JOINT VENTUREACCOUNTINGWITH mySAP™

OIL&GAS

SAP White Paper

THE BEST-RUN E-BUSINESSES RUN SAP

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1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2. Component Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.1 The SAP JVA Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. Master Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.1 Joint Operating Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.2 Equity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.3 Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.5 Equity Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.6 Recovery Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

4. Data Capture and Real-Time Processing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

5. Overview of Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95.1 Cash Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95.2 Overhead Cost Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.3 Cutback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.4 Suspense Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.5 Equity Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.6 Joint Venture Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.7 Partner Netting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.8 Asset and Material Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.9 Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.10 Net Profit and Carried Interest Profit Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.11 Non-Operated Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.12 Inter-Company Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.13 Balanced Books by Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.14 Bank Account Switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.15 Audit Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

6. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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CONTENTS

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In some industries, like the oil and gas industry, certain ven-tures are considered high risk, demanding extensive capitalinvestment and a long payback period. To minimize risks, com-panies develop partnerships called joint ventures. A joint ven-ture consists of an operating partner (operator) and one or morenon-operating partners who combine monetary or personnelresources to share a project’s expenses and revenues. The oper-ator manages the venture, arranges venture activities, and main-tains accounting records. The operator remits venture expenses,collects revenues, and distributes these to the partners, accord-ing to their ownership shares. This process is known as JointVenture Accounting (JVA).

1. INTRODUCTION

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2.1 THE SAP JVA COMPONENT

SAP designed SAP JVA for joint venture partnerships. SAP JVA isa component of the mySAP Oil & Gas industry solution. SAPJVA 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 followingfeatures and benefits:• Joint Venture Data Capture captures and codes all transac-

tions, including vendor invoices, inventory movements andallocations, with an option to produce balanced venturebooks.

• Cash Calls request cash payments from partners for futureventure operations.

• Partner Billing calculates partner shares for venture expens-es and revenue, monitors partner cash calls and receivables,and produces a partner bill containing all relevant informa-tion.

• Overhead calculates different types of overhead as agreed inthe Joint Operating Agreement (JOA).

• Allocations distribute billable and non-billable costs (such asfacility, payroll, and related expenses) to cost centers or proj-ects throughout the allocation cycle.

• Multi-Currency Processing supports the multi-currencyrequirements of typical venture activities.

2. COMPONENT OVERVIEW

SAP JVA allows you to process expenses and revenues for jointventures and assign them to partners. Five SAP JVA master dataobjects are used to associate expenses with ventures and theirpartners:• Joint Operating Agreement• Equity Group• Venture• Equity Type• Recovery Indicator

3.1 JOINT OPERATING AGREEMENT

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

3.2 EQUITY GROUP

The equity group defines joint venture partners, their partici-pation, and it reflects each partner’s contractual interest. Equitygroups are defined in the JOA, and are assigned to the venture.In SAP JVA, the following types of ownership arrangements arepossible:• Operated – The operator in this equity group holds less

than a 100% share. The other partners own the remainingshares.

• Non-Operated – This represents a company’s interest in ajoint venture operated by another party. Only the company’snon-operated interest is reflected on the equity group.

• Non-Operated, On-Billing – In this type of ownership, thecompany can re-bill part of its share of a non-operated ven-ture to third parties. The equity group stores the company’sshare 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, tomanage joint venture partner transactions, by defining all jointventure partners as accounts receivable customers.

3.3 VENTURE

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

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3. MASTER DATA

3.5 EQUITY TYPE

The JOA has different development stages, such as engineeringand design, construction, and production. Different partnersparticipate at each stage. SAP manages the different stages byusing equity types, even if corresponding time frames are over-lapping. The equity type links the venture and the equity groupcontained in the JOA. This relationship between JOA, venture,and equity type defines ownership, and changes of ownershipthroughout the life of the property.

3.6 RECOVERY INDICATOR

The recovery indicator divides general ledger account balancesinto subclasses, such as billable and non-billable adjustments.Because it carries a billable or non-billable indicator, it deter-mines expenditures to be billed to venture partners. The recov-ery indicator is also the basis for operational gross and netreporting and can be used in SAP CO processing, such as alloca-tions.

