Financial Times: Shell accounts get signed off at last
By Clay Harris
May 25, 2004
Any embarrassment Royal Dutch/Shell might have felt yesterday at having to go public for the fourth time this year with a new and lower figure for its proved oil and gas reserves was overshadowed by a sense of relief - even elation.
The Anglo-Dutch group's 2003 accounts were finally signed off with an unqualified opinion by its auditors, and the annual report at long last had gone to the printers.
Even if the timetable was two months behind Shell's usual financial year, the company had met its revised deadline.
Jeroen van der Veer, chairman of the committee of managing directors, said Shell could "celebrate a bit of a milestone" with publication of the annual report on Friday, but it would be "many more months before we can say it's all over".
The biggest hurdle remains the original one - the US Securities and Exchange Commission, whose definition of "proved reserves" had been inconsistently applied by Shell. This resulted in its first shocking downgrade in January when it cut its estimate of proved reserves by 20 per cent, largely due to a restatement of assets in Nigeria and Australia.
Shell has until June 30 to file its 20-F annual financial statement for 2003 with the US regulator, and it still must submit a revised 20-F for 2002.
Tim Morrison, Shell's acting finance director, said: "We still have some areas of discussion with the SEC relating to the 20-F of 2002. At the moment, we have some guidance on improved disclosures and one or two areas where they are still asking for information."
Accounting policy changes announced yesterday went deep into the small print of Shell's accounts, but the impact on 2003's net income was small; the figure reported in February was cut by only $203m to $12.5bn (£7bn). Cash flow was not affected.
What was evident, however, was how much Washington now calls the shots. Invited by an analyst to second-guess the applicability of SEC reserve definitions, Malcolm Brinded, head of exploration and production, said: "Frankly, I don't think it's up to us at the moment to give . . . input or commentary on SEC rules and guidance."
In Canada, until now, Shell has accounted for proved reserves in the same way that it does outside North America, on a gross basis. It has decided, however, to align Canada with its practice in the US, and report on a net basis.
This means the figure for proved reserves will be reported after a deduction equal to cash royalty payments. For the years 1999-2002 the change brought a total reduction of 103m barrels in previously reported proved reserves, Shell said, and 2003 production was cut by 9m barrels.
Shell also said its accounts would now reflect a strict application of the FAS 19 accounting standard on exploration costs. Mr Morrison said: "SEC guidance indicates that strict reading of the standard is required irrespective of the future prospects of the well or the field.
"This means that successful wells in an area have to be written off if more than 12 months elapses between the final exploration well and the taking of final investment decisions and proved reserves can be booked," said Mr Morrison.
Shell is reporting 2003 results entirely according to US Generally Accepted Accounting Principles rather than the previous mixture of US GAAP and Netherlands GAAP.
It will move to International Financial Reporting Standards (IFRS) in 2005.
"The difference between the two GAAPs going forward mainly relates to the amortisation of goodwill," Mr Morrison said. "Under US GAAP, goodwill is now tested for impairment annually or when certain events occur indicating potential impairment. Under Netherlands GAAP, goodwill is amortised on a straight-line basis over its estimated useful economic life."
Anticipating its move to IFRS, Shell also said it was now reporting all inventories on a first-in, first-out (Fifo) basis. Previously, some North American inventories had been reported on a last-in, first-out (Lifo) basis.
As reported by the Financial Times yesterday, the 2003 annual report will not contain details of any pay-offs for Sir Philip Watts, the sacked chairman, and the two other senior executives - Walter van de Vijver and Judy Boynton - who lost their jobs this year.
Mary Jo Jacobi, vice president for external affairs, said: "Their severance arrangements are a matter of discussion among the relevant boards and the individuals, and they are still to be resolved."
Mr van der Veer already has to reckon with "stupid class action [lawsuits that] . . . have usually a long time scale".
And the debate over structure and governance rumbles on.
Mr van der Veer declined to say how far along Shell now was, after his taking the wheel in March. "We are really trying to move as fast as we can," he said. "We are trying to close it out as early as possible."