ANNEX B
Republic of the Philippines
DEPARTMENT OF ENERGY
Taguig City
Metro Manila, Philippines
ACCOUNTING PROCEDURES
Attached to and made an integral part of the RE Contract between the DEPARTMENT and
the RE DEVELOPER dated _____________, 20__.
ARTICLE I:
1.
GENERAL PROVISIONS
Definitions
The Accounting Procedures herein provided for is to be followed and observed in the
performance of all obligations under the RE Contract. Unless otherwise specified, the
terms used herein shall have the same meaning as those defined in the RE Contract.
2.
Purpose
Generally, the purpose of this Accounting Procedures is to set out principles and
procedures of accounting which will enable the DEPARTMENT to effectively monitor the
RE DEVELOPER’s Gross Income derived from the sale of RE produced and/or sale of
electricity from the utilization of RE resources, as applicable, for purposes of determining
the corresponding Government Share pursuant to the terms of the RE Contract and
compliance by RE DEVELOPER with its fiscal obligations under Republic Act No. 9513
(“Act”). Gross Income shall be equivalent to gross sales less sales returns, discounts and
allowances, and the definition of Cost of Goods Sold shall be consistent with Section 27 of
the 1997 Tax Code, as amended by Republic Act No. 9337.
3.
Government Share from Geothermal Energy Resources
a)
For an integrated geothermal operation, the Government Share of one and a half
percent (1.5%) shall be based on the Gross Income from the sale of electricity
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generated from geothermal energy. The Cost of Goods Sold shall be the direct cost
of the generation of electricity.
b)
For steamfield development and production only, the Government Share of one and a
half percent (1.5%) shall be based on the Gross Income from the sale of the
geothermal steam. The Cost of Goods Sold shall be the direct cost of the geothermal
steam production.
c)
For geothermal power plant operation only, the Government Share of one and a half
percent (1.5%) shall be based on the Gross Income from the sale of electricity
generated from geothermal energy. The Cost of Goods Sold shall be the direct cost
of electricity generated from geothermal energy and the direct cost of the geothermal
steam.
4.
Conflicts
If there should be any conflict between the provisions of this Accounting Procedures
and the RE Contract, the provisions of the RE Contract shall prevail.
5.
Working Language and Units of Account
The RE DEVELOPER shall maintain all accounts, records, books, reports and statements
for the Geothermal Operations in the English language. The amounts shall be recorded in
the United States Dollars and/or Philippine Pesos of the RE DEVELOPER in accordance
with the generally accepted accounting practices used in the Philippines;
6.
Currency Translation
For conversion purposes, for transactions between United States Dollars and Philippine
Pesos or any other currency, the applicable exchange rate shall be the exchange rate as
quoted by the Bangko Sentral ng Pilipinas (or Philippine Dealing System) at the close of
business on the last banking day of the same month of disbursement or receipt, or if there
were no such quotations on that day, then such rates on the most recent day in such
preceding month during which were such quotations or on such other basis as may be
agreed upon by the Parties. Provided, however, that in the event of a significant change
in the rate of exchange after the end of the preceding month, then all transactions after
such re-evaluations until the end of that month shall be translated at the rates in effect on
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the day of the transactions.
7.
Accounting Records and Statements
All accounting records directly related to the Geothermal Operations shall be
established and maintained by the RE DEVELOPER within the Philippines.
The RE DEVELOPER shall render to the DEPARTMENT a statement of all charges and
credits to the Geothermal Operations summarized by appropriate classifications indicative
of the nature thereof.
Notwithstanding the generality of the foregoing, the RE DEVELOPER shall make regular
statements relating to the Geothermal Operations as follows:
a)
b)
c)
d)
Expenditure Reports/Investments;
Statement of Revenues and Cost of Goods Sold;
Schedule of Government Share; and
Schedule of Budget for the periodic Work Program or Work Plan.
The Operations Return and other financial reports should be accomplished and submitted by
the RE Developer to the DEPARTMENT on a per contract basis within sixty (60) days after
the end of each calendar quarter.
8.
Adjustments
Subject to the provisions of Section XX (Books of Accounts and Audits) of the RE
Contract, all statements rendered to the DEPARTMENT by the RE DEVELOPER
during any Fiscal Year shall, conclusively be presumed to be true and correct and
reasonable unless within the period provided in said Section, the DEPARTMENT takes
written exception thereto and makes claim on the RE DEVELOPER for adjustment.
