August 18, 2006
United States Securities and Exchange Commission
Division of Corporate Finance
100 F. Street N.E., Stop 7010
Washington, D.C. 20549
Attention: Jill S. Davis
Dear Ms. Davis:
RE: HARVEST ENERGY TRUST ("HARVEST" OR THE "TRUST")
FORM 40-F FOR FISCAL YEAR ENDED DECEMBER 31, 2005
FILED MARCH 30, 2006
FILE NO. 333-121627
- -------------------------------------------------------------------------------
On behalf of Harvest, set forth below are the Trust's responses to the comments
of the Staff of the Securities and Exchange Commission regarding the above
referenced filing set forth in the letter dated August 7, 2006. For your
convenience, we have repeated each of the comments set forth in the Staff's
letter and followed each comment with the Trust's response.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES, PAGE 4
(c) CAPITAL ASSETS, PAGE 5
1. WE NOTE YOUR STATEMENT THAT "THE COST OF UNPROVED PROPERTIES IS EXCLUDED
FROM THE IMPAIRMENT TEST CALCULATION DESCRIBED ABOVE AND SUBJECT TO A
SEPARATE IMPAIRMENT TEST." PLEASE EXPAND YOUR DISCLOSURE TO INDICATE YOUR
METHODOLOGY FOR TESTING UNPROVED PROPERTIES FOR IMPAIRMENT.
RESPONSE:
We propose to amend future filings to include the following statement:
"An impairment of unproved properties is recognized when the cost base exceeds
the fair value determined by a reference to market prices, historical
experience or a third party independent evaluator."
August 18, 2006
Page 2
(i) UNIT - BASED COMPENSATION, PAGE 6
2. WE NOTE THAT YOU APPLY AN INTRINSIC VALUE METHOD WHEN MEASURING AND
RECORDING COMPENSATION EXPENSE OF YOUR EMPLOYEE UNIT INCENTIVE PLANS.
PLEASE CLARIFY WHY YOU BELIEVE THE INTRINSIC VALUE BASED METHOD IS MORE
APPROPRIATE THAN THE FAIR VALUE BASED METHOD FOR CANADIAN REPORTING
PURPOSES. ADDITIONALLY, IN THE EVENT YOU CONCLUDE THAT THE INTRINSIC VALUE
METHOD IS AN APPROPRIATE METHOD UNDER CANADIAN GAAP, IT APPEARS THAT
ADDITIONAL DISCLOSURES WOULD BE REQUIRED REGARDING THE PRO FORMA EFFECT OF
THE FAIR VALUE BASED METHOD. REFER TO PARAGRAPHS 1, 28, AND 78 OF SIS 3870
CICA HANDBOOK.
RESPONSE:
We have two types of unit based incentive plans; 1) Trust Unit Rights Incentive
Plan; and 2) Unit Awards Incentive Plan. The Trust Unit Incentive Plan provides
employees with the option to settle the rights on a net cash or net equity
basis or the employee may choose to purchase trust units at the exercise price.
The Unit Awards Incentive Plan is a direct award of trust units or the
equivalent value in cash to the employee, the choice of settlement in units or
cash is entirely at the option of the employee.
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3870,
STOCK BASED COMPENSATION AND OTHER STOCK BASED PAYMENTS, paragraphs 38-40
specify the appropriate accounting treatment for awards that call for cash
settlement as follows.
.38 FOR AWARDS (INCLUDING MODIFICATIONS TO AWARDS) THAT CALL FOR
SETTLEMENT IN CASH OR OTHER ASSETS, INCLUDING STOCK APPRECIATION
RIGHTS, AN ENTERPRISE SHOULD MEASURE COMPENSATION COST AS THE AMOUNT
BY WHICH THE QUOTED MARKET VALUE OF THE SHARES OF THE ENTERPRISE'S
STOCK COVERED BY THE GRANT EXCEEDS THE OPTION PRICE OR VALUE
SPECIFIED, BY REFERENCE TO A MARKET PRICE OR OTHERWISE, SUBJECT TO ANY
APPRECIATION LIMITATIONS UNDER THE PLAN. CHANGES, EITHER INCREASES OR
DECREASES, IN THE QUOTED MARKET VALUE OF THOSE SHARES BETWEEN THE DATE
OF GRANT AND THE MEASUREMENT DATE RESULT IN A CHANGE IN THE MEASURE OF
COMPENSATION FOR THE RIGHT OR AWARD. COMPENSATION COST ACCRUED DURING
THE SERVICE PERIOD SHOULD NOT BE ADJUSTED BELOW ZERO. THE OFFSETTING
ADJUSTMENT SHOULD BE TO COMPENSATION COST OF THE PERIOD IN WHICH
CHANGES IN THE MARKET VALUE OCCUR. THE ACCRUED COMPENSATION FOR A
RIGHT THAT IS FORFEITED OR CANCELLED SHOULD BE ADJUSTED BY DECREASING
COMPENSATION COST IN THE PERIOD OF FORFEITURE. [JAN. 2002]
.39 AN AWARD OF STOCK APPRECIATION RIGHTS THAT CALLS FOR SETTLEMENT IN
CASH IS AN INDEXED LIABILITY, AND THE MEASUREMENT DATE IS THE
SETTLEMENT (EXERCISE) DATE BECAUSE THAT IS CONSISTENT WITH ACCOUNTING
FOR SIMILAR LIABILITIES.
