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SAP White Paper

JOINT VENTURE ACCOUNTING WITH mySAP OIL & GAS

THE BEST-RUN E-BUSINESSES RUN SAP

Copyright 2001 SAP AG. All rights reserved. No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed without prior notice. Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors. Microsoft, WINDOWS, NT, EXCEL, Word, PowerPoint and SQL Server are registered trademarks of Microsoft Corporation. IBM, DB2, OS/2, DB2/6000, Parallel Sysplex, MVS/ESA, RS/6000, AIX, S/390, AS/400, OS/390, and OS/400 are registered trademarks of IBM Corporation. ORACLE is a registered trademark of ORACLE Corporation. INFORMIX-OnLine for SAP and Informix Dynamic ServerTM are registered trademarks of Informix Software Incorporated. UNIX , X/Open , OSF/1 , and Motif are registered trademarks of the Open Group.

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CONTENTS
1. 2. 2.1 3. 3.1 3.2 3.3 3.5 3.6 4. 5. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 6. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Component Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The SAP JVA Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Master Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joint Operating Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recovery Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 6 6 7 7

Data Capture and Real-Time Processing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Overview of Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overhead Cost Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cutback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Suspense Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joint Venture Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partner Netting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset and Material Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Profit and Carried Interest Profit Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Operated Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inter-Company Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balanced Books by Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Account Switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 10 10 10 10 11 11 11 12 12 13 13 13 13 13

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1. INTRODUCTION
In some industries, like the oil and gas industry, certain ventures are considered high risk, demanding extensive capital investment and a long payback period. To minimize risks, companies develop partnerships called joint ventures. A joint venture consists of an operating partner (operator) and one or more non-operating partners who combine monetary or personnel resources to share a projects expenses and revenues. The operator manages the venture, arranges venture activities, and maintains accounting records. The operator remits venture expenses, collects revenues, and distributes these to the partners, according to their ownership shares. This process is known as Joint Venture Accounting (JVA).

2. COMPONENT OVERVIEW
2.1 THE SAP JVA COMPONENT

SAP designed SAP JVA for joint venture partnerships. SAP JVA is a component of the mySAP Oil & Gas industry solution. SAP JVA uses functions from the components Financial Accounting (SAP FI), Controlling (SAP CO), Asset Management (SAP AM), Materials Management (SAP MM), Plant Maintenance (SAP PM), and Project System (SAP PS). SAP JVA includes the following features and benefits: Joint Venture Data Capture captures and codes all transactions, including vendor invoices, inventory movements and allocations, with an option to produce balanced venture books. Cash Calls request cash payments from partners for future venture operations. Partner Billing calculates partner shares for venture expenses and revenue, monitors partner cash calls and receivables, and produces a partner bill containing all relevant information. Overhead calculates different types of overhead as agreed in the Joint Operating Agreement (JOA). Allocations distribute billable and non-billable costs (such as facility, payroll, and related expenses) to cost centers or projects throughout the allocation cycle. Multi-Currency Processing supports the multi-currency requirements of typical venture activities.

3. MASTER DATA
SAP JVA allows you to process expenses and revenues for joint ventures and assign them to partners. Five SAP JVA master data objects are used to associate expenses with ventures and their partners: Joint Operating Agreement Equity Group Venture Equity Type Recovery Indicator
3.1 JOINT OPERATING AGREEMENT 3.2 EQUITY GROUP

At the outset of a joint venture arrangement, one partner agrees to develop and manage the project and is called the operator. The JOA is the contract between JVA partners, and it governs all operations. The JOA contains all information for an operating agreement, such as allowed overhead provisions.

The equity group defines joint venture partners, their participation, and it reflects each partners contractual interest. Equity groups are defined in the JOA, and are assigned to the venture. In SAP JVA, the following types of ownership arrangements are possible: Operated The operator in this equity group holds less than a 100% share. The other partners own the remaining shares. Non-Operated This represents a companys interest in a joint venture operated by another party. Only the companys non-operated interest is reflected on the equity group. Non-Operated, On-Billing In this type of ownership, the company can re-bill part of its share of a non-operated venture to third parties. The equity group stores the companys share and the proportion passed to other parties. Corporate The operator has a 100% share. SAP JVA uses the SAP R/3 functions of accounts receivable, to manage joint venture partner transactions, by defining all joint venture partners as accounts receivable customers.
3.3 VENTURE

The venture is the master data object used in SAP JVA to capture expenditures and revenues. The venture references the JOA that governs the accounting activities related to that venture. It links related SAP R/3 objects, such as cost centers, projects, orders, and profit centers to the JOA. By using equity types, the venture and its related cost objects are tied to an equity group at a specified time. This allows effective date allocation of joint venture expenditures to non-operating partners.

