Financial Reporting Review Panel - Compliance with FRS 3

Financial Reporting Review Panel - Compliance with FRS 3, 'Reporting Financial Performance' (Paragraph 14) by Companies in the
Oil and Gas Industry'

t has come to the Panel’s attention that a number of companies in the oil and gas industry are adopting a narrow definition of what constitutes an operation in this sector for financial reporting purposes. This has resulted in non-compliance with some of the disclosure requirements of Financial Reporting Standard (FRS) 3, ‘Reporting financial performance’, when accounting for material acquisitions. Specifically, such companies are not reporting the aggregate results of acquisitions as a component of continuing operations as required by paragraph 14 of FRS 3.

FRS 3, paragraph 14 requires a company to disclose separately, at a minimum, the aggregate results of each of continuing operations, acquisitions and discontinued operations, to the level of operating profit. Therefore, if a company has acquired an operation during the reporting period, separate analysis of that operation’s results will be disclosed as part of the profit and loss account.

No guidance is provided in FRS 3 as to what constitutes an operation, but the Statement of Recommended Practice (SORP), ‘Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities’ published by the Oil Industry Accounting Committee on 7th June 2001, supplements UK accounting standards in the light of the special factors prevailing in the Oil and Gas industry. According to these recommendations an acquisition of an operation would encompass the acquisition of an interest in a producing field or a tariffed pipeline, the share or further share of an interest in a field already partly owned and even a farm-in to a licence (paragraphs 214 – 215).

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