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CI/NPI Partner Netting

Overview
In north America ( JVA Regions US and Canada) it is common for one or more working interest partners in a venture to carry the ownership interest of another partner. In this situation, the carrying partner or partners assume both the expenses and the revenues that would normally accrue to the carried partner. This situation is precipitated when the carried partner takes one of the following actions: 1. Fails to sign the joint operating agreement (JOA) 2. Exercises the non-consent provisions of the JOA and declines to participate as a working interest partner in proposed exploration, development, and production activities 3. Makes an agreement with the operating partner to yield a working interest to the operator in return for a negotiated percentage of the interests future revenue There are two types of joint venture partnership arrangements that address these situations: Carried Interest Net Profit Interest

Carried Interest (CI) Partners

A normal working interest partner may become a carried interest partner (CI) by taking one of the following actions: 1. Failing to sign the joint operating agreement (JOA) 2. Exercising the non-consent provisions of the JOA and declining to participate as a working interest partner in proposed exploration, development, and production activities As long as one of these conditions continues, a group of working interest partners in the venture bears the expenses and shares the revenues that would normally accrue to the CI partner based on the interests equity share. When the revenues exceed the sum of the expenses accumulated since initiation of this arrangement and a designated additional percentage of the expenses, payout is achieved. As a result, the CI partners interest reverts to a normal working interest, and that partner once again participates as a full working interest equity owner in the venture. A specific CI arrangement usually applies solely to one JOA; thus, payout is achieved when the penalty provisions of that one JOA are met.

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Net Profit Interest (NPI)

A normal working interest partner becomes a net profit interest partner by making an agreement with the operating partner to yield a working interest to the operator in return for a negotiated percentage of the interests future revenue. The NPI arrangement is different from the CI arrangement because the NPI partner permanently gives up a working interest in the venture; whereas, the CI partner temporarily yields the working interest until the interests revenues exceed its expenses by a ratio, at which time the CI partner once again participates as a full working interest equity owner in the venture. Under the conditions of a typical NPI arrangement, the operator of the venture bears the expenses and enjoys the revenues that would have previously accrued to the NPI partner based on the interests equity share. When the revenues exceed the expenses accumulated since initiation of the arrangement, unlike the CI partners interest, the NPI partners interest does not revert to a normal working interest. Instead the NPI partner receives a percentage of the relinquished interests revenues which is specified in that partners agreement with the operator.

Netting
Both CI and NPI partnership arrangements involve netting expenses and revenues for the partner for the purpose of determining whether payout has been achieved. This activity occurs after Cutback. Processing expenses for ventures that involve CI/NPI arrangements, which includes both Cutback and CI/NPI netting, consists of the following steps: 1. Cutback is executed to assign expenses that were booked to cost objects for a venture to the equity group owners based on their ownership share. 2. CI/NPI netting is then executed to compare Cutback-generated expenses with revenues booked to the CI/NPI partner to determine whether payout has been achieved (i.e., CI/NPI partners revenue exceeds expenses plus a penalty percentage). 3. If payout is not achieved CI/NPI netting does not post any entries. If payout is achieved, CI/NPI netting posts appropriate revenues to the CI/NPI partner.

Configuration of the JVA processes that are run before netting (particularly Cutback) determines which open items are selected for partner netting. CI/NPI netting selects post-Cutback entries for processing from the JVA Billing ledger based on the entries billing indicators.
Payout for CI Partners

Before CI/NPI netting is executed to determine whether a CI partner has reached payout, Cutback apportions the expenses for the partners share among the working interest partners and the operator according to the CI arrangement for the joint venture and equity group. When CI/NPI netting determines that the CI partner has reached payout by comparing these expenses with revenues associated with the CI share, the interest is converted to a normal working interest, and expenses and revenues once again accrue to the CI partner based on the equity share.

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Payout for NPI Partners

Before CI/NPI netting is executed to determine whether an NPI partner has reached payout, Cutback assigns all expenses associated with the NPI partners equity share to the ventures operator. CI/NPI netting function assigns a portion of the revenues for the interest to the NPI partner with the remaining revenue and all expenses being booked to the operator.
Source of Revenue

JVA Cutback is the source of the expense data input to CI/NPI netting. Revenues must be fed into JVA from another computer system, and this data will be the source of revenue data input to CI/NPI netting. FI and JVA Processes Excluded for CI/NPI Partners The following FI and JVA processes cannot be executed for CI/NPI partners: Placing the partner in suspense Posting direct charges to the partner Issuing cash calls to the partner

Prerequisites in FI
The FI elements used by carried interest and net profit interest netting can be divided into the two following categories: Usual FI Configuration Clearing-Related Configuration

The distinction between these two categories is based on the nature of carried interest and net profit interest netting as well as on the Cutback JVA processes that post clearing entries in FI . Usual FI Configuration To enable JVA to process clearances of actual expenditures properly, certain objects and accounts must be configured in standard FI. These items include the following: Field Status Groups Posting Keys Special G/L Entry Indicators (SEIs) Partner Reconciliation Accounts Document Types

