OIL & GAS UPDATE - KPMG | US

2nd QUARTER

OIL & GAS UPDATE

Conference Call
July 6, 2005

© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved. 1

Agenda

• Canadian Accounting Changes Phil Scherman & Jason Brown
• EIC Abstracts Phil Scherman & Jason Brown
• EIC Issues Phil Scherman & Jason Brown
• Tax Related Matters Phil Scherman & Jason Brown
• Income Funds & Royalty Trust Issues Phil Scherman & Jason Brown
• US Accounting Changes Phil Scherman & Jason Brown
• Canadian Regulatory Developments Phil Scherman & Jason Brown
• Alberta Unlimited Liability Corporations Craig Natland
• 2005 Federal Budget – Tax Update Craig Natland

© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved. 2

Accounting &
Regulatory Updates

Phil Scherman Jason Brown

403.691.8001 403.691.8293
[email protected] [email protected]

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Canadian Accounting Changes 4

• Non-Monetary Transactions
• EIC Abstracts
• EIC Issues
• Tax Related Matters
• Income Funds & Royalty Trust Issues
• US Accounting Changes
• Canadian Regulatory Developments

© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.

Canadian Accounting Changes

Non-Monetary Transactions – Revised Standard

Overview / Status Highlights

• Section 3831, Non-Monetary Transactions issued • Requires all non-monetary transactions to be measured at
in June 2005 fair value unless

• Requires non-monetary transactions to be – transaction lacks commercial substance
measured at fair value
– transaction is an exchange of a product or property held for sale
• Effective for transactions initiated in fiscal periods in the ordinary course of business for a product or property to
beginning on or after January 1, 2006 be sold in the same line of business to facilitate sales to
customers other than the parties to the exchange
• Early adoption is permitted only as of the
beginning of a fiscal period beginning on or after – neither the fair value of the assets or services received nor the
July 1, 2005 fair value of the assets or services given up is reliably
measurable, or

– the transaction is a non-monetary, non-reciprocal transfer to
owners that represents a spin-off or other form of restructuring
or liquidation

• Commercial substance replaces culmination of the
earnings process as the test for fair value measurement

• Commercial substance is a function of the cash flows
expected from the exchanged assets

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Canadian Accounting Changes
EIC Abstract
Accounting for Pre-Existing Relationships
Between the Parties of a Business Combination

Overview / Status Highlights

• EIC-154, Accounting for Pre-Existing Relationships • Consummation of a business combination between

Between the Parties of a Business Combination parties with a pre-existing relationship should be

• Addresses whether a business combination between evaluated to determine if a settlement of the pre-
two parties that have a pre-existing relationship should existing relationship exists

be evaluated to determine if a settlement of a pre- • A business combination between two parties that have

existing relationship exists, thus requiring the acquirer to a pre-existing relationship is a multiple-element

account for the settlement separately from the business transaction with one element being the business

combination combination and the other element being the settlement

• Applied prospectively to business combinations of the pre-existing relationship

completed after May 31, 2005 and to goodwill • Other issues addressed

impairment tests performed in reporting periods – Whether it is appropriate for acquirer to recognize a
beginning after May 31, 2005 settlement gain or loss in conjunction with the effective

• Earlier adoption is permitted for periods for which settlement of a lawsuit or executory contract
financial statements have not been issued
– How the effective settlement of a lawsuit or an executory
contract in a business combination should be measured

– Whether certain rights to use intangible assets previously
granted to acquiree should be included in the measurement
of the settlement or included as part of the business
combination

– Whether the acquirer should recognize as a separate
intangible asset apart from goodwill the acquiree’s pre-
existing contractual right to use the acquirer’s intangible
assets

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Canadian Accounting Changes
EIC Abstract
Applying the Conditions in CICA 3475.27
in Determining Whether to Report Discontinued Operations

Overview / Status Highlights

• EIC-153, Applying the Conditions in CICA • Guidance on how to determine whether the
3475.27 in Determining Whether to Report operations and cash flows of a discontinued
Discontinued Operations operation have been eliminated from the ongoing
operations of the reporting entity and on what type of
• Harmonizes Canadian GAAP with EITF 03-13, continuing involvement constitutes significant
Applying the Conditions in Paragraph 42 of FASB continuing involvement in the operations of the
Statement No. 144 in Determining Whether to disposed component
Report Discontinued Operations
• A component of an entity that has been disposed of
• Applied to a component of an entity that is either or is classified as held for sale should not be
disposed of or classified as held for sale in fiscal classified as a discontinued operation if there are
periods beginning on or after April 22, 2005 continuing cash flows that result from a migration or
continuation of activities and the cash flows are
significant in amount

• A component of an entity that has been disposed of
or is classified as held for sale should not be
classified as a discontinued operation if the entity
holds an interest in the disposed component
sufficient to exert significant influence over the
disposed component’s operation and financial
policies

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Canadian Accounting Changes
Revised EIC Abstracts

• EIC-9, Transfer of Receivables and EIC-54, Transfer of Receivables – Definition of
Recourse