Failure on the part of the DEPARTMENT to make written claim on the RE DEVELOPER
for adjustment within such period shall establish the correctness and reasonableness thereof
and preclude the filing of exceptions thereto or making claims for adjustment thereon.
9.
Arm’s Length Transactions
Unless otherwise specifically provided for in the RE Contract, all transactions giving rise
to revenues or expenditures which will be credited or charged to the accounts
prepared, maintained or submitted hereunder shall be conducted at arm’s length or on
such a basis as will assure that all such revenues or expenditures will not be lower or
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higher, as the case may be, than would result from a transaction conducted at arm’s length
on a competitive basis with third parties.
10.
Audit and Inspection
Without prejudice to statutory rights, the DEPARTMENT, upon at least fifteen (15)
calendar days advance written notice to the RE DEVELOPER, shall have the right to
inspect and audit, during normal business hours, all records and documents supporting
costs, expenditures, receipts and income, such as the RE DEVELOPER’s accounts,
books, records, invoices, cash vouchers, debit/credit notes, price lists or similar
documentation with respect to the Geothermal Operations conducted in each Fiscal
Year, within twenty four (24) months (or such longer period as may be required in
exceptional circumstances as agreed by both parties) from the end of such Fiscal Year.
The DEPARTMENT shall undertake the conduct of the audit through its own
representatives and the costs of such audit shall be borne by the RE DEVELOPER as a
general and administrative cost. The RE DEVELOPER shall not be required to incur any
costs and expenses as a consequence of any such access; provided, that the RE
DEVELOPER, if requested by the DEPARTMENT, shall provide reasonable assistance
and logistical support (including without limitation, suitable office space, equipment,
stationery, local area transportation, and other like resources) to the representatives
authorize by the DEPARTMENT using its existing resources.
In conducting the audit, the auditors shall be entitled to examine and verify, at
reasonable times, all charges and credits relating to the RE DEVELOPER’s activities
under the RE Contract and all books of accounts, accounting entries, material records
and inventories, vouchers, payrolls, invoices and any other documents, correspondences
and records considered necessary by the DEPARTMENT to audit and verify the charges
and credits. The auditors shall also have the right, in connection with such audit, to visit
and inspect, at reasonable times, all sites, plants, facilities, warehouses and offices of the
RE DEVELOPER directly serving the Geothermal Operations, and to physically
examine other properties, facilities and stocks used in Geothermal Operations, wherever
located and to question personnel associated with those operations.
11.
Revision of the Accounting Procedures
By mutual agreement in writing between the DEPARTMENT and the RE
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DEVELOPER, this Accounting Procedures may be revised from time to time, in writing
and signed by the Parties, stating the date upon which the amendments shall become
effective.
ARTICLE II:
CLASSIFICATION
AND
DEFINITION
OF
COSTS
AND
EXPENDITURES
1.
Segregation of Costs
The costs shall be segregated in accordance with the purposes for which such costs and
expenditures are made. All costs and expenditures allowable under Article III, relating to
Geothermal Operations, shall be classified, defined and allocated as set out below in this
Article. Expenditure records shall be maintained in such a way as to enable proper
recording and allocation to each Production Area and Development Area. The costs below
shall cover the whole process of exploration, development, production and utilization of
RE resources and actual production/operation of RE Systems/ facilities of the RE
DEVELOPER.
The RE Developer shall maintain a separate accounts classified into exploration stage
expenditures, development and production stage expenditures, cost of goods sold, tangible
investments, marketing expenses, general and administrative expenses, other expenses and
other income.
The report to be submitted by the RE DEVELOPER to the DEPARTMENT in this regard
shall be in the form required by the DEPARTMENT.
2.
Depreciable/Amortizable Tangible Investments/Assets
a)
Tangible Investments/Assets
Plant, property and equipment including production, processing, storage, transmission
lines, transportation and other facilities and equipment used directly in the
Geothermal Operations. Cost of an item of plant, property and equipment shall
comprise of, but not limited to:
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i.
Cost of construction including development costs and services;
ii.
Purchase price, including import duties, and non-refundable purchase taxes,
after deducting trade discounts and rebates,
iii.
Any interest charges, fees or other consideration paid or suffered in respect of
financing
the
Tangible
Assets
during
development/commercial
stage
Geothermal Operations including but not limited to Financial Advisor Fees,
investment banker’s fees, registration and documentary stamps fees and all
closing costs.
iv.
Any costs directly attributable to bringing the asset in commercial operation or
ready to use.
v.