.40 SOME AWARDS OF STOCK-BASED COMPENSATION RESULT IN THE ENTERPRISE
INCURRING A LIABILITY BECAUSE EMPLOYEES CAN COMPEL THE ENTERPRISE TO
SETTLE THE AWARD BY TRANSFERRING ITS CASH OR OTHER ASSETS TO EMPLOYEES
RATHER THAN BY ISSUING EQUITY INSTRUMENTS. FOR EXAMPLE, AN ENTERPRISE
MAY INCUR A LIABILITY TO PAY AN EMPLOYEE EITHER ON DEMAND OR AT A
SPECIFIED DATE AN AMOUNT TO BE DETERMINED BY THE INCREASE IN THE SHARE
PRICE FROM A SPECIFIED LEVEL.
August 18, 2006
Page 3
As discussed above, employees of the Trust can compel the Trust to settle vested
awards issued under either plan with cash, therefore, in accordance with the
recommendations in CICA Handbook Section 3870.38-40, we are required to measure
the compensation cost associated with our unit based compensation using the
intrinsic value. Changes in the market value of the trust units are reflected in
compensation cost at each measurement date.
The awards issued by Harvest are described in paragraph 3870.76 and were
required to be accounted for under the guidance of CICA Handbook Section 3870
since January 1, 2002. CICA Handbook Section 3870 paragraph 78 requires fair
value pro forma disclosure only for those awards issued as described under
paragraphs 77 and 79. As CICA 3870.77 specifically excludes the awards described
under CICA 3870.76, we believe that CICA 3870.78 does not apply to our awards.
.76 THIS SECTION IS ALSO APPLIED TO THE FOLLOWING AWARDS THAT ARE
OUTSTANDING AT THE START OF THE FIRST FISCAL YEAR BEGINNING ON OR
AFTER JANUARY 1, 2002:
(a) AWARDS THAT CALL FOR SETTLEMENT IN CASH OR OTHER ASSETS (SEE
PARAGRAPH 3870.38);
(b) STOCK APPRECIATION RIGHTS THAT CALL FOR SETTLEMENT BY THE
ISSUANCE OF EQUITY INSTRUMENTS; AND
(c) ANY OTHER AWARD THAT IS MODIFIED SO AS TO BECOME AN AWARD
INCLUDED IN (A) OR (B) ABOVE. THE AWARD IS ACCOUNTED FOR AS A
NEW AWARD AND NOT USING MODIFICATION ACCOUNTING.
THE CUMULATIVE AMOUNT, APPLICABLE TO (A) OR (B) ABOVE, THAT WOULD HAVE
BEEN RECOGNIZED IN PRIOR YEARS HAD THIS SECTION BEEN APPLIED, LESS ANY
AMOUNT PREVIOUSLY RECOGNIZED, IS RECOGNIZED AS THE EFFECT OF A CHANGE
IN ACCOUNTING POLICY AND CHARGED TO OPENING RETAINED EARNINGS FOR THE
FISCAL YEAR IN WHICH THIS SECTION IS INITIALLY APPLIED, WITHOUT
RESTATEMENT OF PRIOR PERIODS.
