Legal nature of a joint account in oil and gas activities

Production sharing agreements, as investment agreements, are usually registered with the tax authorities of the states in order to carry out separate accounting of investors' expenses, different from the regime and tax accounting for their ordinary business transactions.

Separate accounting is necessary so that authorized state bodies responsible for monitoring and controlling production sharing agreements can calculate the costs incurred by investors and include them in future compensation at the stage of settlement with them for the extracted hydrocarbon raw materials.

Therefore, in production sharing agreements, you can sometimes find the concept of a «joint accounting account».

The legal nature of a joint accounting account is interesting, because on the one hand, it contains a financial basis, but has not acquired the status of an accounting account, and on the other hand, it is a management account for expenses. That is, a kind of synthetic quasi-sub-account.

However, during the verification of the costs incurred by the investor, disputes arise regarding the correctness of the accrual of costs for this quasi-account, since production sharing agreements fragmentarily regulate the procedure for maintaining a joint accounting account, and the law applicable to the agreements omits this issue.

Sometimes production sharing agreements contain references to the accrual method.

Unfortunately, there is currently no arbitration practice on the issue raised.

In the aspect of the above, I propose to use, at the discretion of the states, the following.

The purpose of the «accrual principle» is that income and expenses are recorded in the accounts at the time they arise, regardless of the date of receipt or payment of funds.

Accruals are reflected in accounting registers and are usually reported in reports and in the periods to which they relate.

The appropriateness of the charge for expenses should be assessed on the basis of facts that the investor knew or could reasonably be expected to have known at the time the expenses were incurred.

The accrual method is largely a question of fact.

Thus, the investor bears the burden of proving the correctness of the accrual in accordance with the expense item of the joint accounting account.

Tax practice follows from the position that in investment agreements, focusing on the decision to comply with the accrual principle seems appropriate as opposed to other principles (most favored nation, equity, etc.).

The accrual method alone provides a fair representation of an investor's performance.

A more important aspect for the formation of accounting rules was the need to limit the investor's power to control the time when receipts should be included in income or when deductions from expenses should be made.

If accounting is conducted on a commercial basis, income and expenses are credited although they are not actually has realized, and the entries thus made do not actually show anything other than the accrual or occurrence of the said income or expense at the relevant point in time.