Actual restoration costs incurred in accordance with the requirements of the
environmental compliance certificate.
3.
Direct Survey Expenditures
a.
Survey expenditures include all geological and geophysical expenditures incurred in
performing activities such as geological studies and mapping, and geophysical
prospecting, the various phases of which cover data acquisition, data processing,
interpretation and restudies.
b.
The costs of contracted and company performed services should be segregated into
contracted services and in-house costs. Contracted services, include those, which
were supplied by third parties and covered by contracts/agreements. In-house costs
should include that portion of exploration survey, which are directly performed by
the RE Developer.
4.
Direct Well Costs
Included are the exploration, appraisal and development drilling costs. The following
activities are covered:
a.
Exploration – Location of potential reservoir including the drilling of exploratory
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wells. If the activity is included in the approved Work Program, the corresponding
cost shall be classified as Deferred Cost. Once commercial operation is declared, the
amortized amount shall form part of the Cost of Goods Sold.
b.
Development – Activities needed to obtain access to proved reservoir and to provide
facilities for extracting, gathering steam for delivery to the power plant. More
specifically, development costs and other costs directly identifiable with
development activities are costs incurred to:
i.
Gain access to and prepare well locations for drilling, including surveying well
locations for the purpose of determining specific development drilling sites,
clearing ground, draining, road building and relocating public roads, gas lines
and power lines, to the extent necessary in developing the proved reserves.
ii.
Drill and equip development well, including the cost of well equipment such as
casing, liner testing assembly and the wellhead assembly.
5.
Production Cost
Production costs are generally regarded as those expenditures which are absolutely
essential to the production operations. This includes the set of activities, which involves
the actual extraction of geothermal fluid for commercialization and if applicable, for power
generation.
Direct production expenses should be allocated to the functional grouping or classification
such as but not limited to the following:
6.
i.
Well operations and maintenance
ii.
Separation and measurement
iii.
Fluid Collection and Re-injection System (Steam Gathering and Waster Disposal)
iv.
Others
Power Generation Costs
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Power generation costs are generally regarded as to include those expenditures relating to
the cost of geothermal steam produced and/or purchases, labor and overhead costs, plant
depreciation and operations and maintenance costs and other charges, variable and fixed
costs, which are necessary for the generation and transmission of electricity.
ARTICLE III:
GROSS INCOME, COSTS OF GOODS SOLD AND
EXPENDITURES OF THE RE DEVELOPER AND
GOVERNMENT SHARE
1.
Gross Income and Other Income
a.
Gross Income shall be valued in accordance with the RE Contract;
b.
Other incidental income from the RE utilization, generation,
transmission and sale of electric power are as follows:
i.
Revenue received from third parties for the use of RE facilities, the cost of
which has been charged to the accounts under the RE Contract.
ii.
Proceeds from sale of By-Product derived from geothermal fluids and heat
energy in the earth.
iii.
Other income which is directly attributed to Geothermal Operations
excluding those generally considered gains from activities not involving RE
Resources, such, as but not limited, to dividend on telephone subscription.
2.
Costs and Expenditures
The costs and expenditures incurred by the RE DEVELOPER on Geothermal
Operations pursuant to the RE Contract as classified under the headings referred to in
Article II shall be allowable for purposes of the RE Contract as part of Cost of Goods
Sold, subject to audit as provided for herein.
a)
Amortization of Surface Rights and Easement Rights
Surface Rights and Easement Rights shall refer to all direct costs attributed to the
acquisition, renewal or relinquishment of surface rights and easement acquired and
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maintained in force for the Geothermal Operations hereunder when paid by the RE
DEVELOPER in accordance with the provisions of the RE Contract.
b)
Labor Cost – Regular and Contracted
i. Salaries, wages and benefits of the RE DEVELOPER’s employees directly
assigned in the Contract Area of the Geothermal Operations of the RE Contract.