.77 FOR AWARDS OTHER THAN THOSE SPECIFIED IN PARAGRAPH 3870.76, THIS
SECTION IS ADOPTED FOR FISCAL YEARS BEGINNING ON OR AFTER JANUARY 1,
2004. EARLIER ADOPTION IS ENCOURAGED. AN ENTERPRISE USES ONE OF THE
FOLLOWING TRANSITIONAL ALTERNATIVES: (12)
(a) RETROACTIVE APPLICATION -- THE FAIR VALUE BASED METHOD OF
ACCOUNTING IS ADOPTED FOR ALL TYPES OF AWARD PREVIOUSLY NOT
ACCOUNTED FOR AT FAIR VALUE, AND EITHER:
(i) PRIOR PERIODS ARE RESTATED TO INCLUDE THE EXPENSE FOR
AWARDS OF THAT TYPE THAT WAS INCLUDED IN THE PRO FORMA
NOTE DISCLOSURE FOR PRIOR PERIODS (SEE PARAGRAPH 3870.78);
OR
(ii) PRIOR PERIODS ARE NOT RESTATED AND AN ADJUSTMENT IS MADE
TO THE OPENING BALANCE OF RETAINED EARNINGS OF THE CURRENT
PERIOD TO REFLECT THE CUMULATIVE EFFECT OF THE CHANGE ON
PRIOR PERIODS CONSISTENT WITH THAT IN PARAGRAPH
3870.77(A)(I).
(b) PROSPECTIVE APPLICATION -- THE FAIR VALUE BASED METHOD IS
APPLIED TO AWARDS (OF THE TYPE PREVIOUSLY NOT ACCOUNTED FOR AT
FAIR VALUE) GRANTED, MODIFIED OR SETTLED ON OR AFTER THE
BEGINNING OF THE FISCAL YEAR IN WHICH THE ENTERPRISE ADOPTS THIS
SECTION FOR THOSE AWARDS. THIS ALTERNATIVE IS ONLY AVAILABLE TO
ENTERPRISES THAT ELECT TO APPLY THE FAIR VALUE BASED METHOD OF
ACCOUNTING TO THAT TYPE OF AWARD FOR FISCAL YEARS BEGINNING
BEFORE JANUARY 1, 2004.
August 18, 2006
Page 4
AN ENTERPRISE DISCLOSES WHETHER IT HAS ADOPTED THE FAIR VALUE METHOD
OF ACCOUNTING FOR THESE AWARDS ON A RETROACTIVE OR PROSPECTIVE BASIS
AND, IF RETROACTIVE, WHETHER PRIOR PERIODS HAVE BEEN RESTATED.
.78 IF AWARDS OF STOCK-BASED EMPLOYEE COMPENSATION WERE OUTSTANDING AND
ARE NOT ACCOUNTED FOR UNDER THE FAIR VALUE BASED METHOD (SEE
PARAGRAPHS 3870.77 AND 3870.79) FOR ANY PERIOD FOR WHICH AN INCOME
STATEMENT IS PRESENTED, THE FOLLOWING INFORMATION IS DISCLOSED FOR
THOSE PERIODS:
(a) THE TOTAL STOCK-BASED EMPLOYEE COMPENSATION COST, NET OF RELATED
TAX EFFECTS, THAT WOULD HAVE BEEN INCLUDED IN THE DETERMINATION
OF NET INCOME IF THE FAIR VALUE BASED METHOD HAD BEEN APPLIED TO
THOSE AWARDS;
(b) PRO FORMA NET INCOME AS IF THE FAIR VALUE BASED METHOD HAD BEEN
APPLIED TO THOSE AWARDS; AND
(c) PRO FORMA BASIC AND DILUTED EARNINGS PER SHARE AS IF THE FAIR
VALUE BASED METHOD HAD BEEN APPLIED TO THOSE AWARDS.
THE REQUIRED PRO FORMA AMOUNTS REFLECT THE DIFFERENCE IN STOCK-BASED
EMPLOYEE COMPENSATION COST, IF ANY, INCLUDED IN NET INCOME AND THE
TOTAL COST MEASURED BY THE FAIR VALUE BASED METHOD, AS WELL AS
ADDITIONAL TAX EFFECTS, IF ANY, THAT WOULD HAVE BEEN RECOGNIZED IN THE
INCOME STATEMENT IF THE FAIR VALUE BASED METHOD HAD BEEN APPLIED TO
ALL AWARDS. THE REQUIRED PRO FORMA PER SHARE AMOUNTS REFLECT THE
CHANGE IN THE DENOMINATOR OF THE DILUTED EARNINGS PER SHARE
CALCULATION AS IF THE ASSUMED PROCEEDS UNDER THE TREASURY STOCK
METHOD, INCLUDING MEASURED BUT UNRECOGNIZED COMPENSATION COST AND THE
EXCESS TAX BENEFITS CREDITED TO CONTRIBUTED SURPLUS, WERE DETERMINED
UNDER THE FAIR VALUE BASED METHOD.
