SAP White Paper

JOINT VENTURE
ACCOUNTING
WITH mySAP
OIL & GAS

THE BEST-RUN E-BUSINESSES RUN SAP

 Copyright 2001 SAP AG. All rights reserved.

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CONTENTS
1.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2.
2.1

Component Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The SAP JVA Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3.
3.1
3.2
3.3
3.5
3.6

Master Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint Operating Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.

Data Capture and Real-Time Processing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

5.
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
5.15

Overview of Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead Cost Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cutback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Suspense Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint Venture Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partner Netting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset and Material Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Profit and Carried Interest Profit Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Operated Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-Company Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balanced Books by Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Account Switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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1. INTRODUCTION
In some industries, like the oil and gas industry, certain ventures are considered high risk, demanding extensive capital
investment and a long payback period. To minimize risks, companies develop partnerships called joint ventures. A joint venture consists of an operating partner (operator) and one or more
non-operating partners who combine monetary or personnel
resources to share a projects expenses and revenues. The operator manages the venture, arranges venture activities, and maintains accounting records. The operator remits venture expenses,
collects revenues, and distributes these to the partners, according to their ownership shares. This process is known as Joint
Venture Accounting (JVA).

2. COMPONENT OVERVIEW
2.1 THE SAP JVA COMPONENT

SAP designed SAP JVA for joint venture partnerships. SAP JVA is
a component of the mySAP Oil & Gas industry solution. SAP
JVA uses functions from the components Financial Accounting
(SAP FI), Controlling (SAP CO), Asset Management (SAP AM),
Materials Management (SAP MM), Plant Maintenance (SAP PM),
and Project System (SAP PS). SAP JVA includes the following
features and benefits:
Joint Venture Data Capture captures and codes all transactions, including vendor invoices, inventory movements and
allocations, with an option to produce balanced venture
books.
Cash Calls request cash payments from partners for future
venture operations.
Partner Billing calculates partner shares for venture expenses and revenue, monitors partner cash calls and receivables,
and produces a partner bill containing all relevant information.
Overhead calculates different types of overhead as agreed in
the Joint Operating Agreement (JOA).
Allocations distribute billable and non-billable costs (such as
facility, payroll, and related expenses) to cost centers or projects throughout the allocation cycle.
Multi-Currency Processing supports the multi-currency
requirements of typical venture activities.

3. MASTER DATA
SAP JVA allows you to process expenses and revenues for joint
ventures and assign them to partners. Five SAP JVA master data
objects are used to associate expenses with ventures and their
partners:
Joint Operating Agreement
Equity Group
Venture
Equity Type
Recovery Indicator
3.1 JOINT OPERATING AGREEMENT

At the outset of a joint venture arrangement, one partner agrees

to develop and manage the project and is called the operator.
The JOA is the contract between JVA partners, and it governs
all operations. The JOA contains all information for an operating agreement, such as allowed overhead provisions.

3.2 EQUITY GROUP

The equity group defines joint venture partners, their participation, and it reflects each partners contractual interest. Equity
groups are defined in the JOA, and are assigned to the venture.
In SAP JVA, the following types of ownership arrangements are
possible:
Operated The operator in this equity group holds less
than a 100% share. The other partners own the remaining
shares.
Non-Operated This represents a companys interest in a
joint venture operated by another party. Only the companys
non-operated interest is reflected on the equity group.
Non-Operated, On-Billing In this type of ownership, the
company can re-bill part of its share of a non-operated venture to third parties. The equity group stores the companys
share and the proportion passed to other parties.
Corporate The operator has a 100% share.
SAP JVA uses the SAP R/3 functions of accounts receivable, to
manage joint venture partner transactions, by defining all joint
venture partners as accounts receivable customers.
3.3 VENTURE

The venture is the master data object used in SAP JVA to capture
expenditures and revenues. The venture references the JOA that
governs the accounting activities related to that venture. It links
related SAP R/3 objects, such as cost centers, projects, orders,
and profit centers to the JOA. By using equity types, the venture and its related cost objects are tied to an equity group at a
specified time. This allows effective date allocation of joint venture expenditures to non-operating partners.

3.5 EQUITY TYPE

3.6 RECOVERY INDICATOR

The JOA has different development stages, such as engineering

and design, construction, and production. Different partners
participate at each stage. SAP manages the different stages by
using equity types, even if corresponding time frames are overlapping. The equity type links the venture and the equity group
contained in the JOA. This relationship between JOA, venture,
and equity type defines ownership, and changes of ownership
throughout the life of the property.

