Update on the October 2019 COGEH Revisions – Operating Leases

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IFRS 16 Changes

Background:

In 2016, the International Accounting Standards Board (IASB) published the International Financial Reporting Standard (IFRS) 16, to be implemented as of January 1, 2019. IFRS 16 set new guidelines for handling leases on both corporate income statements and balance sheets.

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Previously, most leases in the oil and gas industry were classified as operating leases, with lease payments presented only in the income statement as operating expenses. Companies simply had to list any future lease obligations in the footnotes of their financial statements. With no representation on the balance sheet, operating leases were considered off-balance-sheet financing, affecting various debt and liability measurements.

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Under the new standard, companies are required to create a lease asset and corresponding lease liability equivalent to the present value of future lease payments on their balance sheet. These are then depreciated over their economic life as a depreciation expense. What was previously an operating expense line item on the income statement now consists of both a depreciation expense and interest expense except for short-term (12 months or less) and low-value ($5,000 or less) assets.

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How this impacts COGEH and NI 51-101 reporting

Under the latest COGEH revisions, it’s recommended that the previous operating costs that may now be recognized as a depreciation and interest expense continue to be included within the operating costs of reserve reports based on their actual annual costs as has historically been done.

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Reserves evaluators and their clients should work together when analyzing how present and future costs are affected by the implementation of IFRS 16. Future operating cost estimates for reserves reporting are generally derived from historical lease operating statements for each property, which provide detailed information by accounting category. These should be reviewed for any year over year changes and depending on how a company’s internal reporting is set up, any changes with regards to lease expenses should be accounted for.

For more information regarding the most recent October 2019 COGEH revisions, please get in touch with your reserves evaluator or refer to Section 3.6.1 in the latest COGEH edition available at https://speecanada.org