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FIGURE 1: MASTER DATA IN SAP JVA

JOA

VENTURE A VENTURE B

EQUITY TYPE 1

ENGINEERING & DESING

EQUITY TYPE 2

CONSTRUCTION

EQUITY TYPE 2

CONSTRUCTION

A33,3%

B33,3%

C33,3%

D25%

B25%

A50%

C25%

A75%

VALID AS OF01/02/2000

VALID AS OF05/17/2001

VALID AS OF02/11/2002

EQUITY GROUP 1

EQUITY GROUP 2

EQUITY GROUP 3

A33,3%

B33,3%

C33,3%

D25%

B25%

A50%

VALID AS OF04/20/2001

VALID AS OF11/07/2001

EQUITY GROUP 4

EQUITY GROUP 5

A33,3%

B33,3%

C33,3%

B25%

VALID AS OF01/02/2000

VALID AS OF05/17/2001

EQUITY GROUP 1

EQUITY GROUP 6

A25%

D25%

C25%

SAP JVA captures all expenditure and other transactions by usingSAP R/3 objects, such as cost centers, projects, orders, and prof-it centers. These objects contain specific joint venture informa-tion. These details define the venture, equity group, and recov-ery indicator assignments to be used when posting transactionsrelated to the cost objects.

Joint venture documents are created in the accounting inter-face in real time and are stored in separate joint venture data-base tables for use in other JVA processes, such as cutback andbilling.

The SAP JVA accounting interface provides the followingfeatures for accurate cost and revenue allocation:• Manipulation of the recovery indicator ensures that all expens-

es are distributed between the partners at the correct timeduring the procurement process. These include goods receipts,invoice receipts, and payment.

• Additional posting lines, such as taxes, discounts, and freightsinclude joint venture information. These posting lines maythen be split in SAP JVA documents.

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4. DATA CAPTURE AND REAL-TIME PROCESSING

FIGURE 2: DATA CAPTURE IN SAP JVA

REAL-TIME PROCESSING

MM

GOODSRECEIPTS/ISSUES

SD

SALESORDER

HR

TIMESHEETPOSTINGS

FI

PLAYMENTS

CO

ALLOCATIONS/OVERHEADS

BUSINESS PROCESSES

FI

FI DOCUMENTS

CO

CO DOCUMENTS

JVA

JVA DOCUMENTS

AM

AM DOCUMENTS

ACCOUNTING INTERFACE

JVA

SAP JVA is a complete solution for joint ventures, using uniquetransactions, programs, and objects, together with SAP R/3components. The following information provides a high-levelintroduction to SAP JVA.

5.1 CASH CALL

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

In an operated venture, you can invoice all partners or individ-ual partners for future expenditure. In addition, you can definecash call dollar thresholds at the venture, project, or partnerlevel. For operated ventures, cash call requests and receipts arepassed on to the billing process, and are completely integratedwith accounts receivable. Non-operated cash calls are integrat-ed with accounts payable.

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5. OVERVIEW OF FUNCTIONS

FIGURE 3: JVA MONTH END CYCLE

MONTHLYTRANSACTION

SETTLEMENT

ALLOCATIONS

JOINT VENTUREOVERHEAD

SUSPENCEPROCESSING

EQUITY CHANGEPROCESSING

OUTBACK

JVAREPORTING

JVA NETTING

BILLINGPROCESS

(PAPER OR EDI)

CI/NPIPROCESSING

CASH CALLRECLASS-IFICATION

CLOSE FOR FIFISCAL PERIOD

CLOSE FOR BILLABLE JVATRANSACTION

5.2 OVERHEAD COST CALCULATION

Joint venture operators incur indirect expenses, and can chargeoverheads to their partners to recover these costs. Recovery ofcosts is often based on a percentage of expenditure, or on theusage or activity of the venture. In SAP JVA, overheads are basedon JOA criteria, and the charges for non-operating partners arebased on their equity shares. SAP JVA allows the following typesof 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 over-

head percentages and predefined dollar thresholds for anindividual project.

• Statistical-Rate-Based Overheads are based on a definedstatistical quantity and the contractual overhead rate definedin the JOA.