The recovery indicator divides general ledger account balances

into subclasses, such as billable and non-billable adjustments.
Because it carries a billable or non-billable indicator, it determines expenditures to be billed to venture partners. The recovery indicator is also the basis for operational gross and net
reporting and can be used in SAP CO processing, such as allocations.

JOA

VENTURE A

VENTURE B

EQUITY TYPE 1

EQUITY TYPE 2

EQUITY TYPE 2

ENGINEERING & DESING

CONSTRUCTION

CONSTRUCTION

VALID AS OF
01/02/2000

A
33,3%
B
33,3%

C
33,3%

EQUITY GROUP 1
VALID AS OF
05/17/2001

A
50%

B
25%
D
25%

EQUITY GROUP 2
VALID AS OF
02/11/2002

A
75%

VALID AS OF
04/20/2001

A
50%

B
25%

VALID AS OF
01/02/2000

B
33,3%

D
25%

EQUITY GROUP 4
VALID AS OF
11/07/2001

A
33,3%
B
33,3%

C
33,3%

EQUITY GROUP 5

A
33,3%

C
33,3%

EQUITY GROUP 1
VALID AS OF
05/17/2001

A
25%
B
25%
D
25%

C
25%

EQUITY GROUP 6

C
25%

EQUITY GROUP 3

FIGURE 1: MASTER DATA IN SAP JVA

4. DATA CAPTURE AND REAL-TIME PROCESSING

SAP JVA captures all expenditure and other transactions by using
SAP R/3 objects, such as cost centers, projects, orders, and profit centers. These objects contain specific joint venture information. These details define the venture, equity group, and recovery indicator assignments to be used when posting transactions
related to the cost objects.
Joint venture documents are created in the accounting interface in real time and are stored in separate joint venture database tables for use in other JVA processes, such as cutback and
billing.

The SAP JVA accounting interface provides the following

features for accurate cost and revenue allocation:
Manipulation of the recovery indicator ensures that all expenses are distributed between the partners at the correct time
during the procurement process. These include goods receipts,
invoice receipts, and payment.
Additional posting lines, such as taxes, discounts, and freights
include joint venture information. These posting lines may
then be split in SAP JVA documents.

BUSINESS PROCESSES
MM

SD

HR

FI

CO

GOODS
RECEIPTS/
ISSUES

SALES
ORDER

TIMESHEET
POSTINGS

PLAYMENTS

ALLOCATIONS/
OVERHEADS

REAL-TIME PROCESSING
ACCOUNTING INTERFACE

JVA
FI

CO

JVA

AM

FI DOCUMENTS

CO DOCUMENTS

JVA DOCUMENTS

AM DOCUMENTS

FIGURE 2: DATA CAPTURE IN SAP JVA

5. OVERVIEW OF FUNCTIONS
SAP JVA is a complete solution for joint ventures, using unique
transactions, programs, and objects, together with SAP R/3
components. The following information provides a high-level
introduction to SAP JVA.
5.1 CASH CALL

Cash calls allow the operator to invoice partners for future estimated venture costs. SAP JVA cash calls are available for operated
and non-operated ventures. You can post gross or net cash call
requests, and you can post them by venture or project.

In an operated venture, you can invoice all partners or individual partners for future expenditure. In addition, you can define
cash call dollar thresholds at the venture, project, or partner
level. For operated ventures, cash call requests and receipts are
passed on to the billing process, and are completely integrated
with accounts receivable. Non-operated cash calls are integrated with accounts payable.

MONTHLY
TRANSACTION
JVA
REPORTING

SETTLEMENT

JVA NETTING

ALLOCATIONS

CLOSE FOR FI
FISCAL PERIOD
BILLING
PROCESS
(PAPER OR EDI)

JOINT VENTURE
OVERHEAD
CLOSE FOR BILLABLE JVA
TRANSACTION

CI/NPI
PROCESSING

SUSPENCE
PROCESSING

CASH CALL
RECLASSIFICATION

EQUITY CHANGE
PROCESSING

OUTBACK

FIGURE 3: JVA MONTH END CYCLE

5.2 OVERHEAD COST CALCULATION

5.3 CUTBACK

Joint venture operators incur indirect expenses, and can charge

overheads to their partners to recover these costs. Recovery of
costs is often based on a percentage of expenditure, or on the
usage or activity of the venture. In SAP JVA, overheads are based
on JOA criteria, and the charges for non-operating partners are
based on their equity shares. SAP JVA allows the following types
of overhead cost calculation:
Percentage-Based Overheads are based on percentages and
types of costs defined in the JOA.
Stepped-Rate-Based Overheads are based on specified overhead percentages and predefined dollar thresholds for an
individual project.
Statistical-Rate-Based Overheads are based on a defined
statistical quantity and the contractual overhead rate defined
in the JOA.