Amended to note that these abstracts have not been withdrawn because they are still
applicable to existing transfers that originated prior to July 1, 2001

• EIC-26, Reductions in the Net Investment in Self-Sustaining Operations

Amended to clarify that a Canadian company with a self-sustaining foreign operation that
qualifies as “held for sale” should recognize exchange gains and losses that have been
deferred and included in a separate component of shareholders’ equity (CTA) in income in
the same period as a write-down of the asset to fair value less cost to sell in accordance
with CICA 3475

• EIC-101, Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements

Amendments made to the second issue and related consensus to delete reference to “a
change in the borrowing currency" to conform with a prior amendment to EIC-88

• EIC-146, Flow-Through Shares

Amended to clarify that the date of recognition of the future tax liability is the date the
company files the renouncement documents with the tax authorities

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Canadian Accounting Changes
EIC Issues
Draft issue: Effect of Contingently Convertible Instruments
on Diluted Earnings Per Share

Overview / Status Highlights

• D51, The Effect of Contingently Convertible • Contingently convertible instruments are instruments
Instruments on Diluted Earnings Per Share that have embedded conversion features that are
contingently convertible or exercisable based on
• Addresses the issue of when contingently
convertible instruments should be included in – a market price trigger, or
diluted earnings per share
– multiple contingencies if one of the contingencies is a
• Comments were due in May 2005 market price trigger and the instrument can be
converted or share settled based on meeting the
specified market condition

• Contingently convertible instruments should be
included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has
been met

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Canadian Accounting Changes
EIC Issues
Draft Issue: Accounting for Convertible Debt Instruments

Overview / Status

• RD47, Accounting for Convertible Debt Instruments

• Guidance on the application of the standard on presentation
and disclosure of financial instruments (Section 3860.20).
The situation discussed is where an enterprise issues a
debt instrument that is convertible into a fixed number of
common shares. Upon conversion, the issuer is either
required or has the option to satisfy all or part of the
obligation in cash

• As a result of comments received, the EIC made several
significant revisions

• RD47 is expected to be posted for comment in July 2005

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Canadian Accounting Changes
Tax Related Matters

Overview / Status

• Bill C-43 to enact tax measures in the 2005 federal budget
passed 3rd reading on June 16, 2005.

• Bill was amended to eliminate certain previously announced
corporate tax rate reductions.

• Since the Bill has passed 3rd reading, it is considered
substantively enacted for purposes of Canadian GAAP.

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Canadian Accounting Changes
Income Funds & Royalty Trust Issues - Exchangeable
Securities Issued by Subsidiary

• EIC 151

• Classified as non-controlling interest unless

– entitled to equivalent distributions
– non-transferable

• Change effective for periods ending on or after June 30, 2005

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Canadian Accounting Changes
Income Funds & Royalty Trust Issues - Issues not Resolved
by EIC 151

• Valuation of acquired exchangeable shares on business
combination

• Accounting for subsequent exchange following a trust conversion

• Amount of non-controlling charge to income

• Charge to retained earnings for equity classified exchangeables

• US GAAP treatment of trust units and exchangeables

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Canadian Accounting Changes
Income Funds & Royalty Trust Issues Multiple Classes of
Units

• EIC 149

• Multiple classes of units require an analysis to determine whether
each class qualifies as equity

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US Accounting Changes

• Accountings Changes & Error Corrections
• Asset Retirement Obligations
• Mining Stripping Costs
• Share-Based Payments

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US Accounting Changes
Accounting Changes & Error Corrections

Overview / Status applies to all voluntary changes in accounting principles and
applies to changes in an accounting principle required by
• SFAS 154, Accounting Changes and Error Corrections - • issuance of new pronouncements of the FASB and other
A Replacement of APB Opinion No. 20 and FASB standard-setting bodies, unless a new pronouncement
Statement No. 3 was issued in June 2005 contains specific transition guidance

• Effective for accounting changes and corrections of • requires that a change in depreciation, amortization, or
errors made in fiscal years beginning after depletion method for long-lived, non-financial assets be
December 15, 2005 accounted for as a change in accounting estimate effected
by a change in accounting principle
Highlights
carries forward the guidance contained in APB 20 for
• APB 20 previously required that most changes in reporting the correction of an error in previously issued
accounting principle be recognized by including in net • financial statements and a change in accounting estimate
income of the period of the change the cumulative effect
of changing to a new accounting principle carries forward the guidance in APB 20 on justification for a
change in accounting principle
• SFAS 154 requires retrospective application for •
changes in accounting principle, unless it is • carries forward the guidance contained in FASB Statement
impracticable to determine either the cumulative effect No. 3, Reporting Accounting Changes in Interim Financial
or the period-specific effects of the change Statements

• When it is impracticable for an entity to determine the
cumulative effect of applying a change in accounting
principle to all prior periods, the new accounting
principle to be applied as if it were made prospectively
from the earliest date practicable

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US Accounting Changes
Asset Retirement Obligations

Overview / Status Highlights

• FIN 47, Accounting for Conditional Asset • FIN 47 clarifies the term conditional asset retirement
Retirement Obligations was issued in March obligation as used in SFAS 143, Accounting for
2005 Asset Retirement Obligations