3.5 EQUITY TYPE

3.6 RECOVERY INDICATOR

The JOA has different development stages, such as engineering and design, construction, and production. Different partners participate at each stage. SAP manages the different stages by using equity types, even if corresponding time frames are overlapping. The equity type links the venture and the equity group contained in the JOA. This relationship between JOA, venture, and equity type defines ownership, and changes of ownership throughout the life of the property.

The recovery indicator divides general ledger account balances into subclasses, such as billable and non-billable adjustments. Because it carries a billable or non-billable indicator, it determines expenditures to be billed to venture partners. The recovery indicator is also the basis for operational gross and net reporting and can be used in SAP CO processing, such as allocations.

JOA

VENTURE A

VENTURE B

EQUITY TYPE 1 ENGINEERING & DESING

EQUITY TYPE 2 CONSTRUCTION

EQUITY TYPE 2 CONSTRUCTION

VALID AS OF 01/02/2000

A 33,3% B 33,3%

C 33,3%

VALID AS OF 04/20/2001

A 50%

D 25%

B 25%

VALID AS OF 01/02/2000

A 33,3% B 33,3%

C 33,3%

EQUITY GROUP 1 VALID AS OF 05/17/2001

EQUITY GROUP 4 VALID AS OF 11/07/2001 A 33,3% B 33,3%

EQUITY GROUP 1 VALID AS OF 05/17/2001 A 25% C 25% B 25% D 25%

A 50%

B 25% D 25%

C 33,3%

EQUITY GROUP 2 VALID AS OF 02/11/2002

EQUITY GROUP 5

EQUITY GROUP 6

A 75%

C 25%

EQUITY GROUP 3

FIGURE 1: MASTER DATA IN SAP JVA

4. DATA CAPTURE AND REAL-TIME PROCESSING


SAP JVA captures all expenditure and other transactions by using SAP R/3 objects, such as cost centers, projects, orders, and profit centers. These objects contain specific joint venture information. These details define the venture, equity group, and recovery indicator assignments to be used when posting transactions related to the cost objects. Joint venture documents are created in the accounting interface in real time and are stored in separate joint venture database tables for use in other JVA processes, such as cutback and billing. The SAP JVA accounting interface provides the following features for accurate cost and revenue allocation: Manipulation of the recovery indicator ensures that all expenses are distributed between the partners at the correct time during the procurement process. These include goods receipts, invoice receipts, and payment. Additional posting lines, such as taxes, discounts, and freights include joint venture information. These posting lines may then be split in SAP JVA documents.

BUSINESS PROCESSES MM GOODS RECEIPTS/ ISSUES SD SALES ORDER HR TIMESHEET POSTINGS FI PLAYMENTS CO ALLOCATIONS/ OVERHEADS

REAL-TIME PROCESSING ACCOUNTING INTERFACE

JVA FI FI DOCUMENTS CO CO DOCUMENTS JVA JVA DOCUMENTS AM AM DOCUMENTS

FIGURE 2: DATA CAPTURE IN SAP JVA

5. OVERVIEW OF FUNCTIONS
SAP JVA is a complete solution for joint ventures, using unique transactions, programs, and objects, together with SAP R/3 components. The following information provides a high-level introduction to SAP JVA.
5.1 CASH CALL

Cash calls allow the operator to invoice partners for future estimated venture costs. SAP JVA cash calls are available for operated and non-operated ventures. You can post gross or net cash call requests, and you can post them by venture or project.

In an operated venture, you can invoice all partners or individual partners for future expenditure. In addition, you can define cash call dollar thresholds at the venture, project, or partner level. For operated ventures, cash call requests and receipts are passed on to the billing process, and are completely integrated with accounts receivable. Non-operated cash calls are integrated with accounts payable.

MONTHLY TRANSACTION JVA REPORTING SETTLEMENT

JVA NETTING

ALLOCATIONS

CLOSE FOR FI FISCAL PERIOD BILLING PROCESS (PAPER OR EDI) CLOSE FOR BILLABLE JVA TRANSACTION CI/NPI PROCESSING SUSPENCE PROCESSING JOINT VENTURE OVERHEAD

CASH CALL RECLASSIFICATION OUTBACK

EQUITY CHANGE PROCESSING

FIGURE 3: JVA MONTH END CYCLE

5.2 OVERHEAD COST CALCULATION

5.3 CUTBACK

Joint venture operators incur indirect expenses, and can charge overheads to their partners to recover these costs. Recovery of costs is often based on a percentage of expenditure, or on the usage or activity of the venture. In SAP JVA, overheads are based on JOA criteria, and the charges for non-operating partners are based on their equity shares. SAP JVA allows the following types of overhead cost calculation: Percentage-Based Overheads are based on percentages and types of costs defined in the JOA. Stepped-Rate-Based Overheads are based on specified overhead percentages and predefined dollar thresholds for an individual project. Statistical-Rate-Based Overheads are based on a defined statistical quantity and the contractual overhead rate defined in the JOA.