.79 ENTERPRISES OTHER THAN PUBLIC ENTERPRISES, CO-OPERATIVE ENTERPRISES,
DEPOSIT-TAKING INSTITUTIONS AND LIFE INSURANCE ENTERPRISES APPLY THIS
SECTION FOR FISCAL YEARS BEGINNING ON OR AFTER JANUARY 1, 2003 TO:
(a) TRANSACTIONS WITH NON-EMPLOYEES (SEE PARAGRAPH 3870.75);
(b) AWARDS SETTLED IN CASH OR OTHER ASSETS OF THE TYPE IDENTIFIED IN
PARAGRAPH 3870.76(A); AND
(c) AWARDS MODIFIED (SEE PARAGRAPH 3870.76(C)) TO BECOME AN AWARD
INCLUDED IN PARAGRAPH 3870.76(A).
FOR ALL OTHER AWARDS, ENTERPRISES TO WHICH THE ABOVE EXEMPTION
APPLIES, MAY DEFER THE EXPENSE RECOGNITION REQUIREMENTS OF THIS
SECTION UNTIL FISCAL YEARS BEGINNING ON OR AFTER JANUARY 1, 2005, BUT
MUST IN THAT CASE ALSO DISCLOSE PRO FORMA NET INCOME AND, IF EARNINGS
PER SHARE IS PRESENTED, PRO FORMA EARNINGS PER SHARE FOR EACH PERIOD
FOR WHICH AN INCOME STATEMENT IS PROVIDED IN ACCORDANCE WITH PARAGRAPH
3870.78. PUBLIC ENTERPRISES ARE THOSE ENTERPRISES THAT HAVE ISSUED
DEBT OR EQUITY SECURITIES THAT ARE TRADED IN A PUBLIC MARKET (A
DOMESTIC OR FOREIGN STOCK EXCHANGE OR AN OVER THE COUNTER MARKET,
INCLUDING LOCAL OR REGIONAL MARKETS), THAT ARE REQUIRED TO FILE
FINANCIAL STATEMENTS WITH A SECURITIES COMMISSION, OR THAT PROVIDE
FINANCIAL STATEMENTS FOR THE PURPOSE OF ISSUING ANY CLASS OF
SECURITIES IN A PUBLIC MARKET.
(a) WHOSE EQUITY SECURITIES ARE TRADED IN A PUBLIC MARKET; OR
(b) THAT MAKES A FILING WITH A REGULATORY AGENCY IN PREPARATION FOR
THE SALE OF ANY
August 18, 2006
Page 5
CLASS OF EQUITY SECURITIES IN A PUBLIC MARKET; OR
(c) THAT IS CONTROLLED BY AN ENTERPRISE COVERED BY (A) OR (B).
AN AWARD WHOSE TERMS, OTHER THAN THAT THEY INCLUDE A REPURCHASE
OBLIGATION, WOULD RESULT IN IT BEING ACCOUNTED FOR AS A LIABILITY, IS
NOT ACCOUNTED FOR AS AN EQUITY INSTRUMENT AS A RESULT OF THIS
PARAGRAPH. FOR EXAMPLE, STOCK APPRECIATION RIGHTS THAT INCORPORATE A
REPURCHASE AGREEMENT AND THAT CALL FOR SETTLEMENT BY THE ISSUANCE OF
EQUITY INSTRUMENTS, ARE ACCOUNTED FOR IN ACCORDANCE WITH PARAGRAPH
3870.65.
(k) DEFERRED FINANCING CHARGES, PAGE 6
3. WE NOTE THAT YOU ARE AMORTIZING YOUR DEFERRED FINANCING CHARGES ON A
STRAIGHT-LINE BASIS OVER THE TERM OF THE RELATED DEBT. PLEASE TELL US WHY
YOU ARE NOT USING THE EFFECTIVE INTEREST METHOD IDENTIFIED IN PARAGRAPH 71
OF SIS 3855 CICA HANDBOOK.
