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This excerpt taken from the CHK 8-K filed Jul 9, 2008. Consideration of Alternative Accounting Treatment—Production Loan A production loan, while similar to a volumetric production payment, requires the seller to deliver cash or quantities of oil and gas production having a value equal
Securities and Exchange Commission June 13, 2008 Page 13 of 14
to the amount of cash received by the seller plus a stated rate of interest. An important distinction between a production loan and a volumetric production payment is that the volumes to be delivered under a volumetric production payment are specified in the agreement and there are no mechanisms that guarantee the value of the production and reserves attributable to the purchaser’s ownership interest. As described above, the buyers of Chesapeake’s VPP assumed all, or substantially all, price risks and reserve risk. Because the makeup mechanism does serve to mitigate some of the risk associated with the timing of production, Chesapeake carefully evaluated whether the VPP should be accounted for as debt. In addition to utilizing the concept of risk transfer in the table above, the company evaluated the sale of the VPP using the attributes provided in EITF 88-18, Sales of Future Revenues. Of the six attributes listed in EITF 88-18, only one was potentially met. It states, “The enterprise has significant continuing involvement in the generation of the cash flows due the investor (for example, active involvement in the generation of the operating revenues of a product line, subsidiary, or business segment).” Although the presence of this attribute creates the rebuttable presumption that classification of the proceeds as debt is required, there are numerous mineral conveyances (including those discussed in SFAS 19 for entities utilizing successful efforts) that involve some element of continuing involvement by the seller, and for which sale accounting is provided. Chesapeake believes that EITF 88-18 was not intended to alter the accounting for mineral conveyances of oil and gas companies as contemplated by SFAS 19 and Regulation S-X Rule 4-10. In summary, we rejected the alternative of accounting for the VPP as debt. The characteristics of the VPP, taken as a whole, are more indicative of a volumetric production payment as contemplated in Regulation S-X Rule 4-10. |
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