The operating partner carries all of the operating costs of a venture throughout the accounting period. SAP JVA analyzes expenditures and creates invoice amounts for billing the partners. This process typically occurs at the end of the accounting period after all transactions have been posted and allocations have been run. Cutback is the process of allocating these transactions to the operator and the non-operating partners, according to their equity shares. Cutback also processes expenses for ventures involving special partnership arrangements, such as carried interest, net profit interest, or suspended partners, as well as suspended equity groups or projects. In some countries, transactions between SAP JVA partners are subject to value added tax (VAT). The cutback process also handles VAT postings to joint venture partners.
5.4 SUSPENSE PROCESSING

Suspense processing allows the operator to continue regular processing in the event of dispute or uncertainty. SAP JVA provides three levels of suspense processing: partner suspense, equity group suspense, and project suspense. Partner-level suspense allows you to suspend a partner or partners in an equity group. During cutback, charges for the suspended partner are not processed. The operator retains these charges temporarily. This allows the operator to generate billings to the remaining partners in the equity group. After the partner is released from suspense, the previously unprocessed charges are posted and recognized as open items in the partners accounts receivable account. Equity group and project suspense functions are designed for circumstances in which the ownership of an equity group or project is undefined, but the operator wishes to proceed with the project. The operator carries 100% of expenditure related to suspended items, until their release.

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5.5 EQUITY ADJUSTMENT

5.6 JOINT VENTURE BILLING

Equity group partners can transfer their interest to other partners. Pre-cutback equity change and equity change management can meet this requirement by allowing ownership changes in the current period and in prior periods. Ownership changes during the current period can result in expenditure being posted across multiple venture or equity groups. Pre-cutback equity change allows the operator to correct these transactions, and to cut all venture expenditures back to a single venture or equity group combination. This process reverses postings to the original venture or equity group, and books them to the active venture or equity group combination at month end. These adjustments are made only in the JVA ledgers. The original entries in the originating SAP R/3 components remain unaffected, thereby preserving the audit trail. Equity change management is designed to make retroactive changes at the accounts receivable level for prior period ownership adjustments. SAP JVA determines the net change in share for each partner and the operator, and posts an adjustment document to the affected partners.

Joint venture billing allows the operator to invoice partners for expenditure and revenues, and to issue cash calls. You can send different levels of supporting information with the invoice, down to the line-item level of the document that created the billable item. The billing statements are fully configurable and can accommodate special billing formats required in different countries or industries. SAP provides templates for the most common billing formats. You can send the joint venture bill on paper or by Electronic Data Interchange (EDI).
5.7 PARTNER NETTING

SAP JVA also supports a process called netting. The netting process calculates the sum of a partners open expenses and cash calls, within the venture, to a single residual entry of outstanding expenses. It then posts that entry to the partners accounts receivable account for billing.
5.8 ASSET AND MATERIAL TRANSFERS

SAP provides asset and material transfer capabilities for industry sectors where joint operations are necessary. SAP JVA functions in SAP Asset Management (SAP AM) and SAP Material Management (SAP MM) allow asset and material transfers with joint venture properties at the current replacement price, rather than at historical cost. Originally designed for upstream exploration, development, and production companies, the asset and materials transfer function complies with the Council of Petroleum Accountants Society (COPAS) accounting and reporting standards. The following summary highlights features in joint venture SAP AM and SAP MM.

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SAP MM Functions SAP MM can use the current replacement price for material movements between warehouses and goods issues, and returns to and from assets and projects. For the material movements mentioned above, the operators inventory and expense accounts are charged with moving average price, while joint venture partners are billed CRP according to the current replacement price. For the oil and gas industry, you can split the current replacement price between tangible and intangible development costs. SAP AM Functions SAP AM allows you to track the operators net asset cost, as well as gross cost. Three additional asset books contain all billable, non-billable, and total gross book costs associated with the asset. You can price asset transactions, such as transfers, retirements, and sales, according to the current replacement price, when joint venture properties are involved. The joint venture partners are billed or credited according to the current replacement price, while the operators cost is removed from the books together with the historical cost. Estimated book costs are used if the historical cost is unknown.

