Definition of a Business for the Oil and Gas Industry
Determining whether an acquired set meets the definition of a business can be complex in the oil & gas industry. Make sure you get it right by using this supplement to BDO's "Blueprint" on Business Combinations.
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An oil and gas entity may acquire different types of assets in a single acquisition transaction. For example, the acquired group of assets (acquired set) may include mineral and royalty interests, leasehold rights, proved developed producing wells, proved undeveloped wells, unproved acreage, or midstream infrastructure. The acquired set may also include processing plants, pipelines, and joint operating agreements.
Determining whether an acquired group of assets and liabilities meets the definition of a business is an important decision because there are significant differences in accounting for business combinations and asset acquisitions. Accounting Standards Codification (ASC) 805, Business Combinations, requires that an acquirer assess (1) whether substantially all the value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets (the screen test); and (2) whether the acquired set includes the required elements of a business under the framework in ASC 805.
Determining whether the screen test is met for an oil and gas entity can require significant judgment, specifically when determining whether individual assets have similar risk characteristics and therefore can be grouped into a single asset for purposes of the screen test. Also, for an acquired set that fails the screen test, an entity may need to exercise significant judgment when determining whether a substantive process or organized workforce has been acquired.
This Industry Supplement provides guidance for evaluating whether a set acquired by an oil and gas entity meets the definition of a business and should be read in connection with BDO’s Blueprint, Business Combinations Under ASC 805.