Cash Flow and Accounting Treatment Associated with ION Geophysical s Multi-Client Data Library Offering

Transcription

1 Cash Flow and Accounting Treatment Associated with ION Geophysical s Multi-Client Data Library Offering Page 1

2 The cash movement and accounting associated with Multi-Client Data Library projects is complex and can be difficult to comprehend. The following is intended to facilitate a deeper understanding of cash flow movements and the accounting treatment of ION s Multi-Client portfolio. To clarify our definitions, our multi-client business is comprised of new venture activity and data libraries. We define new venture activity as the process of acquiring and processing data in our SPAN (regional seismic data programs acquired and depth imaged using advanced geophysical technology) products. Once the data is processed, the SPAN moves into our data library category. In forecasting our revenues from SPANs, we historically estimate that 40% is derived in the multi-client stage and the remaining 60% during data library (roughly providing a four year life). Cash Flow New Venture New ventures are defined as the time period from project sanctioning thru to acquisition and processing/interpreting the data. For cash flow, we treat all new venture programs as a portfolio and manage the portfolio with the goal that a vast majority of external costs are underwritten by the oil companies. At any given time $15 million to $40 million of working capital is used to bridge the timing of the cash inflows versus the cash outflows. For an example, cash inflows can be structured with 33% at signing, with another 33% at completion of acquisition and the remaining at delivery of the processed data to the oil company. Major cash outflows are made up of the charter costs of the vessels on a day rate basis, as well as the labor costs associated with personnel and outside contractors. Data Library Once the data is processed, it transitions from New Venture into Data Library for continued sales. These sales are converted in full to cash, net of any royalties we are obligated to pay to certain countries where the program exists and our sales commissions. Page 2

3 Accounting Treatment New Venture Revenue Recognition Revenues from underwritten (pre-funded) new venture programs are recognized as the seismic data is acquired and/or processed on a proportionate basis as work is performed. Under this method, we recognize revenues based upon quantifiable measures of progress such as kilometers acquired or days processed. Capitalization and Amortization We capitalize the costs we pay to third parties for the acquisition of the seismic data and our direct internal costs associated with processing and interpreting the data. Our method for amortizing the costs associated with a new venture programs is based on the percentage of actual revenue to the total estimated revenue multiplied by the total cost of the project (the sales forecast method). Data Library Revenue Recognition Revenues on licenses of completed multi-client data surveys are recognized when a signed final master geophysical data license agreement and accompanying license supplement is returned by the customer, the purchase price for the license is fixed or determinable, delivery or performance has occurred, and no significant uncertainty exists as to the customer's obligation, willingness or ability to pay. Amortization Once a new venture program is complete and moves into our data library, our method of amortization is the greater of (i) the sales forecast method or (ii) the straight-line basis over a four-year period. Page 3

4 Sales Forecast Method (applicable to new venture and data library) The sales forecast method is our primary method of calculating amortization. The total amortization period of four years represents the minimum period over which, benefits from these surveys are expected to be derived. We have determined the amortization period of four years based upon our historical experience that indicates that the majority of our revenues from multi-client surveys are derived during the acquisition and processing phases and during four years subsequent to survey completion. Estimated sales are determined based upon discussions with our customers, our experience, and our knowledge of industry trends. Changes in sales estimates may have the effect of changing the percentage relationship of cost of services to revenue. In applying the sales forecast method, an increase in the projected sales of a survey will result in lower cost of services as a percentage of revenue, and higher earnings when revenue associated with that particular survey is recognized, while a decrease in projected sales will have the opposite effect. Further detail of accounting treatment for multi-client projects can be in our Annual Report on Form 10K. Page 4

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