Salaries and wages shall include everything constituting gross pay to employees
as reflected on the RE DEVELOPER’s payroll including, but not limited to,
overtime pay, rest day pay, holiday pay, vacation pay, and vacation travel pay,
sickness and disability benefits, bonuses and customary allowances;
ii. The costs of expenditures or contributions made pursuant to obligations
imposed by the governmental authority on the labor costs or salaries and
wages of employees directly assigned in the Contract Area;
iii. Personal income and fringe benefit taxes of employees directly assigned in the
Contract Area where and when they are paid by the RE DEVELOPER to the
Government of the Philippines for the employee, in accordance with
the RE DEVELOPER’s standard personnel policies;
iv. The RE DEVELOPER’s cost of established plans for employee’s group life and
accident insurance, health insurance, pension retirement, thrift and other
benefits of like nature for employees directly assigned in the Contract Area;
v. For home office based employees, salaries and wages and employees benefits
shall be charged as part of Direct Labor Costs based on the percentage of time
directly benefited the Geothermal Operations in the Contract Area.
c)
Materials, Equipment and Supplies
i. General
As far as it is reasonable, practicable and consistent with efficient and
economical operation, only such materials shall be purchased or furnished by
the RE DEVELOPER for use in the Geothermal Operations as may be required
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for use in the reasonably foreseeable future and the accumulation of surplus
stocks shall be avoided. Materials and equipment held in inventory shall only be
charged as Cost of Goods Sold when such materials and equipment are
removed from inventory and used in the Contract Area.
ii. Value of materials charged to the account under the RE Contract
Materials, equipment or supplies purchased by the RE DEVELOPER for use in
the Geothermal Operations shall be valued to include invoice price less trade
and cash discounts, if any, plus purchase and procurement fees freight and
forwarding charges between point of supply and point of shipment, freight to
port of destination, insurance, taxes, custom duties, consular fees, brokerage fees,
other items chargeable against imported material and, where applicable,
handling and transportation costs from point of importation to warehouse or
operating site, installation costs and in-transit losses not recovered through
insurance, and these costs shall not exceed those currently prevailing in normal
arm’s length transactions in the open market.
Any adjustment received by the RE DEVELOPER from the suppliers
or manufacturers or their agents in connection with defective materials shall be
adjusted accordingly against the cost of the materials, equipment and supplies
previously charged under the RE Contract.
d)
Rental Expenditures
The rental expenditures incurred by the RE DEVELOPER relative to the direct land
rental of both private and public lands, RE equipment, machineries, other computer
peripherals, transportation vehicles, software programs and licenses within the Contract
Area and land rental of both private and public lands adjacent to the Contract Area.
e)
Transportation Costs
i.
Reasonable transportation and travel expenses of employees directly
assigned in the Contract Area including those made for travel and relocation
of the Expatriate Employees and their families (limited to spouse and dependent
children) assigned in the Philippines.
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ii.
Reasonable costs of transportation of equipment, materials and supplies,
including those directly related costs such as unloading charges, dock fees
and inland and ocean freight charges for such equipment, materials and supplies
directly used in the Contract Area.
f) Services
The actual costs of contract services, services of professional consultants, utilities and
other services such as but not limited to engineering, operations and maintenance
services and technical advisory services which are directly necessary for or
incidental to the development/production of Geothermal performed by third parties
and Affiliates.
g) Damages and Losses
All costs or expenses necessary to replace or repair damages or losses in the Contract
Area not recovered from insurance incurred by fire, flood, storm, theft,
accident or any other cause that is unforeseeable by the RE DEVELOPER through
the exercise of reasonable diligence or is inevitable. The RE DEVELOPER shall
furnish the DEPARTMENT written notice of damages or losses incurred as soon as
practicable after report of the same has been received by the RE DEVELOPER.
h) Communication
i. The costs of leasing, operating, repairing and maintaining communication systems
including radio and satellite communication facilities in the Contract Area
ii. For home office based employees, the costs of the communication facilities shall
be charged based on the percentage of usage of these facilities in the Contract
Area.
i) Depreciation of Tangible Investment/Assets
The costs of physical assets classified as depreciable in accordance with
generally accepted international geothermal industry as defined in
Article
II.2 incurred and purchased and/or fabricated by the RE DEVELOPER, and used by
the RE DEVELOPER in its Geothermal Operations shall include such costs as export
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broker’s fees, purchasing agent’s fees, transportation charges, loading and unloading
fees, license fees associated with the procurement of materials and equipment, duties
and customs fees, in-transit losses not recovered through insurance and
installation costs necessary to put the asset ready for use. All tangible investments
in the Contract Area acquired during the exploration, development/commercial
stage shall be allocated as part of Cost of Goods Sold over the estimated useful
life of the asset. While tangible investments used in the exploration of additional
wells shall be treated as Deferred Cost amortizable over the estimated useful life of
the asset upon the start of commercial operations as mentioned in Article II.4.a
Tangible investments under this section include but are not limited to the costs of the
following:
i.
Production wells
ii.
Well testing equipment
iii.
