation method using the Proved Developed Reserve portion
- Gas Plants – Straight Line Method based on committed field of production life or particular number of years or UOP Method using the Proved Developed Reserve portion
- Support Facilites – Straight Line Method based on committed field of production life or particular number of years or UOP Method using the Proved Developed Reserve portion
- Deferred Tax – Respective Amortized method can be followed
- Undeveloped Leasehold – Straight-line amortization method can be used over the lease term that is applicable for particular cases
- Capitalized Interest Leasehold & Non-Leasehold can be depreciated through the UOP method utilizing the Proved Reserve or Proved Developed Reserve based on the respective scenario.
- Buildings, Vehicle, Plant, Machinery, Software, Hardware, Furniture – Straight Line Method utilizing the number of years for respective asset classes.
- Pipeline – Straight Line Method using committed field/asset production life or UOP method utilizing Proved Developed Reserves (it could be for pipelines which are dedicated to a single producing asset/field).
Let’s look at how to achieve that in SAP:
Standard SAP Asset Depreciation configurations are useful (some of the important transaction codes are highlighted below) to set up the system so that DD & A can be executed as required:
- Copy Chart of Depreciation – Transaction Code: EC08
- Define Chart of Depreciation and depreciation areas – Transaction Code: OAOB
- Assign Chart of Depreciation to Company code – Transaction Code: OAOB
- Define how depreciation areas post to General Ledger – Transaction Code: OADX
- Assign the General Ledger Accounts – Transaction Code: AO90
- Maintain Depreciation keys & activate them – Transaction Code: AFAMA
- Specify document type for posting depreciation – Transaction Code: AO71
- Determine Depreciation Areas in the Asset Class – Transaction Code: OAYZ
- Define Unit-of-Production Depreciation – Transaction Code – AO25 (This is UOP Method and is used to update the quantities for respective company codes for appropriate depreciation key)
The configuration menu path for the UOP is as follows: Period/Year wise number of units will be entered here for respective Company Code & Depreciation Key combination.