SAP Joint venture Accounting(JVA) – Basic Concepts
In this blog, I have provided an introduction to Joint venture Accounting and In Which phase they will be using this JVA in an oil and gas Industry and why?
An oil and gas industry is usually divided into three major sectors,
The upstream sector includes searching for potential underground or underwater crude oil and natural fields, drilling exploratory wells, and subsequently operating the wells that recover and bring the crude oil or raw natural gas to the surface.
Midstream refers to anything required to transport and store crude oil and natural gas before they are refined and processed into fuels. Midstream also includes pipelines and all the infrastructure needed to move these resources long distances, such as pumping stations, tank trucks, rail tank cars and transcontinental tankers.
The final sector of the oil and natural gas industry is known as downstream. This includes everything involved in turning crude oil and natural gas into thousands of finished products we use every day like gasoline, diesel, kerosene.
PROCESS OF UPSTREAM:-
Upstream process starts with sending seismic waves which is nothing but a tool used to find oil and natural gas deep into the Earth’s surface .
This technique allows for interpretation of what is underneath the ground or seabed (oil, gas, water, faults, folds etc) without having to actually drill.when we get any positive signal through waves, Exploration is carried out at that place where the probablity of getting crude oil is 50% and if oil is present means it will be moved to Production and Crude gathering is done by gathering crude oil along with natural gas in either gas storage or through pipelines.
The Risk involved during the process of Exploration is very high as the Probablity of getting crude oil is low and Investment is high,In order to reduce the risk involved and to minimise the profit and loss of that company,they will do partnership with the some other companies and share all the profit and loss involved,Here is where Joint venture came into Picture.
In simple “Joint Venture is a business arrangement where two or more parties pool their resources for the purpose of accomplishing a specific task”.
JOINT VENTURE ACCOUNTING:-
IF LOSS =600M
1 ST COMPANY -200M
2ND COMPANY -200M
3RD COMAPNY -200M
The process of doing this accounting by sharing the profit and loss is called Joint venture Accounting.
JOINT VENTURE AGREEMENT(Operating Agreement):-
A JOA is a formal agreement that specifies the conditions for a joint operation. This covers the interests of the partners and their properties as wells as overheads and penalties.
It specifies the overhead rates.
This is an association of Two or more partners, formed to share a venture’s risks, costs and
revenues. Each partners share is proportional to their undivided interest in the venture.
The JOA has different stages such as
Different partners participate at each stage
JVA manages different stages by using Equity Types,An Equity type explains a particular association of partners.
An equity group represents an association of venture partners and their interests.An Equity group may consist of all or some of the venture partners.
For ex:if we are having 10 partners means 2 or more partners will form a group that is called as equity group.
JOINT VENTURE PARTNER:-
This is a partner mentioned in JOA with undivided intrest in a venture.
One partner called OPERATOR manages the operation.
The remaining non-operating partners share the expenses and revenues.
RECOVERY AND BILLING INDICATORS:-
We Assign recovery indicators to a cost object to indicate whether or not expenses posted using the cost object,are billable to JVA partners.
we assign billable costs to the appropriate partners.
we assign Non billable expenses to the operator.
Billing indicators are assigned to billable postings and identify the type of posting involved,including
cash call and normal expenditures.
The JOA specifies the relationship between partners,joint ventures and rules for cost calculations.
Joint ventures,equity types and equity groups are assigned to JOA.
Joint venture partners are assigned to equity groups.
A joint venture can belong to only one JOA,However multiple ventures can belong to the same JOA.
TYPES OF JOINT VENTURES:-
Example:- there are 3 companiesSHELL-Main company which opens JVA
Operated by the company managing SAP JVA.
Allows carried interest(CI) Or net profit interest(NPI),Partner and suspense processing.
You cannot add tax to this type of ventures.
Operated by the company running SAP JVA.
Neither CI/NPI Partners nor Suspense processing is allowed for this type of ventures.
You can assign Tax codes.
Cutback calculates tax charges to venture partners based on the tax setting for the company in the SAPJVA configuration.
NON OPERATED VENTURE:-
Company managing SAP JVA holds a non operated venture share.
This is billed by the operator for its share of venture expenses.
NON OPERATED ON BILLING:-
Company running SAP JVA sells part of its non operated share of the venture to its third parties.
Eg:-If BP have 200 USD share means they can sell 100 USD to the third parties on Billable.
Company running SAP JVA holds 100% interest.
Eg:- If the ventures are shared over a period of 5 years means after 5 years Shell will be set as a corporate venture.
- Month end processing
- JVA Billing
- Financial Accounting
- Material Management
- Project system
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