• FIN 47 clarifies the term conditional asset – Refers to a legal obligation to perform an asset
retirement obligation as used in SFAS 143, retirement activity in which the timing and (or) method of
Accounting for Asset Retirement Obligations settlement are conditional on a future event that may or
may not be within the control of the entity
• Effective no later than the end of fiscal years
ending after December 15, 2005. – The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the
timing and (or) method of settlement

• Uncertainty about the timing and (or) method of
settlement of a conditional asset retirement
obligation should be factored into the measurement
of the liability when sufficient information exists

• FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair
value of an asset retirement obligation

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US Accounting Changes
Mining Stripping Costs

Overview / Status Highlights

• EITF 04-6, Accounting for Stripping Costs in the • Stripping costs incurred during the production phase
Mining Industry addresses the accounting for of a mine are variable production costs that should
stripping costs incurred during the production be included in the costs of the inventory produced
phase of a mine in the mining industry. during the period that the stripping costs are
incurred.
• Consensus ratified by the FASB in March 2005.
• This consensus does not address the accounting for
• Effective for the first reporting period in fiscal stripping costs incurred during the pre-production
years beginning after December 15, 2005, with phase of a mine.
early adoption permitted.

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US Accounting Changes
Share-Based Payments

• In April 2005 the SEC announced a new rule that amends the
compliance dates for SFAS 123R for many SEC registrants.

• SEC registrants that do not file as small business issuers may
adopt the provisions at the beginning of their first annual period
beginning after June 15, 2005.

• Small business issuers may apply SFAS 123R for annual periods
beginning after December 15, 2005.

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Canadian Regulatory Developments

• NI 52-110.
• NI 58-201 and NI 58-101.

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Canadian Regulatory Developments
Multilateral Instrument 52-110, Audit Committees - Final

• Amendments come into force on June 30, 2005. • The original Canadian definition of independence was
designed to incorporate into a single set of
• Clarification of the Definition of Independence requirements the key elements of each of the SEC
requirements and the stock exchange requirements.
The original Audit Committee Rule
contains a definition of independence that • The amendment divides the existing definition of
is generally applicable to audit committee independence into two separate sets of requirements:
members. In developing this definition,
participating members of the CSA – One corresponding to the SEC requirements and
attempted to parallel the definitions of – One corresponding to the stock exchange
independence applicable to members of
audit committees of US listed companies. requirements
In the United States, for an audit committee
member to be considered independent, the • Division permits a convenient cross-reference in NP
member must satisfy two distinct 58-201, Defining Effective Corporate Governance to
requirements: the stock exchange requirements contained in the
Audit Committee Rule.
– the member must be independent within the
meaning of section (b)(1) of SEC Exchange Rule – Update to the Definition of Independence
10A-3 and
The amendments also reflect changes to the definition of
– the member must be an independent director as independence that correspond to the changes proposed in
defined by the listing requirements of the the NYSE amendments that were made in August 2004.
applicable exchange or market

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Canadian Regulatory Developments
National Policy 58-201, Corporate Governance Guidelines, and
National Instrument 58-101, Disclosure of Corporate Governance
Practices - Final

• Applies to all reporting issuers (other than – Providing new directors with a comprehensive
investment funds) and comes into force on June 30, orientation and providing all directors with continuing
2005 education opportunities

• Policy outlines recommended corporate governance – Adopting a written code of business conduct and ethics
best practices.
– Appointing a nominating committee composed entirely
• Issuers required to disclose in their management of independent directors
information circular or AIF their corporate
governance practices that they have adopted. – Adopting a process for determining what competencies
Where a guideline set out in the Policy has not been and skills the board as a whole should have and
adopted, issuers will be required to state that fact applying this result to the recruitment process for new
and to explain how the board ensures that the directors
objective of the guideline has been met.
– Appointing a compensation committee composed
• The recommended best practices include: entirely of independent directors

– Majority of independent directors on the board of – Conducting regular assessments of board
directors effectiveness, as well as the effectiveness and
contribution of each board committee and each
– Separate meetings of the independent directors individual director

– Appointing a chair of the board who is an independent
director, or where this is not appropriate, appointing a
lead director who is an independent director

– Adopting a written board mandate

– Developing position descriptions for the chair of the
board, the chair of each board committee, and the chief
executive officer

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Tax Update

Craig Natland

403.691.8022
[email protected]

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Alberta Unlimited Liability Corporations

• An Alberta ULC can be established as of May 17, 2005
• Can be used in structuring cross-border transactions between

Canada and the US
• Alternative to the Nova Scotia ULC
• Unique characteristics

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2005 Federal Budget Now Law

• Bill C-43 received Royal Assent June 29, 2005
• Foreign content limit gone
• Originally proposed 2 per cent general tax rate cut eliminated
• Corporate surtax measures amended

– effective 2008
– surtax eliminated for businesses with taxable capital of $50 million
– reduced rate for corporations with taxable capital between $50 and

$75 million

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