RESPONSE:
As per CICA Handbook Section 3855, FINANCIAL INSTRUMENTS - RECOGNITION AND
MEASUREMENT, we are not required to adopt the guidance in this section for the
year ended December 31, 2005 as it is applicable to interim and annual
financial statements relating to fiscals years beginning on or after October 1,
2006. Earlier adoption is permitted but we have not elected to early adopt
these sections. Paragraph 87 of the section describes the transitional
provisions as follows:
.87 EXCEPT AS SPECIFIED IN PARAGRAPH 3855.87A, THIS SECTION APPLIES TO
INTERIM AND ANNUAL FINANCIAL STATEMENTS RELATING TO FISCAL YEARS
BEGINNING ON OR AFTER OCTOBER 1, 2006. EARLIER ADOPTION IS PERMITTED
ONLY AS OF THE BEGINNING OF A FISCAL YEAR ENDING ON OR AFTER DECEMBER
31, 2004. AN ENTITY THAT HAS PREVIOUSLY ISSUED INTERIM FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES FOR A PERIOD WITHIN A PARTICULAR FISCAL YEAR IS PRECLUDED
FROM ADOPTING THIS SECTION UNTIL THE BEGINNING OF ITS NEXT FISCAL
YEAR. AN ENTITY ADOPTING THIS SECTION FOR A FISCAL YEAR BEGINNING
BEFORE OCTOBER 1, 2006 ALSO ADOPTS COMPREHENSIVE INCOME, SECTION 1530,
AND HEDGES, SECTION 3865.
Emerging Issues Committee ("EIC") 94, ACCOUNTING FOR CORPORATE TRANSACTION
COSTS, provides guidance on the accounting for deferred financing charges. The
appendix for this EIC, refers to the accounting for cost associated with the
issue of debt securities as follows:
APPENDIX
COLUMNS (2) AND (4) OF THE FOLLOWING TABLE SUMMARIZE THE
CONSENSUS POSITIONS SET OUT IN THE ACCOMPANYING ABSTRACT. COLUMN
(3) SUMMARIZES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR
COSTS OF COMPLETED CORPORATE TRANSACTIONS AS REQUIRED BY CICA
ACCOUNTING RECOMMENDATIONS AND EXISTING PRACTICE.
August 18, 2006
Page 6
(1) (2) (3) (4)
TRANSACTION BEFORE TRANSACTION IS WHEN TRANSACTION IS IF TRANSACTION IS
TYPE COMPLETED COMPLETED ABANDONED
- ----------- --------------------- ------------------- -----------------
ISSUE OF DEBT DEFER IF COSTS ARE CONTINUE TO DEFER EXPENSE COSTS
SECURITIES ELIGIBLE, TRANSACTION AND IS AMORTIZE WHEN ABANDONED
IS SPECIFICALLY COSTS OVER TERM OF
IDENTIFIED AND DEBT
COMPLETION IS MORE
LIKELY THAN NOT
Based on the excerpt from EIC 94 above, transaction costs associated with the
issue of debt should be amortized over the term of the debt. The method of
amortization has not been specified. Prior to the adoption of CICA HB Section
3855, it is acceptable practice under Canadian GAAP to use the straight-line
method to amortize these types of costs. In addition, we have determined that
the approximate adjustment on our December 31, 2005 consolidated income
statement if we applied the effective interest method would be less than
$100,000. For our 2007 fiscal year we will be adopting the recommendations of
CICA HB Section 3855 on a prospective basis and applying the effective interest
rate method.
NOTE 5 CAPITAL ASSETS, PAGE 10
4. WE NOTE YOU HAVE CAPITALIZED $7.1 MILLION IN GENERAL AND ADMINISTRATIVE
COSTS. PLEASE EXPAND YOUR DISCLOSURE TO EXPLAIN YOUR POLICY REGARDING THE
TYPE OF GENERAL AND ADMINISTRATIVE COSTS THAT YOU BELIEVE QUALIFY FOR
CAPITALIZATION
RESPONSE:
We propose amending our disclosure in future filings to the following:
"The Trust follows the full cost method of accounting for its petroleum and
natural gas activities. All costs of acquiring petroleum and natural gas
properties, whether productive or unproductive, related development costs, and
overhead charges directly related to these activities, SUCH AS SALARIES AND
CONSULTING COSTS RELATED TO GEOLOGICAL, GEOPHYSICAL AND DEVELOPMENT ACTIVITIES,
are capitalized and accumulated in one cost centre. Maintenance and repair
costs that do not extend or enhance the recoverable reserves are charged
against income"
NOTE 20 RECONCILIATIONS TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES,
PAGE 22
GOODWILL
5. WE NOTE YOUR POLICY DISCLOSURE ON PAGE FIVE INDICATING THAT YOU EVALUATE
IMPAIRMENT OF GOODWILL BY COMPARING THE CARRYING AMOUNT OF GOODWILL FOR
THE REPORTING ENTITY TO THE EXCESS OF THE TRUST'S FAIR VALUE OF ITS
PUBLICLY TRADED TRUST UNITS OVER THE RELATED BOOK VALUE OF THE ENTITY.