5.3 CUTBACK

The operating partner carries all of the operating costs of a ven-ture throughout the accounting period. SAP JVA analyzesexpenditures and creates invoice amounts for billing the part-ners. This process typically occurs at the end of the accountingperiod after all transactions have been posted and allocationshave been run. Cutback is the process of allocating these trans-actions to the operator and the non-operating partners, accord-ing to their equity shares.

Cutback also processes expenses for ventures involving specialpartnership arrangements, such as carried interest, net profitinterest, or suspended partners, as well as suspended equitygroups or projects. In some countries, transactions betweenSAP JVA partners are subject to value added tax (VAT). The cut-back process also handles VAT postings to joint venture partners.

5.4 SUSPENSE PROCESSING

Suspense processing allows the operator to continue regularprocessing 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 part-ners in an equity group. During cutback, charges for the sus-pended partner are not processed. The operator retains thesecharges temporarily. This allows the operator to generatebillings to the remaining partners in the equity group. Afterthe partner is released from suspense, the previously unpro-cessed charges are posted and recognized as open items in thepartner’s accounts receivable account.

Equity group and project suspense functions are designed forcircumstances in which the ownership of an equity group orproject is undefined, but the operator wishes to proceed withthe project. The operator carries 100% of expenditure related tosuspended items, until their release.

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5.5 EQUITY ADJUSTMENT

Equity group partners can transfer their interest to other part-ners. Pre-cutback equity change and equity change manage-ment can meet this requirement by allowing ownership changesin the current period and in prior periods.

Ownership changes during the current period can result inexpenditure being posted across multiple venture or equitygroups. Pre-cutback equity change allows the operator to cor-rect these transactions, and to cut all venture expendituresback to a single venture or equity group combination. Thisprocess reverses postings to the original venture or equity group,and books them to the active venture or equity group combi-nation at month end. These adjustments are made only in theJVA ledgers. The original entries in the originating SAP R/3components remain unaffected, thereby preserving the audittrail.

Equity change management is designed to make retroactivechanges at the accounts receivable level for prior period owner-ship adjustments. SAP JVA determines the net change in sharefor each partner and the operator, and posts an adjustmentdocument to the affected partners.

5.6 JOINT VENTURE BILLING

Joint venture billing allows the operator to invoice partners forexpenditure and revenues, and to issue cash calls. You can senddifferent levels of supporting information with the invoice,down to the line-item level of the document that created thebillable item. The billing statements are fully configurable andcan accommodate special billing formats required in differentcountries or industries. SAP provides templates for the mostcommon billing formats. You can send the joint venture billon paper or by Electronic Data Interchange (EDI).

5.7 PARTNER NETTING

SAP JVA also supports a process called netting. The nettingprocess calculates the sum of a partner’s open expenses andcash calls, within the venture, to a single residual entry of out-standing expenses. It then posts that entry to the partner’saccounts receivable account for billing.

5.8 ASSET AND MATERIAL TRANSFERS

SAP provides asset and material transfer capabilities for industrysectors where joint operations are necessary. SAP JVA functionsin SAP Asset Management (SAP AM) and SAP Material Manage-ment (SAP MM) allow asset and material transfers with jointventure properties at the current replacement price, ratherthan at historical cost. Originally designed for upstream explo-ration, development, and production companies, the asset andmaterials transfer function complies with the Council of Petro-leum Accountants Society (COPAS) accounting and reportingstandards. The following summary highlights features in jointventure 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 returnsto and from assets and projects.

• For the material movements mentioned above, the operator’sinventory and expense accounts are charged with movingaverage price, while joint venture partners are billed CRPaccording to the current replacement price.

• For the oil and gas industry, you can split the currentreplacement price between tangible and intangible develop-ment costs.

SAP AM Functions• SAP AM allows you to track the operator’s net asset cost, as

well as gross cost. Three additional asset books contain allbillable, non-billable, and total gross book costs associatedwith the asset.

• You can price asset transactions, such as transfers, retirements,and sales, according to the current replacement price, whenjoint venture properties are involved. The joint venture part-ners are billed or credited according to the current replace-ment price, while the operator’s cost is removed from thebooks together with the historical cost. Estimated book costsare used if the historical cost is unknown.