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The SAP client that contains JVA is preconfigured with the FI objects and accounts as well as with the JVA objects needed to execute CI and NPI netting. You may choose to change some of these items or use additonal items as well as the preconfigured ones. You should use the preconfigured items in FI and in JVA as models for your own elements. These FI-based objects are the constituent parts used to form the posting rules in JVA for posting entries from JVA to FI. To see how these FI-based objects are used in formulating the rules of CI and NPI netting, see below under Defining JVA Processes that Govern Netting. Field Status Groups When they are assigned to G/L accounts and posting keys, FI field status groups control whether a number of fields are available for entry (either Required, Optional, or Suppressed) during FI postings. The field status groups assigned to accounts used for JVA CI and NPI netting should make the JVA fields available for entry. These field status groups should be assigned to the posting keys and the G/L reconciliation accounts for the customers and vendors who are joint venture partners. These JVA fields must be either optional or required in the field status group to enable JVA netting to clear entries. The accounts for customers and vendors who are not joint venture partners should be assigned another field status group that does not require JVA information. Posting Keys Postings resulting from CI and NPI netting use standard FI posting keys with no need for special configuration. Special G/L Entry Indicators (SEIs) Special G/L Entry Indicators are assigned to posting keys. The SEIs identify alternative reconciliation accounts that are used to post certain special transactions (such as Cash Calls or Partner and Convenience Netting). Specifying SEIs for these special transactions ensures that entries related to a particular special transaction are stored and cleared in a reserved area of the account that is devoted to the special transaction. Since Cutback posts expense entries related to CI and NPI netting to the JVA Billing ledger and the CI and NPI netting process accesses these entries from that ledger for clearing, there is no need to specify SEIs and thus reserve special areas for CI and NPI netting related entries in FI accounts.

FI Account for the Partner

To support processing of JVA posted entries within FI, you must create at least one of the following two types of reconciliation accounts in FI for each JVA partner. Customer account in FI-Accounts Receivable (A/R) Vendor account in FI-Accounts Payable (A/P)

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Whether you should set up only an A/R account or both an A/R and an A/P account for a JVA partner is determined by how the partner participates in joint ventures and the kinds of postings that will be made to the partner. Customer account in FI-Accounts Receivable (A/R) To make it possible to post amounts due, for monthly billing, cash calls, or partner netting to JVA partners, every JVA partner must have a customer account in A/R. This A/R customer account must access a reconciliation account that is assigned a field status group which allows the input of the field groups Joint Venture Account Assignment and Joint Venture Billing Indicator.
CI/NPI FI A/R Account Requirements

An FI A/R account must be set up for all working interest partners of a venture and equity group who are carrying partners in a CI arrangement so the CI partners expenses can be booked to these carrying partners. At payout (when revenues exceed expenses plus a penalty percentage), the carried partner will revert to a normal working partner, at which time the expenses associated with the interest will be posted to the carried partners FI A/R account. The operating company should also have an FI A/R account to receive postings of CI partner expenses and postings of all expenses from NPI partners. Vendor account in FI-Accounts Payable (A/P) If the partner is also an operator in non-operated ventures or the partner is subject to convenience netting (which is only used in the United States and Candadian regions), you must create a vendor account for the partner in A/P in addition to the A/R customer account. In this case the field Vendor must contain the name assigned to the partner in JVA.
CI/NPI FI A/P Account Requirements

An FI A/P account must be set up for CI or NPI partners so that revenues can be posted to the partners after payout is achieved. Balance Sheet Accounts for Automatic JVA Posting You should set up balance sheet accounts for the operator to receive netting payout postings from each of the following automatic JVA posting procedures: Miscellaneous income for NPI Net expense for NPI Miscellaneous income holding for NPI

Miscellaneous Income for NPI

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When an NPI partner reaches payout, the revenue which exceeds the amount paid out to the NPI partner should be posted to this operator account. Net Expense for NPI When an NPI partner reaches payout in a venture for which there is a net expense balance, this operator account should be credited for expenses that the operator carried for the NPI partner. Miscellaneous Income Holding for NPI At payout revenue for the current period that has already been assigned to the operator is redirected to the CI or NPI partner. The debit entry to revenue for this reallocation to the CI or NPI partner should be made to this operator account. Document Type You should set up a document type specifically to receive postings from CI/NPI netting. This document type should accept postings with the following account types: Customer Vendor G/L

Clearing-Related Configuration
To enable CI and NPI netting to post clearing entries to FI and credit amounts to partners in FI, you must set up the following types of procedures for clearing and for posting credit balances for JVA postings in FI: Clearing posting keys Payment program configuration

Clearing Posting Keys FI clearing procedures consist of sets of posting keys which are used to perform various types of clearing postings. JVA posting rules refer to FI clearing procedures, and the posting keys specified in these clearing procedures are used to post the clearing entries controlled by those posting rules. The posting keys used for these clearing procedures must themselves be configured with the correct SEIs and field status groups as described above. Each clearing procedure includes a specification for both debit and credit posting keys to be used for postings to A/R, A/P, and G/L accounts. The specification for A/R and A/P postings includes debit and credit posting keys for the following types of postings: Clearing entry Residual item Special G/L transaction

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The JVA posting rules idenfity the FI clearing procedure that applies to a particular type of JVA posting. CI and NPI netting makes use of the clearing procedure called JVACLEAR to post a summary entry to the carrying partners A/R accounts. At payout, CI and NPI netting uses this clearing procedure to post a residual credit balance to the CI and NPI netting partners A/P account. Payment Program Configuration FI payment program configuration consists of identifying the Special Entry Indicators (SEIs) that will be used in capturing special G/L transaction payments for the company. CI and NPI netting does not usually make use of SEIs.

Prerequisites in CO
To make it possible to post expenses for a venture, you must associate a cost object (either a cost center, an order, or a project) with that venture in CO. While setting up cost objects for ventures in CO, you must also assign joint venture information to them, including the JVA cost object types that correspond to the CI penalty categories. When you post expenses to the venture, you will associate those expenses with a cost object, and the JVA cost object type associated with that cost object will ensure that the expenses are identified with a CI penaltry category, if appropriate, as well as with the venture. With regard to posting costs to ventures covered by CI arrangements, costs related to the carried interest may be booked to several cost objects associated with the affected venture. For more information about reviewing and setting up CO prerequisites, such as Cost Centers, Orders, and Projects, refer to the chapter entitled Setting up Cost Objects in CO in the section of this guide entitled Configuration for Data Capture.