PLEASE CLARIFY HOW YOUR IMPAIRMENT DETERMINATION AND MEASUREMENT IS NOT
MATERIALLY DIFFERENT FROM THAT APPLIED FOR U.S. GAAP PURPOSES AND THE
EFFECT, IF ANY, HAD YOU APPLIED IMPAIRMENT DETERMINATION AND MEASUREMENT
IN ACCORDANCE WITH PARAGRAPHS 19-21 OF SFAS 142 FOR PURPOSES OF YOUR U.S.
GAAP RECONCILIATION PRESENTATION. REFER TO PARAGRAPHS 23-25 OF SFAS 142
FOR GUIDANCE RELATED TO DETERMINING FAIR VALUE FOR U.S. GAAP.
RESPONSE:
We do not believe there is a U.S. GAAP to Canadian GAAP difference with respect
to the determination of whether or not there is an impairment of goodwill. In
accordance with Statement of Financial Accounting
August 18, 2006
Page 7
Standards Board ("SFAS") 142 paragraph 19 and 23-25, our evaluation of goodwill
consisted of the comparison of our total unitholders' equity book value and the
related fair value, to determine if there was a potential goodwill impairment.
As we have determined that we have one reporting unit we assessed our fair
value based on the trading price of our trust units as at December 31, 2005,
effectively our market capitalization. We understand that SFAS 142 footnote 16
states that "... MEASURING THE FAIR VALUE OF A COLLECTION OF ASSETS AND
LIABILITIES THAT OPERATE TOGETHER IN A CONTROLLED ENTITY IS DIFFERENT FROM
MEASURING THE FAIR VALUE OF THAT ENTITY'S INDIVIDUAL EQUITY SECURITIES. AN
ACQUIRING ENTITY OFTEN IS WILLING TO PAY MORE FOR EQUITY SECURITIES THAT GIVE
IT A CONTROLLING INTEREST THAN AN INVESTOR WOULD PAY FOR A NUMBER OF EQUITY
SECURITIES REPRESENTING LESS THAN A CONTROLLING INTEREST. THAT CONTROL PREMIUM
MAY CAUSE THE FAIR VALUE OF A REPORTING UNIT TO EXCEED ITS MARKET
CAPITALIZATION." Applying a "control premium" to the fair value would have
resulted in a larger fair value, however, given that our market capitalization
at December 31, 2005 was $2.0 billion which is $2.9 billion in excess of the
carrying value of our equity under U.S. GAAP which was a deficit of $896
million, we did not apply a "control premium" nor were we required to complete
the second step of the goodwill impairment test.
We propose clarifying our disclosure in future filings to the following:
"For accounting purposes goodwill is recognized when the purchase price of an
acquired business exceeds the fair value of the net identifiable assets and
liabilities of the acquired business. The carrying value of goodwill is
assessed for impairment annually at year-end, or more frequently if events
occur that could result in an impairment. THE GOODWILL IMPAIRMENT TEST IS A TWO
STEP TEST. IN THE FIRST STEP, THE CARRYING VALUE OF OUR ASSETS AND LIABILITIES,
INCLUDING GOODWILL, IS COMPARED TO THE FAIR VALUE OF THE REPORTING GROUP. FOR
THE FIRST STEP, FAIR VALUE IS DETERMINED USING QUOTED MARKET PRICES, ADJUSTED
FOR ANY BENEFITS AS A RESULT OF SYNERGIES AND BENEFITS OF A CONTROLLING
INTEREST. IF THE FAIR VALUE IS LESS THAN THE CARRYING VALUE, A POTENTIAL
IMPAIRMENT OF GOODWILL MAY EXIST AND WE PERFORM THE SECOND TEST. IMPAIRMENT IS
MEASURED BY ALLOCATING THE FAIR VALUE OF THE REPORTING GROUP, AS DETERMINED IN
THE FIRST TEST, OVER THE IDENTIFIABLE ASSETS AND LIABILITIES. THE EXCESS OF THE
FAIR VALUE OF THE REPORTING GROUP OVER THE FAIR VALUE OF THE IDENTIFIABLE
ASSETS AND LIABILITIES REPRESENTS THE FAIR VALUE OF GOODWILL. The excess of the
book value of goodwill over this implied fair value is then recognized as an
impairment and charged to income in the period in which it occurs. Goodwill is
stated as cost less impairment and is not amortized."
