New Developments on revenue transparency in extractive industry financial reporting

07 September 2010 | News story

By Michelle de Cordova - The global Publish What You Pay (PWYP) campaign focuses on disclosure of company payments and government revenues from extractive industry. It aims to support citizens of resource-rich developing countries in holding their governments accountable for management of revenues from oil, gas and mining – with the objective of breaking the “resource curse”, so that extractive industry contributes to social development, rather than being a source of corruption and conflict.

This year has seen two internationally-important policy developments in the area of revenue transparency relating to PWYP.

The Dodd-Frank US financial reforms act was signed into law in July. Among a mass of measures relating to the financial crisis, the act contained a significant clause on revenue transparency. It requires publicly-traded extractives companies to file independently-audited statements on their payments to foreign governments with the Securities and Exchange Commission (SEC) – thus mandating a level of disclosure that only a few major extractives companies have undertaken voluntarily. This measure not only impacts US-based oil and gas and mining companies, but is likely to affect foreign companies such as Rio Tinto, BHP Billiton, BP and Shell whose shares are traded on US exchanges. The next step is a rule-making process at SEC to define the details for the implementation of the legislation, including the level of disaggregation of payments that will be required.

Meanwhile, the International Accounting Standards Board (IASB) has been considering the need for a special International Financial Reporting Standard (IFRS) to deal with the unique challenges and risks of extractive industry. IFRS are the principles underlying financial reporting in more than 100 countries around the world. They are used throughout Europe and will likely be adopted by the US in the longer tem. One of the issues raised in the IASB extractives discussion paper is whether information relating to revenue transparency should be included within financial reporting. PWYP has been calling on IASB to include requirements to disclose payments to governments, as well as to disaggregate information on extractive activities on a country-by-country basis. There is support for this in some parts of the investment community, as the information may provide additional insight into the degree of social risk faced by companies. A further issue of environmental and social relevance in the IASB proposals is the extent to which oil and gas companies will be required to disaggregate data by type of resource and production method. As conventional reserves become increasingly scarce or difficult to access, companies are turning to an array of unconventional oil and gas assets and technologies – such as ultra-deepwater oil, thermal heavy oil, and oil sands mining. Although the final product may be the same – a barrel of oil - each production method is associated with a specific set of environmental and social challenges. Disclosure standards that allow data on different types of production to be aggregated can mask these risks. IASB will decide later this year whether to go forward with the initiative to develop a standard.