Company Set-up Decisions in JVA

To enable JVA to process CI and NPI netting for your company, you must establish the following pre-conditions within JVA: Activate the partners in JVA Select CI postings in gross amounts by venture or net by partner

Activate the Partners in JVA

In addition to setting up customer accounts in FI-A/R and vendor accounts in FI-A/P, you also have to activate the partners in JVA, so that they become JV partners. To do so, you have to maintain an entry for each partner in the JVA partner table. The entry for a partner record in JVA contains the following information: Company code of your company

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Partner code for the partner Company code if the partner is a related company using SAP Threshold amount for cash calls Technical format of billing (paper, EDI, or both) regions C and U Output tax code Indicator if the partner will be subject to convenience netting Billing format if the invoice is on partner level and not on the venture level (For more information about billing, see the chapter entitled Billing.) Billing format if the invoice is on partner level and not on the venture level EDI partner identifier Partner group to which the partner belongs, which is used in cash calls

Menu Path To access the partner master record screen to set up partners for your company, follow this menu path: From the Joint Venture Accounting menu, select Environment > Configuration > Environment > Partner. On the Change View Partner: Overview screen, enter the information required for the partner. For more information on how to set up a partner record in JVA, see the section entitled Setting up Partners in the section entitled Defining Joint Venture System Objects in this guide.

Select CI Postings in Gross by Venture or Net by Partner

On the JVA Global Company Parameters screen by selecting the Gross CI postings field under Cutback and Billing, you can indicate that expense and revenue CI postings should be executed in gross amounts by venture rather than in net by partner, which is the default method. If CI postings are posted gross by venture for the company, Cutback will post expenses and expense offsets gross by venture rather than net by partner. Revenues will also be posted gross by venture. The statements issued to the CI partners will also be presented in gross amounts by venture. Menu Path To access the JVA Global Company Parameters screen on which you can choose to have CI postings for your company posted in gross amounts by venture rather than net by partner, follow this menu path: From the JVA menu select Environment > Configuration menu > Environment > Company > Global parameters. A pop-up screen will prompt you for your company code. When you enter the company code and press ENTER, the JVA Global Company Parameters screen will be displayed.

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Setting up JVA Master Data Objects

As part of configuration for CI/NPI processing, you must set up certain master objects that will be used to ascribe attributes to the expense and revenue postings you make for ventures. As part of JVA configuration of CI and NPI, you should perform the following tasks: 1. 2. 3. 4. 5. Define the CI penalty categories for the company Assign CI penalty categories to JVA cost object types Define billing indicators for CI and NPI postings from Cutback Define billing indicators for posting different types of revenues in CI processing Set up CI and NPI groups

Define the CI Penalty Categories for the Company

There are 36 one-character CI penalty categories, 35 of which (0 to 9 and A to Z ) are user definable (penalty category 0 is reserved for unmatched records). You may define any or all of these penalty categories for your company. After you define a penalty category for your company, you can assign that category for use at the JOA level. For each CI penalty category that you activate for your company, you will also have to set up a corresponding JVA billing indicator and a JVA Cutback function item. This will make it possible to post expenses and revenues for CI partners while applying the proper penalty percentage for calculating payout. To define penalty categories for your company, enter the following information on the Penalty Category: New Entries screen: Code for your company in the CC field Code (1 through 9 and A through Z) for the penalty category in the P field Description of the new penalty category in the Penalty Category Name field

Menu Path To access the Penalty Category: Overview screen for your company to activate CI penalty categories for your company, follow this menu path: From the Joint Venture Accounting menu, select Environment > Configuration > Environment > Master > Penalty Category. On the screen, select new entries.

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Penalty Categories Typically Used by Different Regions Though there are 36 CI penalty categories, your company is likely to use only some of these categories. The following table cites the CI penalty categories that are typically used by US oil companies:
CI Penalty Category 1 2 3 4 5 6 7 8 Description

Operating Drilling Equipping Rework Surface Equipment Drilling Platform Producing Platform Subsurface Equipment

The following table cites the CI penalty categories that are typically used by Canadian oil companies:
CI Penalty Category A Description

Exploratory Well - Drilling and Completion Cost of Well Development Well - Drilling and Completion Cost of Well Operating and Maintenance

Assign CI Penalty Categories to JVA Cost Object Types

When you post expenses in FI, you associate them with JVA ventures by booking them to cost objects (WBSs, orders, and cost centers) that are set up in CO. When you set up these cost objects in CO, you specify an array of joint venture-related information including: Joint venture to which the CO cost object belongs Recovery indicator that indicates whether expenses booked to the cost object are billable to partners

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Equity type, which in combination with the joint venture will indicate a valid equity group JV Cost Type which is the JVA cost object type that is associated with the CO cost object

The JVA cost object types that are assigned to CO cost objects are set up in JVA Configuration. The JVA cost object type can also be assigned a CI penalty category. When expenses are booked to the cost object in FI, those expenses will be associated with the CI penalty category assigned to the cost object type. A penalty category must be defined for the company before it can be assigned to a cost object type. To support this method of identifying expenses booked to cost objects with CI penalty categories via JVA cost object types, you should ensure that a cost object type is set up for each of the CI penalty categories that are activated for your company. When you have defined penalty categories in JVA Configuration, you can activate them for specific JOAs for use with joint ventures and equity groups within the JOA. For more information on setting up billing indicators in JVA, see the section of this guide entitled Defining JVA Objects and the unit entitled Defining Cost Object Types. To assign CI penalty categories to cost object types for your company, enter the following information on the JV Cost Center, Order, or Project screen: Code for a penalty category that has already been defined for the company in JVA Configuration in the Penalty Category field

Menu Path To assign CI penalty categories to cost object types, use the following menu path: From the the Joint Venture Accounting menu, select Environment > Configuration > Master Data > Cost Object Types > Projects, Cost Centers, or Orders.