EXCHANGEABLE SHARES
6. WE NOTE THAT THE TERMS OF YOUR EXCHANGEABLE SHARES, WHICH ARE INSTRUMENTS
OTHER THAN OUTSTANDING UNITS OF THE TRUST AND ARE REDEEMABLE AT THE OPTION
OF THE HOLDERS. PLEASE CLARIFY FOR US WHY YOU BELIEVE THESE SHARES DO NOT
QUALIFY FOR LIABILITY CLASSIFICATION FOR U.S. GAAP REPORTING PURPOSES AND
CITE THE AUTHORITATIVE GUIDANCE SUPPORTING YOUR CONCLUSION. REFER TO
PARAGRAPH 11 OR SFAS 150.
RESPONSE:
SFAS 150, details the scope of the statement as follows:
THIS STATEMENT REQUIRES AN ISSUER TO CLASSIFY THE FOLLOWING INSTRUMENTS AS
LIABILITIES (OR ASSETS IN SOME CIRCUMSTANCES):
o A FINANCIAL INSTRUMENT ISSUED IN THE FORM OF SHARES THAT IS
MANDATORILY REDEEMABLE--THAT EMBODIES AN UNCONDITIONAL OBLIGATION
REQUIRING THE ISSUER TO REDEEM IT BY TRANSFERRING ITS ASSETS AT A
SPECIFIED OR DETERMINABLE DATE (OR DATES) OR UPON AN EVENT THAT IS
CERTAIN TO OCCUR
o A FINANCIAL INSTRUMENT, OTHER THAN AN OUTSTANDING SHARE, THAT, AT
INCEPTION, EMBODIES AN OBLIGATION TO REPURCHASE THE ISSUER'S EQUITY
SHARES, OR IS INDEXED TO SUCH AN OBLIGATION, AND THAT
August 18, 2006
Page 8
REQUIRES OR MAY REQUIRE THE ISSUER TO SETTLE THE OBLIGATION BY
TRANSFERRING ASSETS (FOR EXAMPLE, A FORWARD PURCHASE CONTRACT OR
WRITTEN PUT OPTION ON THE ISSUER'S EQUITY SHARES THAT IS TO BE
PHYSICALLY SETTLED OR NET CASH SETTLED)
o A FINANCIAL INSTRUMENT THAT EMBODIES AN UNCONDITIONAL OBLIGATION, OR A
FINANCIAL INSTRUMENT OTHER THAN AN OUTSTANDING SHARE THAT EMBODIES A
CONDITIONAL OBLIGATION, THAT THE ISSUER MUST OR MAY SETTLE BY ISSUING
A VARIABLE NUMBER OF ITS EQUITY SHARES, IF, AT INCEPTION, THE MONETARY
VALUE OF THE OBLIGATION IS BASED SOLELY OR PREDOMINANTLY ON ANY OF THE
FOLLOWING:
o A FIXED MONETARY AMOUNT KNOWN AT INCEPTION, FOR EXAMPLE, A PAYABLE
SETTLEABLE WITH A VARIABLE NUMBER OF THE ISSUER'S EQUITY SHARES
o VARIATIONS IN SOMETHING OTHER THAN THE FAIR VALUE OF THE ISSUER'S
EQUITY SHARES, FOR EXAMPLE, A FINANCIAL INSTRUMENT INDEXED TO THE
S&P 500 AND SETTLEABLE WITH A VARIABLE NUMBER OF THE ISSUER'S
EQUITY SHARES
o VARIATIONS INVERSELY RELATED TO CHANGES IN THE FAIR VALUE OF THE
ISSUER'S EQUITY SHARES, FOR EXAMPLE, A WRITTEN PUT OPTION THAT
COULD BE NET SHARE SETTLED.
THE REQUIREMENTS OF THIS STATEMENT APPLY TO ISSUERS' CLASSIFICATION AND
MEASUREMENT OF FREESTANDING FINANCIAL INSTRUMENTS, INCLUDING THOSE THAT
COMPRISE MORE THAN ONE OPTION OR FORWARD CONTRACT.
Further clarification of SFAS 150 was issued in the March 17-18, 2004 Emerging
Issues Task Force ("EITF") Meeting Minutes where the SEC staff prepared an
addendum to the Subsequent Developments section of Topic D-98.