The operating partner carries all of the operating costs of a venture throughout the accounting period. SAP JVA analyzes
expenditures and creates invoice amounts for billing the partners. This process typically occurs at the end of the accounting
period after all transactions have been posted and allocations
have been run. Cutback is the process of allocating these transactions to the operator and the non-operating partners, according to their equity shares.
Cutback also processes expenses for ventures involving special
partnership arrangements, such as carried interest, net profit
interest, or suspended partners, as well as suspended equity
groups or projects. In some countries, transactions between
SAP JVA partners are subject to value added tax (VAT). The cutback process also handles VAT postings to joint venture partners.
5.4 SUSPENSE PROCESSING

Suspense processing allows the operator to continue regular

processing in the event of dispute or uncertainty. SAP JVA
provides three levels of suspense processing: partner suspense,
equity group suspense, and project suspense.
Partner-level suspense allows you to suspend a partner or partners in an equity group. During cutback, charges for the suspended partner are not processed. The operator retains these
charges temporarily. This allows the operator to generate
billings to the remaining partners in the equity group. After
the partner is released from suspense, the previously unprocessed charges are posted and recognized as open items in the
partners accounts receivable account.
Equity group and project suspense functions are designed for
circumstances in which the ownership of an equity group or
project is undefined, but the operator wishes to proceed with
the project. The operator carries 100% of expenditure related to
suspended items, until their release.

10

5.5 EQUITY ADJUSTMENT

5.6 JOINT VENTURE BILLING

Equity group partners can transfer their interest to other partners. Pre-cutback equity change and equity change management can meet this requirement by allowing ownership changes
in the current period and in prior periods.

Joint venture billing allows the operator to invoice partners for

expenditure and revenues, and to issue cash calls. You can send
different levels of supporting information with the invoice,
down to the line-item level of the document that created the
billable item. The billing statements are fully configurable and
can accommodate special billing formats required in different
countries or industries. SAP provides templates for the most
common billing formats. You can send the joint venture bill
on paper or by Electronic Data Interchange (EDI).

Ownership changes during the current period can result in

expenditure being posted across multiple venture or equity
groups. Pre-cutback equity change allows the operator to correct these transactions, and to cut all venture expenditures
back to a single venture or equity group combination. This
process reverses postings to the original venture or equity group,
and books them to the active venture or equity group combination at month end. These adjustments are made only in the
JVA ledgers. The original entries in the originating SAP R/3
components remain unaffected, thereby preserving the audit
trail.
Equity change management is designed to make retroactive
changes at the accounts receivable level for prior period ownership adjustments. SAP JVA determines the net change in share
for each partner and the operator, and posts an adjustment
document to the affected partners.

5.7 PARTNER NETTING

SAP JVA also supports a process called netting. The netting

process calculates the sum of a partners open expenses and
cash calls, within the venture, to a single residual entry of outstanding expenses. It then posts that entry to the partners
accounts receivable account for billing.
5.8 ASSET AND MATERIAL TRANSFERS

SAP provides asset and material transfer capabilities for industry

sectors where joint operations are necessary. SAP JVA functions
in SAP Asset Management (SAP AM) and SAP Material Management (SAP MM) allow asset and material transfers with joint
venture properties at the current replacement price, rather
than at historical cost. Originally designed for upstream exploration, development, and production companies, the asset and
materials transfer function complies with the Council of Petroleum Accountants Society (COPAS) accounting and reporting
standards. The following summary highlights features in joint
venture SAP AM and SAP MM.

11

SAP MM Functions
SAP MM can use the current replacement price for material
movements between warehouses and goods issues, and returns
to and from assets and projects.
For the material movements mentioned above, the operators
inventory and expense accounts are charged with moving
average price, while joint venture partners are billed CRP
according to the current replacement price.
For the oil and gas industry, you can split the current
replacement price between tangible and intangible development costs.
SAP AM Functions
SAP AM allows you to track the operators net asset cost, as
well as gross cost. Three additional asset books contain all
billable, non-billable, and total gross book costs associated
with the asset.
You can price asset transactions, such as transfers, retirements,
and sales, according to the current replacement price, when
joint venture properties are involved. The joint venture partners are billed or credited according to the current replacement price, while the operators cost is removed from the
books together with the historical cost. Estimated book costs
are used if the historical cost is unknown.