Define Billing Indicators for CI and NPI Postings from Cutback

The JVA CI/NPI netting process derives expenses for its processing from the JVA Billing ledger based on the billing indicators of the expenses. These billing indicators are assigned to the postings by the posting rule details that Cutback applies when it reassigns expenses that were originally booked to ventures in FI to the partners in those ventures based on their equity shares. To support this process, you must ensure that billing indicators are configured for all the CI penalty categories that you have defined for your company as well as for NPI. Specifically for billing indicators that will be assigned to postings for CI expenses by Cutback, you should assign the CI penalty category in the ExpT (expense type) field for the billing indicator For more information on setting up billing indicators in JVA, see the section of this guide entitled Defining JVA Objects and the unit entitled Defining Billing Indicators.

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Menu Path

To review existing billing indicators for JVA processes or define new ones, use the following menu path: From the Joint Venture Accounting menu, select Environment > Configuration > Master Data > Billing Indicator > Master.

Define Billing Indicators for Posting Revenues Via REVI

The same 36 one-character codes, 35 of which (0 to 9 and A to Z ) are user definable (0 is reserved for unmatched records) are available for setting up billing indicators for different types of revenue as are available for setting up CI penalties. You may define a billing indicator for a particular type of revenue by combining one of these one-character codes with a prefix of R. You may use any or all of these codes in combination with the R prefix to define revenue billing indicators for your company. As you set up these revenue billing indicators, you should select the revenue indicator RevId to indicate that the billing indicator will be assigned to revenue postings. For each revenue billing indicator that you set up, you must also set up a corresponding function item for the REVI function, which is used to post CI/NPI revenues. This will make it possible to post specific types of revenues to CI/NPI partners.
Menu Path

Use the same menu path used to access CI/NPI Cutback billing indicators.

Set up CI and NPI Groups

When changes in ownership of a venture (that do not involve the CI or NPI partners share) occur while a CI or an NPI arrangement is in effect, a new equity group must be created for the venture to reflect the new ownership. Under these circumstances, the CI partners revenues and expenses for both equity groups should be netted together to determine when payout is achieved. In the absence of an indication to JVA of this connection between equity groups, however, payout would be calculated separately for each equity group. Assigning the CI/NPI partner to the same CI or NPI group in both equity groups notifies JVA that the revenues and expenses from both equity groups should be combined for the purposes of determining when payout is achieved for the CI/NPI partner. To make it possible to assign CI/NPI partners to CI or NPI groups at the venture, equity group, partner level, these groups must be set up as master data objects at the company level within JVA Configuration. To set up an NPI group for your company, enter the following information on the JV Net Profit Interest Group: New Entries screen: Code for your company in the CoCd field Four-character code for the NPI group in the NPIG or for the CI group in the Cgrp field

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Percentage of revenue that exceed expenses for the interest to be paid out to the NPI partner when revenues exceed expenses for the share in the NPI Pay % field Description of the NPI group in the JV Net Pofit Int Text field or the CI group in the Carried Interest Group Name field

Setting up a CI group is similar to setting up an NPI group with the exception that you will not enter a percentage of revenue to be paid out to the partner at payout. The percentage to be paid out at payout is unnecessary for the CI groups because the CI partners interest converts to a working interest at payout and the partner receives all subsequent revenue Menu Path To define CI or NPI groups, use the following menu path: From the the Joint Venture Accounting menu, select Environment > Configuration >CI Groups or NPI Groups. To set up a new group, select New Entries on the Overview screen.

Define JVA Processes that Govern CI/NPI Netting

A set of objects created in JVA configuration are delivered with JVA to control execution of major joint venture accounting processes such as CI and NPI netting. Working in combination with one another, these objects identify the various types of postings that JVA makes to FI to implement accounting transactions performed in JVA. In addition, they specify the characteristics of these postings (such as the posting key and subledger of the posting). As a group, the following objects provide a protocol for processing major joint venture accounting processes: Function Function item Posting rules and details

Generally, you should not change the preconfigured JVA objects that are used to control the execution of major processes. These objects have been preconfigured to provide all the functionality that should be needed for executing the major accounting processes in JVA. If you do choose to use alternative objects to control the major accounting processes in JVA, you should use the corresponding preconfigured objects as models in creating your own. There are some exceptions to this general rule with regard to CI/NPI.

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Three of these sets of objects which implement the following major JVA processes are involved in CI/NPI:
Process
Cutback CI/NPI Netting Revenue

JVA Function
CUTB NETT REVI

Cutback The JVA process Cutback assigns expenses posted to ventures in FI and CO to venture partners in JVA based on their equity share. The expense postings associated with CI/NPI arrangements that will ultimately be netted through the CI/NPI netting process (function NETT) must first be processed through Cutback. Cutback must be configured so that it applies the proper billing indicators to these CI/NPI postings. This will ensure that the postings will be picked up when CI/NPI netting is executed. To support the processing of CI/NPI netting, the JVA Cutback function (CUTB) must be configured with a function item for each of the following CI/NPI conditions: Each CI penalty category that has been activated for the company NPI postings CI/NPI offset postings

At a minimum, you must define a function item for each one of the CI penalty categories that you have defined for the company. The posting rule details for each of these CI/NPI-related function items of Cutback must themselves be configured with posting rule details containing both appropriate debit and credit posting keys and with billing indicators. When you set up CI billing indicators in JVA Configuration, you assigned expense types (ExpT field) consisting of the penalty categories to them. When you assign these CI billing indicators to the posting rule details for CI/NPI Cutback function items, the expense type assigned to the billing indicator must consist of the same penalty category that composes the second character of the function items name. This configuration of the JVA Cutback function (CUTB) will ensure that upon execution Cutback will assign billing indicators to CI/NPI postings that will allow the CI/NPI netting function (NETT) to pick them up for processing. Function item CN is used for NPI postings. Cutback function item CC corresponds to the CI expense type 0, the default for unmatched records. Function item P0 is excluded from use. Function item CO is used for offset entries for the other CI function items.

