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30 CHAPTER FOUR ACCOUNTING TREATMENT OF BONUS AND ROYALTIES Bonus payments and oil and gas royalties sometimes require special accounting treatment. This chapter provides an overview of how airports generally manage revenue accounting associated with the receipt of oil and gas royalties and bonus payments. In all cases, an airportâs independent accountants are advised to provide specific directions. BONUS PAYMENT Once the airport has inked its deal and received a bonus payment, the accounting treatment becomes significant, especially in relation to the applicable Airport Operating Agreement (AOA). First, from a strictly accounting rules perspective, the bonus payment may not be recognized entirely as income in the year in which it is received but must be applied proportionately over the lease term. For example, a $10 million bonus paid in connection with a lease with a 5-year term will be recognized as revenue at the rate of $2 million a year. This is not to say that the airport will not receive the entire cash payment. It will. This means that for income recognition purposes, only that portion will be recognized for each year. In a residual rate-setting regimen,1 this will affect the rates and charges allocable to the airlines, since the benefit of the payment is carried out over the period of the lease instead of applying the entire bonus payment in the year received. The same would be the case under a hybrid arrangement if, as would likely be the case, any portion of the oil and gas production occurs at airfield locations.2 However, portions would also likely be at non-airfield locations, and this would require an allocation. The positive aspect of this treatment means that the airport cannot be forced to recognize the entire amount in the year received, which provides for a more predictable and consistent statement of income in the succeeding years. The impact on rates and charges is not subject to one spike, so airlines and airport staff can plan accordingly over the term of the lease. ROYALTIES The payment of ongoing royalties raises different issues from an allocation standpoint, as the payment of royalties is recog- nized in the year actually received. The more significant issue is the allocation to the appropriate cost center described in the AOA. As with the bonus payment, the allocation to a cost center may result in a mandatory split of such revenue with the signatory airlines. This will be governed by the AOA and, again, will depend on the rate-setting regimen. Planning for the layout of well pads and pipelines may be dictated by the airportâs concerns regarding this allocation, but logistics and site conditions will be determinative. That said, if a well pad is placed in a commercial cost center as opposed to an airfield location, the revenues would be treated differently. Commercial cost center revenue may belong entirely to the airport (depending on the AOA), whereas placement in a defined airfield location will likely generate a mandated share to the airlines. Once again, all of this will follow the provisions of the AOA. For example, assume that a well pad straddles 5 acres; 3 of those acres are in an airport industrial cost center and 2 acres are in a cost center to which the airlines have no rights to revenue. The royalty from that well pad would be split 60% to the airlines and 40% to the airport. The impact is the same with respect to lateral pipelines. More likely than not, pipelines will cross more than one cost center and the airfield. Therefore, an allocation of royalty revenue based on the proportionate use of the various cost centers and the airfield will need to be calculated and the revenue allocated accordingly.
31 ENDNOTES 1 Airlines collectively assume significant financial risk by agreeing to pay any costs of running the airport that are not allocated to other users or covered by non-airline sources of revenue. 2 In most hybrid AOAs, the airfield is residual while other parts of the airport are compensatory. The airport operator assumes the major financial risk by agreeing to pay any costs of running the airport and charges the airlines fees and rental rates to recover the actual costs of the facilities and services they use.