WorldWide Drilling Resource

Northern Plains Chapter of the ISEE President: Ron Eastman Tel: 307-680-8805 www.npcisee.org 29 WorldWide Drilling Resource ® SEPTEMBER 2014 Drilling Into Money Not Boring by Mark E. Battersby Leasing May Lose Some of its Glitter Whether to buy or lease is a ques- tion facing many drilling businesses, even as credit becomes more readily available. While virtually everyone understands the simplicity of buying, leasing is far more complicated and about to get even more complex. Under current rules, drilling opera- tions can generally classify almost all leases as “operating leases” and keep them off their balance sheets. This so- called “off-balance-sheet financing” often makes a business look less indebted than it really is. The proposed lease accounting rules would require many businesses to add to their balance sheets all but the shortest leases, as liabilities akin to debt. However, the lease accounting rules as we currently know them, may be chang- ing as a result of ongoing negotiations between the International Accounting Standards Board which sets rules for many countries around the globe, and the U.S. Financial Accounting Standards Board which writes the rules in the United States. The proposals would require many businesses to add all leases but those with the shortest term to their balance sheets as liabilities, much like debt. obviously, this would result in a less attractive financial picture for poten- tial lenders, suppliers, or investors. The proposal would also set up a two-track system for how lease costs must be reflected in the drilling opera- tions' earnings. Costs of real estate leas- es would be recognized evenly over the term of the lease, while costs of other leases would be more front-loaded and decline over the lease term. In all likelihood, there will be a con- siderable delay in making the new rules effective, probably until 2017. This would give drilling contractors and their busi- nesses time to comply and, in some cases, renegotiate loan agreements. The many drilling businesses that currently have borrowing limits and/or restrictions placed on them by lenders and investors could be in violation of those agreements if leases must be included on the oper- ation’s balance sheet. Deciding the best strategy is a tough move for anyone and, obviously, there is no one correct answer to fit every sit- uation, nor for every business. However, with a startling eight out of ten business- es reportedly leasing some equipment, every contractor should keep an eye peeled for the upcoming changes in the accounting rules - or seek professional advice - before entering into any leasing transaction. Mark Mark E. Battersby may be contacted via e-mail at admin@ worldwidedrillingresource.com /4&2/"4*0/"- )0/& "8 0-- 2&& ; &26*/( 4)& %2*--*/( */%53429 3*/$& < ;!)&/ *4 $0.&3 40 = > 7& ,/07 4)& < !& "2& " 1205% .&.#&2 0' 07&34 2*$&3 0/ &25/ "/% &4*1 2*$0/&3 */ 4)& /%53429 "34 '02 30'4 "/% .&%*5. '02."4*0/3 ! : ? ! 544&23 544&23 &33 4)"/ *43 */ 340$, "4 "-- 4*.&3 ."*- 4&&+"9 .*%7&34 /&4 08 !&34 2"/,'024 --*/0*3