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CI and NPI Netting Function A JVA function has been created for each of the major processes performed by JVA. With regard to CI/NPI netting, the function NETT has been created.
JVA FUNCTION
NETT

Description
Execute CI/NPI netting for the selected CI/NPI partner: 1. 2. Determining whether payout has been achieved by comparing Cutbackgenerated expenses for the CI/NPI partner to revenues for the partner Assigning expenses and revenues for the partner either to the partner or to carrying partners depending on whether conditions for payout have been met and whether the partner is covered by a CI or an NPI arrangement Removing the Interest Type for carried interest from the CI partners record at the venture level if payout has been achieved, thus reestablishing the partner as a working interest partner

3.

Function Items Function items provide multiple alternative expense processing procedures that flow from a single function. The number and nature of these alternative procedures depends on the type and condition of the partners relationship to the venture whose expenses are being processed. Different functions offer different possibilities for such partner relationships. For example, in addition to processing expenses for normal partner accounts Cutback provides processing procedures for handling expenses for such special situations as suspended, carried interest, and net profit interest partners as well. So there are a number of function items for the single Cutback function, one for each possible alternative processing procedure. By contrast, some functions are limited to one possible processing procedure, so they have a single function item. A JVA function item has been created for each of the three alternative processing procedures performed by the CI/NPI netting function (NETT): Booking expenses for the carried partners interest to non-operating carrying partners Booking expenses and revenues for the carried partners interest to the operating partner Booking revenues for the carried partners interest to non-operating carrying partners

CI/NPI netting (represented by function NETT) is executed after Cutback and is intended to assign multiple expense and revenue items for a CI/NPI partner to the carrying working interest partners or to the operator.

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Since NETT is designed to perform three possible actions, three function items (CU, EN, VE) are assigned to it. These function items indicate that the FI posting resulting from the execution of the protocol controlled by the NETT function will be booked to the appropriate partner and FI account. JVA Function
NETT

Process
CI/NPI Netting

Function Item
CU

Process
Booking expense to working interest partner of venture who is carrying CI/NPI partner. Booking of net expense or revenue to operator who is carrying CI or NPI partner. Booking of revenue to working interest partner of venture who is carrying CI/NPI partner.

EN

VE

The following additional function items are preconfigured for processing intercompany CI/NPI postings: JVA Function
NETT

Process
CI/NPI Netting

Function Item
IC

Process
Booking of net expense to working interest partner of venture who is carrying CI/NPI partner. Booking of net revenue to working interest partner of venture who is carrying CI/NPI partner. Booking of net revenue to operator who is carrying CI or NPI partner

IE

IV

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Define CI/NPI Revenue Process REVI

The JVA function REVI is actually invoked by the CI/NPI netting function NETT. The revenue function REVI actually provides functionality to CI/NPI netting that allows revenues to be booked to the carried CI/NPI partner when payout is achieved. The following function items are preconfigured for the function REVI:

JVA Function
REVI

Process

Function Item

Process

CI/NPI Revenue

CC CN

Booking of revenue to CI partner at payout Booking of revenue to NPI partner at payout CI/NPI offset entry for revenue posting to carried partner

CO

Additional REVI Function Items

For each specific type of revenue that you want to distinguish, you should set up a separate function item with dependent posting rule details. The function item for a revenue type will have the same code as the billing indicator for the revenue type (discussed above under Define Billing Indicators for Posting Revenues Via REV). For example, if you want to distinguish Gross Gas Revenues, you might define a billing indicator of R1 to represent that type of revenue posting. At the same time, you should define a function item for REVI of R1, and the posting rule details for this function item should include R1 as the billing indicator assigned to postings generated via the item. The posting rule details would also include a designation of the posting key for a debit posting as a bill (posting key 01) and a credit posting as a credit memo (posting key 11). Menu Path To review the JVA function items that are preconfigured for the Cutback, CI/NPI netting, and the CI/NPI revenue functions and function items, follow this menu path: From the the Joint Venture Accounting menu, select Environment > Configuration > Processing > Processes > Function items. All the function items configured for JVA will be displayed on the JV Function items: Overview screen. Posting Rules and Posting Rule Details JVA posting rules and posting rule details work in tandem to define the characteristics of the FI posting that results from execution of the accounting transaction controlled by the JVA function and function item. The posting rules for a function state the conditions for selecting entries to be processed by the JVA process represented by the function protocol. The posting rule details provide the features of the FI posting that results from

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the execution of the JVA process represented by the function and function item combination. Preconfigured Posting Rules for Processing CI/NPI Netting The posting rules serve as a filter for selecting entries to be processed by the JVA process. The posting rules are controlled by the function alone, so they apply to all the function items that are controlled by that function. JVA posting rules include the following information: Document type of a debit posting generated by this function in the DB field Clearing procedure to be applied to open items processed by this function in the ClerPrc field List of the Special G/L Entry Indicators (SEI) from which entries should be cleared by this function in the Clear SEI field Indicator if entries without SEIs should be cleared by this function in the ClerBID field
Function
NETT

