19 Seiten, Note: 1
1. Table of Contents
3. Company description
3.1. History of the company
3.2. Owners’ structure
3.3. Company structure and business areas
3.4. Subsidiaries and shareholdings
4. Economic Environment
4.1. Branch description in general
4.2. Oil price
4.3. Gas price
4.4. Political instability in countries where OMV is involved
4.5. Gas crisis related to the conflict between Russia and Ukraine
5. Accounting information
5.1. Key accounting policies
5.2. Accounting flexibility
5.3. Likely earnings management motivations
5.4. Accounting strategy and disclosure quality
6. Red flags in the annual report of OMV
6.1. The use of Impairment and deferred taxes for real earnings management
6.1.1. Impairment of “Oil and gas assets”
6.1.2. The importance of deferred taxes for real earnings management
6.1.3. Assets and liabilities held for sale and their effect on earnings
6.1.4. Misstatements in the annual report of
6.2. Other possible red flags which are an indicator for real earnings management
7. Conclusion and final statement
9. List of tables
The aim of this paper is to discover potential sources and methods how earnings management could happen within OMV. To discover the methods, we will briefly look at the outline of the company and its history. The main part of this work will be dealing with accounting policies of the company as well as the CEO change in 2015. The CEO change will be the focus of our research in discovering potential methods and tools for earnings management. In detail, we will focus our work on the years 2014, 2015 and 2016. All the information will be taken from the official annual reports of OMV, which are all available for the public.
The OMV AG or Österreichische Mineralölverwaltung AG is an Austrian petroleum and gas company.
In 1956, the OMV AG was founded to substitute the former Sowjetische Mineralölverwaltung (SMV). The SMV controlled the oil exploration in the UdSSR-controlled sector of Austria. In 1990, the OMV AG started engaging in oil retailing business by opening the company‘s first gas station.
Originally, the OMV AG was hold by the Republic of Austria. After setting up the ÖIAG (Österreichische Industrieholding AG) as a holding for most of the publicly held enterprises owned by Republic of Austria, the OMV AG interest of Republic Austria has been holding by ÖIAG. In 2015, the company name of ÖIAG was converted into ÖBIB (Österreichische Bundes- und Industriebeteiligungen).
At the end of 2016 31.5 % of OMV AG was publicly held via ÖBIB. 24.9 % was owned by International Petroleum Investment Company (IPIC), the public holding for state-owned petroleum enterprises in Abu Dhabi. 0.3 % was treasury shares and 0.4 % was held by employees.
The OMV AG deals in two main product categories: oil and gas. The two business divisions are: upstream and downstream.
Upstream means the exploration of oil and gas. OMV AG does exploration in all continents excepted America. In terms of the company’s organizational structure, the upstream business is divided into the following four global regions: Middle and Eastern Europe, North Sea, Middle East and Africa and Russia. There are also oil and gas reserves in Austria that are owned by OMV AG, but compared with the whole production of the OMV AG that is only marginal. Oil and gas production have nearly the same relevance in term of production volume for the whole business portfolio of OMV AG.
Downstream means refining and market primarily in sense of retailing, i. e. running gas stations. The OMV AG runs one refinery in Schwechat (most famous one), one in Germany and one in Romania. As a component of the gas sector, there is the gas terminal in Baumgarten to receive gas from Russia. OMV AG gas stations exist in 11 countries.
The OMV AG holds 36 % of the shares of Borealis AG, an Austrian composite producer.
The Gas Connect Austria GmbH is a 51 % subsidiary of the OMV AG. The business subject of Gas Connect Austria GmbH is providing pipelines and infrastructure for gas transport. This company is running the gas pipeline system of Austria. Before OMV AG has sold a 49 % share, it was a wholly owned subsidiary of OMV AG.
In Romania, the OMV AG holds 51 % of OMV Petrom SA. That results from one of the biggest share deals that ever had happened in Romania and that had ever been done by OMV AG. During the privatization process, the OMV AG acquired the majority of the public Romanian oil company Petrom.
The oil and gas industry depends each on one single natural resource with volatile price. As Austria has only few natural oil and gas reserves, most of it must be imported or be produced abroad. This fact is a reason for high vulnerability in case of political crises or international economic events.
In Austria OMV AG has a monopoly in the production of oil and gas. On the contrary, the retail sector in the oil industry (gas stations) is very competitive because there are a large number of petroleum retail companies in Austrian market.
In Austria, the gas market and gas price is regulated by the E-Control as public market authority.
The oil price is known to be very volatile. For a refining company, the oil price is one of the most important figures as it is the price of the basic resource. On the one hand, higher oil price means higher retail prices, which are beneficial for the company. On the other hand, higher oil prices mean higher purchase costs in case that the raw oil is not from own oil reserves.
In contrast to a long term before of oil prices on a very high level, in 2014 the oil price decreased because of a supply surplus. The time before, oil price was pushed because OPEC minimized production level.