5.9 CONTROLLING

In SAP JVA, you need to allocate various costs among multiplecost objects for distribution to the ventures. You must also beable to bill joint venture partners through cutback. Allocationis the process by which billable and non-billable costs, such asfacility, payroll, and related expenses, are distributed to costcenters or projects receiving services or benefits. It is based onan equitable form of distribution.

The SAP CO processes assessments and distributions, andfacilitates allocations. Settlement consists of the final allocationof costs from orders or Work Breakdown Structure (WBS) elements to cost centers, projects, fixed assets, general ledgeraccounts, networks, materials, sales orders, or cost objectsdefined in the settlement rule for the sender. To enhance thecore functions of SAP CO, SAP JVA addresses the complexrequirements of distributing costs related to allocations and settlement.

SAP JVA allows you to determine whether or not billable itemsshould be charged to the joint venture partner, based on theinformation of either the sending cost object or the receivingobject. This is important particularly if the venture informationin the sending and receiving objects is different. A user-definedmanipulation rule of the recovery indicator governs thisfeature.

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5.10 NET PROFIT AND CARRIED INTEREST

PROFIT PARTNERS

A Net Profit Interest is one in which the non-operating partnerhas interest in the venture, but does not pay venture develop-ment or operation expenditure. If revenue exceeds expenditure,this partner receives a percentage of the revenue. This type ofinterest can occur when a prospective partner proposes a ven-ture opportunity to the operator, but chooses to remain inac-tive. The operator may give the partner a cash payment and anNPI.

A carried interest arrangement is one in which the operator,with or without the assistance of other partners, carries a por-tion or the total interest of another partner. A carried interestarrangement commonly results when a partner exercises anon-consent provision contained in the JOA. In a carriedinterest arrangement, you can penalize the non-participatingpartner by defining penalty percentages for the venture develop-ment and operational costs assumed by other partners. Reve-nue must exceed these costs before the partner can resumeparticipation in the venture.

5.11 NON-OPERATED PROPERTIES

SAP JVA facilitates non-operating partners. The processing ofincoming, non-operated invoices is fully integrated with SAPaccounts payable functions. You can record these invoicesonline. In addition, cash call features are available for non-operated ventures at the venture and project level. You entercash call requests for outside operators online and these arefully integrated into accounts payable for payment. You canalso process the non-operated invoice by using SAP FI inboundEDI functions.

5.12 INTER-COMPANY FUNCTIONS

An operator may have an affiliated company (a legal entitywithin the same SAP system) as a partner. In this instance, SAPJVA allows you to book inter-company entries on the books ofthe operator and all affiliates. By identifying these relationshipsthrough inter-company mappings of accounts and other rele-vant objects, SAP JVA automates processing of inter-companyjoint venture transactions. It does this by posting entries direct-ly on the affiliated company’s books through the cutbackprocess.

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5.13 BALANCED BOOKS BY VENTURE

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

5.14 BANK ACCOUNT SWITCHING

Outside North America, large ventures are commonly fundedfrom one or more dedicated bank accounts called VentureBank Accounts (VBA). Depending on the venture, SAP JVAdetermines the bank account from which an invoice is paid. Ifthe invoice applies to more than one venture, the venture withthe greatest expenditure on the invoice determines the payingbank. In the event of payments from a central bank, the exis-tence of multi-venture invoices, or inter-venture allocation orsettlements, SAP JVA calculates the bank account movementsrequired to restore each account to its correct position. SAPJVA also produces correspondence, notifying the bank to makeall required transactions for the movement of cash betweenaccounts. In addition, bank account switching produces allrequired settlement documents, and can calculate all applica-ble interest.

5.15 AUDIT SUPPORT

SAP JVA can give non-operating partners detailed accountingtransaction records in an electronic format to assist transactionaudits. These records are based on operator-defined selectioncriteria and can be restricted at multiple levels.

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The oil and gas industry recognizes the value of joint ventureagreements in minimizing the risks associated with capital-intensive projects. By working closely with customers, andcollaborating with key technology and implementationpartners on an ongoing basis, SAP ensures that SAP JVA facili-tates smooth management, with great flexibility for growth.SAP JVA is a complete accounting system, supporting joint venture operations throughout the world.

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6. SUMMARY

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