DB
DE - JVA CI/NPI Posting

ClerPrc
JVACLEAR - JVA Transfer with Clearing

Clear SEI

ClerBID
YES

Document Type of a Debit Posting The document type for a debit posting part of the posting rules specifies the document header information for the FI document that was posted from JVA. Documents of this type will be accessed when the current function (NETT) is executed. In addition to specifying the number range for documents posted using the document type, the document type also limits the types of accounts that can be posted to. You may specify a recovery indicator for postings originating in JVA as part of the definition of a document type. It is important to coordinate the debit document type with the specification for recovery indicator to be applied to the outgoing FI posting which is specified in the posting rule details. The document type for debit postings that will be accessed by NETT indicates that the posting is a CI/NPI posting from the JVA Billing ledger. No recovery indicator is specified for the document type. Clearing Procedure The clearing program JVACLEAR, which is used by NETT, incorporates the billing and operations month functionality used in common by cash calls and other netting processing.

Configuring Billing

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Configuring Billing

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Clearing SEI The entries in the Clear SEI field of the posting rules for the function determine what open items are selected for processing. Since entries are selected for processing by the CI/NPI netting function (NETT) from the JVA Billing ledger based on billing indicator, no SEI is needed to target certain entries in FI. Indicator to Include Entries without SEIs NETT is preconfigured to accept entries without SEIs for processing. Preconfigured Posting Rules for REVI The CI/NPI function for revenue (REVI) consists solely of a designation of the debit document type (DB field) as CI/NPI revenue (document type DV). Menu Path To review the JVA posting rules that are preconfigured for the CI and NPI process, follow this menu path: From the the Joint Venture Accounting menu, select Environment > Configuration > Processing > Posting > Rules. All the posting rules configured for JVA will be displayed by company on the JV Posting Rules: Overview screen. Preconfigured Posting Rule Details for Processing CI/NPI Netting Posting rule details specify the following features of both debit and credit FI postings posted by the execution of the function and function item: Posting keys Subledger (or special entry indicator) Billing indicator Payment block for automatic postings Recovery indicator to be assigned

The preconfigured CI/NPI netting function (NETT) that generates postings to FI is delivered with posting rule details. These posting rule details define the following features of postings that are initiated by the netting function: Posting key for debit and credit entries Billing indicator Payment block for automatic postings

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The following table illustrates configuration of the posting rule details for NETT:
Function Function Item Description Posting Keys DB NETT CU Receivable posting to carrying partner for CI/NPI partner interest expense Posting to operator account for revenue payout to CI/NPI partner Payable posting to posting to carrying partner for CI/NPI partner interest expense 01 CR 11 Special Entry Indicator DB CR Billing Indicator DB 6 CR 6 Payment Block DB A CR A Recovery Indicator DB CR

EN

40

50

VE

21

31

The function NETT has three function items assigned: CU for expense postings to working interest partners who are carrying a CI/NPI partner, EN for operator net postings under CI/NPI arrangements, and VE for revenue postings to partners who are carrying a CI/NPI partner after payout has been reached. Each of these three combinations of the function NETT and one of the function items invokes a different set of posting rule details that specify information to be included in processing the FB05 JV Clearing with Transfer transaction that completes NETT execution. The rules determine the characteristics of the new open items which result from executing CI/NPI. CI Postings to Carrying Partners Under Carried Interest (CI) arrangements, working interest partners share responsibility for carrying the carried partners portion of venture expenses as well as enjoy a portion of the partners revenues along with the ventures operator. When payout is achieved, the carrying partners is billed for the appropriate share of the revenues owed the carried partner through a debit posting of an invoice (posting key: 01) with a JVA billing indicator for an expenditure (billing indicator: 6) and a block on the payment (payment block: A) so that the carrying partners account is debited and a separate invoice is not sent for this charge.
Function Function Item Description Posting Keys DB NETT CU Receivable posting to working interest partner for revenue payout to CI/NPI partner 01 CR Billing Indicator DB 6 CR Payment Block DB A CR

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CI/NPI Postings to the Operator Under both Carried Interest (CI) and Net Profit Interest (NPI) arrangements, the operator assumes responsibility for at least a part of the carried partners expenses and receives at least a portion of that partners revenues as well. When payout is achieved in either case, the operator is billed for the appropriate share of the revenues owed the carried partner through a standard debit posting of an expenditure (posting key: 40) to the operators miscellaneous income holding account. Revenue for the CI/NPI partners share in the venture has been booked to this same account during the period of the CI/NPI arrangement.
Function Function Item Description Posting Keys DB NETT EN Posting to operator account for revenue payout to CI/NPI partner 40 CR

CI/NPI Postings to the CI/NPI Partner For both Carried Interest (CI) and Net Profit Interest (NPI) arrangements, the nonoperating carrying partner receive the revenue for the carried partner as a credit memo (posting key: 21) posting.
Function Function Item Description Posting Keys DB NETT VE Payable posting to CI/NPI partner when payout is reached 21 CR

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Posting Rule Details for the Revenue Function REVI When payout is achieved either under a CI or an NPI arrangement, subsequent revenues for the carried partners share are assigned to the carried partner rather than to the carrying partners. The posting rules details associated with the revenue function REVI and its function items are as follows:
Function Function Item Description Posting Keys DB REVI CC Payable posting to CI partner at payout Payable posting to NPI partner at payout Offset for payable posting to carried partner at payout 0D CR 1D Special Entry Indicator DB CR P P Billing Indicator DB 18 CR 18 Payment Block DB CR Recovery Indicator DB CR