But in the last years, OPEC increased production level. What is more, in the USA more and more oil is produced via fracking. Some very big economies, e. g. China or some countries in Latin America, also had less demand resulting from less economic growth.
To sum up, over the last three years, oil price sank from more than 100 US-Dollar for one barrel at the beginning of 2014, to level of approximately 30-50 US-Dollar in 2016. The reaction of OMV AG was to increase productivity by reducing costs.
The gas price has very high correlation with the oil price. Therefore, the price of 1 MMBtu was approximately 4 US-Dollar, in 2016 it had a level of 2 US-Dollar. The gas price is the second important factor, because gas businesses this is the second product line of OMV AG.
The exploration business of OMV AG partly takes place in countries with high political instability, e. g. Pakistan, Libya, Tunisia or Yemen.
In 2014, OMV AG stopped gas exploration in Libya because of the actual turbulences. But in 2016 OMV AG restarted its engagement in Libya. Production level in Libya now is not the same than it was before 2014.
The upstream business in Yemen was affected by the actual war. In 2015, there was also a blockade of the sea ports in Yemen. After OMV AG had stopped production in Yemen in 2015, it didn’t restart again up to now.
The engagement in Pakistan was also in public focus as there is rather high political instability. But, security is given there for the OMV AG production. In Pakistan, OMV AG initiated some CSR-projects in order to have good will there and also concerning the media resonance.
OMV AG also owns oil and gas reserves in Russia and has also cooperations with Gazprom. OMV AG and CEO Rainer Seele have close relationship to Russian government.
Since the political changes in Ukraine in 2005 and 2014, there is a political conflict between Russia and Ukraine.
There is often disagreement between Gazprom and Ukraine concerning gas price and payment terms. As Ukraine is an essential transit country, this conflict can influence the gas transport to Austria. For the case of supply default, the OMV AG has reserves for a certain time. Up to now, no material gas supply had happened.
OMV AG tried to construct the South-Stream pipeline in cooperation with Gazprom and other international partners. It should take the route from Russia via the Black Sea and then to Bulgaria. From Bulgaria, it was planned to continue to Austria and Western Europe. Finally, this project has been cancelled because Bulgaria stopped cooperation.
As OMV is an energy producing company that is specialized in the extraction and distribution of oil and gas, oil- and gas reserves are a key element in their business, which should be reflected in their accounting policies. Oil and gas reserves are a major part of the company's assets and are divided into proved and unproved oil and gas properties. These oil and gas properties are a critical factor in the accounting policy of OMV because they are a major part of their assets. Furthermore, the future cashflows and also the success of the company depends on the profitability of these reserves. Therefore, when it comes to the capitalization of oil and gas reserves, one of the most important issues is to determine their value. There are a lot of risks involved in the valuation process because it is hard to say how profitable an oil field will be and how much it will be worth in future.
OMV records their upstream activities according to the successful-efforts method. This means that acquisition costs for geological and geophysical studies before the discovery of proved reserves are expensed and the costs for wells are first capitalized as intangible assets until it is determined whether there exist potentially viable oil or gas reserves. When this is not the case the costs for the wells must be expensed.
For exploration wells which are not yet determined as viable or not OMV explains that the costs continue to be capitalized as long as the following criteria are met:
- Sufficient oil and gas reserves have been discovered that would justify completion as a production well
- Sufficient progress is being made in assessing the economic and technical feasibility to justify beginning field development in the near future
Costs that are related to unproved reserves, like license acquisition costs and capitalized appraisal activities are not amortized but tested for impairment. When the reserves are proved to be commercially viable OMV reclassifies the assets as tangible assets and capitalizes development expenditure on the construction as well as the installation of infrastructure facilities (e.g. platforms) and start to depreciate them when production starts. For the depreciation, they use the unit-of-production method which means that the depreciation charge depends on the level of activity in the period and is not based on years of useful life but on the expected number of units available from the asset. Therefore, the reserves are depleted unit by unit.
For all non-financial assets, there have to be carried out impairment tests when there are indications for their necessity. For the calculation of value in use OMV apply a model which contains estimated future cashflows which are discounted by a discount rate that should reflect the specific risks of the asset. When an asset's recoverable amount is lower than its carrying amount, impairments and write-offs are considered.
Of course, not only these assets in the upstream business are important but also the tangible assets which are part of the downstream segment (e.g. gas pipelines, gas power plants, storage tanks, pipeline systems) play an important role. These assets are recognized at cost of acquisition or construction and depreciated using a straight-line method on the basis of their estimated useful life.
Another issue that has to be considered in the oil and gas industry is the importance of concessions and licenses. These intangible assets are usually not amortized as long as they are related to unproved reserved but they are tested for impairment. When they are related to proved reserves they are amortized on the basis of their useful life or the contract duration.
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