5.9 CONTROLLING

In SAP JVA, you need to allocate various costs among multiple cost objects for distribution to the ventures. You must also be able to bill joint venture partners through cutback. Allocation is the process by which billable and non-billable costs, such as facility, payroll, and related expenses, are distributed to cost centers or projects receiving services or benefits. It is based on an equitable form of distribution. The SAP CO processes assessments and distributions, and facilitates allocations. Settlement consists of the final allocation of costs from orders or Work Breakdown Structure (WBS) elements to cost centers, projects, fixed assets, general ledger accounts, networks, materials, sales orders, or cost objects defined in the settlement rule for the sender. To enhance the core functions of SAP CO, SAP JVA addresses the complex requirements of distributing costs related to allocations and settlement. SAP JVA allows you to determine whether or not billable items should be charged to the joint venture partner, based on the information of either the sending cost object or the receiving object. This is important particularly if the venture information in the sending and receiving objects is different. A user-defined manipulation rule of the recovery indicator governs this feature.

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5.10 NET PROFIT AND CARRIED INTEREST PROFIT PARTNERS

5.11 NON-OPERATED PROPERTIES

A Net Profit Interest is one in which the non-operating partner has interest in the venture, but does not pay venture development or operation expenditure. If revenue exceeds expenditure, this partner receives a percentage of the revenue. This type of interest can occur when a prospective partner proposes a venture opportunity to the operator, but chooses to remain inactive. The operator may give the partner a cash payment and an NPI. A carried interest arrangement is one in which the operator, with or without the assistance of other partners, carries a portion or the total interest of another partner. A carried interest arrangement commonly results when a partner exercises a non-consent provision contained in the JOA. In a carried interest arrangement, you can penalize the non-participating partner by defining penalty percentages for the venture development and operational costs assumed by other partners. Revenue must exceed these costs before the partner can resume participation in the venture.

SAP JVA facilitates non-operating partners. The processing of incoming, non-operated invoices is fully integrated with SAP accounts payable functions. You can record these invoices online. In addition, cash call features are available for nonoperated ventures at the venture and project level. You enter cash call requests for outside operators online and these are fully integrated into accounts payable for payment. You can also process the non-operated invoice by using SAP FI inbound EDI functions.
5.12 INTER-COMPANY FUNCTIONS

An operator may have an affiliated company (a legal entity within the same SAP system) as a partner. In this instance, SAP JVA allows you to book inter-company entries on the books of the operator and all affiliates. By identifying these relationships through inter-company mappings of accounts and other relevant objects, SAP JVA automates processing of inter-company joint venture transactions. It does this by posting entries directly on the affiliated companys books through the cutback process.

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5.13 BALANCED BOOKS BY VENTURE

5.14 BANK ACCOUNT SWITCHING

Operators are often obligated to produce balanced venture financial statements for non-operating partners. For this purpose, SAP JVA allows you to balance books by venture. If a document without balancing-entries-by-venture is posted to the joint venture ledger, the data capture process creates the inter-venture booking to balance the document by venture.

Outside North America, large ventures are commonly funded from one or more dedicated bank accounts called Venture Bank Accounts (VBA). Depending on the venture, SAP JVA determines the bank account from which an invoice is paid. If the invoice applies to more than one venture, the venture with the greatest expenditure on the invoice determines the paying bank. In the event of payments from a central bank, the existence of multi-venture invoices, or inter-venture allocation or settlements, SAP JVA calculates the bank account movements required to restore each account to its correct position. SAP JVA also produces correspondence, notifying the bank to make all required transactions for the movement of cash between accounts. In addition, bank account switching produces all required settlement documents, and can calculate all applicable interest.
5.15 AUDIT SUPPORT

SAP JVA can give non-operating partners detailed accounting transaction records in an electronic format to assist transaction audits. These records are based on operator-defined selection criteria and can be restricted at multiple levels.

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6. SUMMARY
The oil and gas industry recognizes the value of joint venture agreements in minimizing the risks associated with capitalintensive projects. By working closely with customers, and collaborating with key technology and implementation partners on an ongoing basis, SAP ensures that SAP JVA facilitates smooth management, with great flexibility for growth. SAP JVA is a complete accounting system, supporting joint venture operations throughout the world. SAP AG Neurottstrasse 16, 69190 Walldorf, Germany Mailing address: 69189 Walldorf, Germany SAP information service: Tel. +49 (180) 5 34 34 24 Fax +49 (180) 5 34 34 20 www.sap.com

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THE BEST-RUN E-BUSINESSES RUN SAP SAP AG Neurottstrae 16 69190 Walldorf Germany T +49/1805/34 34 24 F +49/1805/34 34 20 www.sap.com

50 051 556s (01/10)