12

5.9 CONTROLLING

In SAP JVA, you need to allocate various costs among multiple

cost objects for distribution to the ventures. You must also be
able to bill joint venture partners through cutback. Allocation
is the process by which billable and non-billable costs, such as
facility, payroll, and related expenses, are distributed to cost
centers or projects receiving services or benefits. It is based on
an equitable form of distribution.
The SAP CO processes assessments and distributions, and
facilitates allocations. Settlement consists of the final allocation
of costs from orders or Work Breakdown Structure (WBS)
elements to cost centers, projects, fixed assets, general ledger
accounts, networks, materials, sales orders, or cost objects
defined in the settlement rule for the sender. To enhance the
core functions of SAP CO, SAP JVA addresses the complex
requirements of distributing costs related to allocations and
settlement.
SAP JVA allows you to determine whether or not billable items
should be charged to the joint venture partner, based on the
information of either the sending cost object or the receiving
object. This is important particularly if the venture information
in the sending and receiving objects is different. A user-defined
manipulation rule of the recovery indicator governs this
feature.

5.10 NET PROFIT AND CARRIED INTEREST

PROFIT PARTNERS

A Net Profit Interest is one in which the non-operating partner

has interest in the venture, but does not pay venture development or operation expenditure. If revenue exceeds expenditure,
this partner receives a percentage of the revenue. This type of
interest can occur when a prospective partner proposes a venture opportunity to the operator, but chooses to remain inactive. The operator may give the partner a cash payment and an
NPI.
A carried interest arrangement is one in which the operator,
with or without the assistance of other partners, carries a portion or the total interest of another partner. A carried interest
arrangement commonly results when a partner exercises a
non-consent provision contained in the JOA. In a carried
interest arrangement, you can penalize the non-participating
partner by defining penalty percentages for the venture development and operational costs assumed by other partners. Revenue must exceed these costs before the partner can resume
participation in the venture.

5.11 NON-OPERATED PROPERTIES

SAP JVA facilitates non-operating partners. The processing of

incoming, non-operated invoices is fully integrated with SAP
accounts payable functions. You can record these invoices
online. In addition, cash call features are available for nonoperated ventures at the venture and project level. You enter
cash call requests for outside operators online and these are
fully integrated into accounts payable for payment. You can
also process the non-operated invoice by using SAP FI inbound
EDI functions.
5.12 INTER-COMPANY FUNCTIONS

An operator may have an affiliated company (a legal entity

within the same SAP system) as a partner. In this instance, SAP
JVA allows you to book inter-company entries on the books of
the operator and all affiliates. By identifying these relationships
through inter-company mappings of accounts and other relevant objects, SAP JVA automates processing of inter-company
joint venture transactions. It does this by posting entries directly on the affiliated companys books through the cutback
process.

13

5.13 BALANCED BOOKS BY VENTURE

5.14 BANK ACCOUNT SWITCHING

Operators are often obligated to produce balanced venture

financial statements for non-operating partners. For this purpose, SAP JVA allows you to balance books by venture. If a
document without balancing-entries-by-venture is posted to
the joint venture ledger, the data capture process creates the
inter-venture booking to balance the document by venture.

Outside North America, large ventures are commonly funded

from one or more dedicated bank accounts called Venture
Bank Accounts (VBA). Depending on the venture, SAP JVA
determines the bank account from which an invoice is paid. If
the invoice applies to more than one venture, the venture with
the greatest expenditure on the invoice determines the paying
bank. In the event of payments from a central bank, the existence of multi-venture invoices, or inter-venture allocation or
settlements, SAP JVA calculates the bank account movements
required to restore each account to its correct position. SAP
JVA also produces correspondence, notifying the bank to make
all required transactions for the movement of cash between
accounts. In addition, bank account switching produces all
required settlement documents, and can calculate all applicable interest.
5.15 AUDIT SUPPORT

SAP JVA can give non-operating partners detailed accounting

transaction records in an electronic format to assist transaction
audits. These records are based on operator-defined selection
criteria and can be restricted at multiple levels.

14

6. SUMMARY
The oil and gas industry recognizes the value of joint venture
agreements in minimizing the risks associated with capitalintensive projects. By working closely with customers, and
collaborating with key technology and implementation
partners on an ongoing basis, SAP ensures that SAP JVA facilitates smooth management, with great flexibility for growth.
SAP JVA is a complete accounting system, supporting joint
venture operations throughout the world.
SAP AG
Neurottstrasse 16, 69190 Walldorf, Germany
Mailing address: 69189 Walldorf, Germany
SAP information service:
Tel. +49 (180) 5 34 34 24
Fax +49 (180) 5 34 34 20
www.sap.com

15

THE BEST-RUN E-BUSINESSES RUN SAP

SAP AG
Neurottstrae 16
69190 Walldorf
Germany
T +49/1805/34 34 24
F +49/1805/34 34 20
www.sap.com

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