CN

0D

1D

18

18

CO

0D

1D

19

19

Payable Posting to CI Partner When payout is achieved for a CI partner, CI/NPI netting invokes the function REVI and the function item CC. A revenue posting to a CI partner will be posted using the posting key 0D for JVA Revenue to the special GL entry indicator P for JVA Revenue with a JVA billing indicator of 18 for NPI/CI Revenue. Payable Posting to NPI Partner When payout is achieved for an NPI partner, CI/NPI netting invokes the function REVI and the function item CN. A revenue posting to an NPI partner will be posted using the posting key 0D for JVA Revenue to the special GL entry indicator P for JVA Revenue with a JVA billing indicator of 18 for NPI/CI Revenue. Offset Entry for CI/NPI Revenue Posting The offset for a revenue posting to a CI or NPI partner uses the function REVI and the function item CO with the posting key 0D for JVA Revenue to the special GL entry indicator P for JVA Revenue with a JVA billing indicator of 19 for NPI/CI Revenue Offset. Menu Path To review the JVA posting rule details that are preconfigured for the CI and NPI process, follow this menu path: From the the Joint Venture Accounting menu, select Environment > Configuration > Processing > Posting > Rules. All the posting rules configured for JVA will be displayed by company on the JV Posting Rules: Overview screen. To access the specifications for the debit and credit entries generated by a rule, place the cursor on the same line as the rule and select Posting Rule Details. This will display the initial JV Posting Rule Details: Overview screen for the function within the company. To view the

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posting rule details for a specific function and function item combination, select a function item and select Details. This will display the JV Posting Rule Detail: Details screen for the function and function item combination. JVA Automatic Posting Processes The JVA automatic posting processes for CI/NPI must all post to balance sheet accounts. These automatic posting processes are: JV3 for miscellaneous income for NPI JV4 for net expense for NPI JV5 for miscellaneous income holding for NPI

Joint Operating Agreement

A specific CI arrangement always applies solely to one JOA; thus, payout is achieved when the penalty provisions of that one JOA are met. Multiple penalty categories for different types of expenses may be stipulated for a single JOA. In addition to defining objects and processes to control CI/NPI netting in JVA configuration, you must perform some tasks at the JOA and JV level to enable CI/NPI processing to work properly. You must perform the following tasks at the JOA level: Activate CI penalty categories Assign penalty percentage for CI penalty categories Stop payment for non-signatory CI partners

Activate CI Penalty Categories and Assign Penalty Percentages

As part of the configuration of your company in JVA (see Company Set-up Decisions in JVA above), you activate selected CI penalty categories for your company. There are two reasons that a CI partnership arrangement may be initiated for a partner. The partner may decline to participate in an activity for the venture (non-consent), or the partner may have failed to sign the JOA (non-signatory). Before you can apply one of the penalty categories for the company to a partner in a venture, you must both activate the CI penalty category and assign penalty percentages for both non-consent and nonsignatory conditions at the JOA level. During CI netting the penalty percentage for a CI penalty category will be applied to expenses booked to the to cost objects associated with this penalty category. The resulting amount will be added to expenses to determine when payout is achieved. Revenues for the CI partner must exceed expenses for the partner plus penalties in order for payout to be achieved.

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To activate a CI penalty category and penalty percentages at the JOA level, enter the following information on the Change Operating Agreement: Penalty Category Recovery % screen: Code for the CI penalty category that you already set up in JVA Configuration in the P field Percentage to be applied to expenses (must be equal to or greater than 100%) with this CI penalty category to determine the penalty amount to be added to expenses to determine when payout is achieved in the Non-con % (non-consent) field Percentage to be applied to expenses (must be equal to or greater than 100%) with this CI penalty category to determine the penalty amount to be added to expenses to determine when payout is achieved in the Non-Sig % (non-signatory) field

Menu Path To activate penalty categories for a JOA and assign penalty percentages to them, use the following menu path: From the Joint Venture Accounting menu, select Master data > Joint operating agreement > Change. On the Joint operating agreement: Change screen, enter the code for the JOA in the Joint Oper. Agr field and the code for your company in the Company code field and select the Penalty Cat. Rec.% field. Stop Payment for Non-Signatory CI Partners Between the time when a non-signatory partner is placed in CI status and when the agreement is signed, you may want to prevent the partner from reaching payout by putting a stop payment on the partner at the JOA and equity group level. The stop pay will prevent revenues from being accrued for the partner, so payout will not be achieved. This may be necessary for non-signatory CI partners. Menu Path To put a stop pay on a partner within an equity group of a JOA, use the following menu path: From the the Joint Venture Accounting menu, select Master data > Joint operating agreement > Change. On the Joint operating agreement: Change screen, enter the code for the JOA in the Joint Oper. Agr field and the code for your company in the Company code field and select Equity Group. On the Change Joint Agreement: Equity Group screen, select the equity group in which the non-signatory CI partner is an owner and select Select. On the Change Joint Agreement: Partner Shares screen for the equity group, select S for Stop Payment to put a stop payment on a particular partner.

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Joint Venture and Equity Group

At the JV level, you should perform the following tasks to support CI/NPI processing: Assign partners to CI and NPI groups Assign an interest type to CI or NPI partners Identify the carrying partners for a CI partners share and the percentage those partners will carry.

Assign Partners to CI or NPI Groups

CI groups are used to execute netting across multiple venture equity groups within the JOA. There may be changes of ownership of a venture for which a CI or an NPI arrangement is active which does not involve the CI or NPI partners share. In this case, a new equity group will be set up to provide for the new ownership arrangement. You must assign the CI or NPI partner to a CI or NPI group which has already been set up through JVA configuration (See Set up CI and NPI Groups above) to indicate that the the CI or NPI partners revenues and expenses for the equity groups should be combined for the netting that determines when payout is achieved.