Fluid gathering equipment
iv.
Fluid separation equipment
v.
Power Plant and civil works (applicable for integrated geothermal generation)
vi.
Pipelines
vii.
Laboratory equipment
viii.
Field survey equipment
ix.
Site Office furniture and fixtures/equipment used in direct support of
Geothermal Operations
x.
Tools and equipment
xi.
Automotive equipment
xii.
Communication facilities
xiii.
Housing facilities used in direct support of Geothermal Operations
xiv.
Leasehold improvements with estimated life of over one (1) year
xv.
Other capital expenditures classifiable as tangible investments following
generally accepted geothermal industry accounting principles and practices.
j)
Amortization of Leasehold Improvements
Improvements and betterments on leasehold which can be capitalized in accordance
with generally accepted international geothermal industry accounting principles and
practices shall be amortized over the estimated economic life.
k)
Amortization of Intangible Investments/Assets
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Notwithstanding any other provision of this Accounting Procedures, all intangible investments
directly related to the Geothermal operations shall be amortized over the estimated useful
life and shall form part of the Cost of Goods Sold.
3.
Costs not considered/allowed as Exploration Stage Expenditures and/or Cost of
Goods Sold under the RE Contract
The following costs and expenditures shall not be considered nor allowed as part of the
Cost of Goods Sold for government share computation purposes under the RE
Contract.
a)
Processing/application fees, bonuses
and other payments made to the
DEPARTMENT such as but not limited to the payments for signature bonus,
discovery bonus, production bonus and tax exemption certificates;
b)
Costs attributed to posting the performance guaranty deposits required under this
Re Contract;
c)
Expenditures in respect of any financial transaction to negotiate, float or
otherwise obtain or secure funds which are not used for Geothermal Operations;
d)
Expenditures incurred in obtaining,
guarantees
required
furnishing
and
maintaining
the
under the Re Contract and any other amounts spent on
indemnities with regard to non-fulfillment of contractual obligations;
e)
Fines and penalties imposed by courts of law of the Republic of the Philippines;
f)
Costs incurred in the creation of any partnership or joint venture arrangement;
g)
Membership and club dues not related to professional organizations;
h)
Costs incurred as a result of failure to insure where insurance is required pursuant
to the Contract, or where the RE DEVELOPER has elected to self insure, or has
under-insured; and
i)
Costs and expenditures incurred as a result of willful misconduct or negligence of
the RE DEVELOPER.
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4.
Other Income
All other income and proceeds received under the RE Contract, including but not limited to
the items below, shall be credited to the accounts under the RE Contract and shall be
treated as follows:
a)
As offset against Exploration Cost
i.
Proceeds of any insurance or claim or judicial awards in connection with
Geothermal Operations under the RE Contract or any assets charged to the
accounts under the RE Contract where such operations or assets have been
insured and the premiums charged to the accounts under the RE Contract;
ii.
Any adjustment received by the RE DEVELOPER from the suppliers/
manufacturers or their agents in connection with defective materials, the costs
of which was previously charged by the RE DEVELOPER to the accounts
under the RE Contract;
iii.
Refunds or other credits received by the RE DEVELOPER which apply to any
charge which has been made to the accounts under the RE Contract;
iv.
Costs originally charged to the accounts under the RE Contract for materials
subsequently exported from the Republic of the Philippine without being used
in Geothermal Operations under the RE Contract;
v.
Rental of equipment shall be considered provided that the costs of these
equipment was charged to the accounts under the RE Contract.
b)
As offset against Cost of Goods Sold
The following incidental income earned during the development/ commercial stage
shall be credited against cost of goods sold for such particular period:
i.
Proceeds of any insurance or claim or judicial awards in connection with
Geothermal Operations under the RE Contract or any assets charged to the
accounts under the RE Contract where such operations or assets have been
insured and the premiums charged to the accounts under the RE Contract;
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ii.
Any adjustment received by the RE DEVELOPER from the suppliers/
manufacturers or their agents in connection with defective materials, the costs
of which was previously charged by the RE DEVELOPER to the accounts
under the RE Contract;
iii.
Refunds or other credits received by the RE DEVELOPER which apply to any
charge which has been made to the accounts under the RE Contract;
iv.
Costs originally charged to the accounts under the RE Contract for materials
subsequently exported from the Republic of the Philippine without being used
in Geothermal Operations under the RE Contract;
v.
Rental of equipment shall be considered provided that the costs of these
equipment was charged to the accounts under the RE Contract.
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