Net Profit Interest Group

The NPI group is assigned at the venture and equity group. To assign an equity group to an NPI group for a specific venture, enter the following information on the Change Joint Venture Master: Equity Group screen: Code for the NPI group, which has already been set up in JVA Configuration, to which the equity group will be assigned in the NPIG field

Carried Interest Type and Group

CI groups are used to net expenses and revenues for a CI partner across multiple equity groups. Partners are assigned to CI groups at the partner level within a venture and an equity group. so you will have to assign the same partner to the same group for all equity groups within the venture that should be included in netting the partners expenses and revenues to determine when payout is reached. At the partner level within the venture and equity group, you should perform the following tasks: 1. Identify the interest type of the partners interest 2. Assign the partner to a CI group if the partners share represents a carried interest interest type

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To assign a partner in a venture and equity group to CI or NPI status, you must enter one of the following codes in the T or Interest Type field for the partner on the Change Joint Venture Master: Partner Shares screen for the venture and equity group:
Interest Type 1 2 3 4 Blank Description Carried Interest - Non-Signatory Net Profit Interest Carried Interest - Non-Consenting Working Interest after CI Payout Working Interest

A Carried Interest - Non-Signatory condition exists when the partner has failed to sign the joint operating agreement. A Net Profit Interest exists when the partner yields the working interest to the operator, who henceforth accrues the revenues and expenses for the interest, in return for a specified percentage of revenues that exceed expenses. A Carried Interest - Non-Consenting condition exists when the partner declines to participate in an exploration, development, or production activity for the venture as a contributing working interest partner. A Working Interest after CI Payout condition occurs when the cumulative revenues for the ownership share of a partner who is in CI status exceed the expenses for that share by a specified percentage. If the CI partner is not on stop pay, the system converts the partner from CI status to working interest status upon execution of the CI/NPI posting that establishes the conditions required for the conversion (i.e., revenues exceed expenses by a specified percentage). Several activities may be underway for a venture at the same time, and it is possible that the same partner may decline to participate in more than one of these activities. A new venture or equity group may be set up for each activity. To distinguish between the activities for the purposes of determining when payout is achieved, it is important to use CI and NPI groups (see Assign Partners to CI or NPI Groups above). To assign a partner to a carried interest group, enter the following information on the Change Joint Venture Master: Partner Shares screen: Code for the carried interest group, which has already been set up in JVA Configuration, in the Cgrp field

A CI group must be unique to a single JOA. CI groups must also be unique to an interest type within the JOA. Menu Path

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To assign partners to a CI or an NPI group within an equity group and a venture, use the following menu path: From the the Joint Venture Accounting menu, select Master data > Joint venture >Change. On the Joint Venture Master: Change screen, enter the code for the joint venture in the Joint Venture field and the code for your company in the Company code field and select Equity Groups. On the Change Joint Venture Master: Equity Groups screen, you can assign the equity group to an NPI group. If you want to assign a partner to a CI group for the venture and equity group, select the equity group to which the partner to be assigned to a CI or NPI group belongs and select Details > Partner Shares to access the Change Joint Venture Master: Partner Shares screen on which you can assign the partner to an interest type and a carried interest group.

Identify the Carrying Partners and Their Carrying Percentage

Any number of the partners in an equity group can be assigned as carrying partners for a CI partners share. Each carrying partner must also be assigned a percentage of the CI partners share. To Indentify the carrying partners of a CI partners share and indicate the percentage of the interest that each will carry, enter the following information on the the Change Joint Venture Master: Carried Interest screen: Code for the carrying partner in the Carry Part field Percentage of the CI partners share that the carrying partner will bear in the CarrShare field

Menu Path To assign equity group partners to carry a percentage of a CI partners share, use the following menu path: From the the Joint Venture Accounting menu, select Master data > Joint venture >Change. On the Joint Venture Master: Change screen, enter the code for the joint venture in the Joint Venture field and the code for your company in the Company code field and select Equity Groups. On the Change Joint Venture Master: Equity Group screen, select the equity group affected by the carried interest condition and select Details > Partner Shares. On the Change Joint Venture Master: Partner Shares screen, select the CI partner and select Details > Carried Interest to access the the Change Joint Venture Master: Carried Interest screen on which you can assign partners to carry the CI partners interest.

CI/NPI Netting Processing

Executing CI/NPI Netting with Selection Criteria The screen from which you execute CI/NPI netting (NETT) allows you to specify critieria for selecting open items for processing. Based on this selection criteria, open items are then selected from the JVA Billing ledger. The NETT selection criteria includes:

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Company code Partner, Period and Year

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The following table outlines how the program executes the selection criteria:
Selection Criteria
Company Partner Period and Year OR

Selection Processing
Open item must have company code. Open item must have partner Open item must have posting date less than or equal to the last day of the period and year entered on the screen, or less than or equal to the posting date entered on the screen.

CI Netting For CI partners until payout is achieved, all expenses and revenues for the CI partners share will be booked to the carrying partners according to the percentage of the CI partners share that they are carrying. When revenues exceed expenses by a penalty percentage, revenues that exceed expenses plus the penalty amount will be booked to the CI partner and the CI partner will convert to a normal working interest partner. Changes in venture ownership that are not related CI arrangement do not affect calculation of payout. If consecutive non-consent operations result in a CI arrangement for the same partner, payout is calculated based on the costs and revenues of both operations NPI Netting For NPI partners until payout is achieved, all expenses and revenues for the NPI partners are booked to the operator. When revenues for the share exceed expenses, a percentage of the revenues that exceed expenses will be booked to the NPI partner. The percentage of revenues to be booked to the NPI partner after payout is achieved is specified in the NPI group set up through JVA Configuration.