"AT THE MARCH 17-18, 2004 MEETING, THE SEC OBSERVER CLARIFIED THE SEC
STAFF'S POSITION RELATING TO THE INTERACTION OF TOPIC D-98 AND STATEMENT
150 FOR CONDITIONALLY REDEEMABLE PREFERRED SHARES. IF A COMPANY ISSUES
PREFERRED SHARES THAT ARE CONDITIONALLY REDEEMABLE, FOR EXAMPLE, AT THE
HOLDER'S OPTION OR UPON THE OCCURRENCE OF AN UNCERTAIN EVENT NOT SOLELY
WITHIN THE COMPANY'S CONTROL, THE SHARES ARE NOT WITHIN THE SCOPE OF
STATEMENT 150 BECAUSE THERE IS NO UNCONDITIONAL OBLIGATION TO REDEEM THE
SHARES BY TRANSFERRING ASSETS AT A SPECIFIED OR DETERMINABLE DATE OR UPON
AN EVENT CERTAIN TO OCCUR...."
The exchangeable shares were issued by a subsidiary of Harvest. Each of the
exchangeable shares gives the holder the right, at their option, to convert the
exchangeable shares to units of the Trust at any time. As a result, we believe
that the exchangeable shares are conditionally redeemable. Therefore, based on
the above discussion of the scope of SFAS 150 and the related interpretation
included in the March 17-18 EITF meeting minutes, we believe that the
exchangeable shares are scoped out of SFAS 150 and, as a result, paragraph 11
of that statement would not apply.
Consequently, the exchangeable shares have been classified outside of permanent
equity as required under EITF topic D-98 and Accounting Series Release number
268 due to the fact that they are convertible into securities of the Trust. The
Trust's units are redeemable at the option of the holder and meet the
requirements under EITF topic D-98 and Accounting Series Release number 268 to
be classified outside of permanent equity. On June 20, 2006, the Trust redeemed
the remaining outstanding exchangeable shares for cash of approximately $1
million; as such these instruments will not be outstanding in future periods.
ITEM (b)
7. WE NOTE YOUR DISCLOSURE THAT PROVED RESERVES FOR U.S. GAAP PURPOSES ARE
DERIVED BY APPLYING CONSTANT PRICES AND COSTS. PLEASE EXPAND YOUR
DISCLOSURE TO INDICATE THAT THESE PRICES AND COSTS ARE DERIVED UNDER
EXISTING ECONOMIC AND OPERATING CONDITIONS, I.E., PRICES AND COSTS AS OF
THE DATE THE ESTIMATE IS MADE, IF TRUE, OR OTHERWISE ADVISE. REFER TO RULE
4-10(A)(2) OF REGULATION S-X.
RESPONSE:
August 18, 2006
Page 9
We propose to amend our disclosure in future filings as follows:
"Under U.S. GAAP, proved reserves used for the depletion calculation are
estimated using constant prices and costs AS OF THE DATE THE ESTIMATE OF
RESERVES IS MADE..."
ITEM (c)
8. WE NOTE YOUR DISCLOSURES INDICATING THAT YOU APPLY SFAS 123 FOR YOUR TRUST
UNIT INCENTIVE PLAN AND THE UNIT AWARD INCENTIVE PLAN. PLEASE EXPAND YOUR
DISCLOSURE TO INDICATE THE EXPECTED IMPACT ON YOUR FINANCIAL STATEMENTS
UPON ADOPTION OF SFAS 123(R). REFER TO SAB TOPIC 11:M.
RESPONSE:
Under SAB Topic 11:M, the following has been stated:
QUESTION 2: DOES THE STAFF HAVE A VIEW ON THE TYPES OF DISCLOSURE THAT
WOULD BE MEANINGFUL AND APPROPRIATE WHEN A NEW ACCOUNTING STANDARD HAS
BEEN ISSUED BUT NOT YET ADOPTED BY THE REGISTRANT?
INTERPRETIVE RESPONSE: THE STAFF BELIEVES THAT THE REGISTRANT SHOULD
EVALUATE EACH NEW ACCOUNTING STANDARD TO DETERMINE THE APPROPRIATE
DISCLOSURE AND RECOGNIZES THAT THE LEVEL OF INFORMATION AVAILABLE TO THE
REGISTRANT WILL DIFFER WITH RESPECT TO VARIOUS STANDARDS AND FROM ONE
REGISTRANT TO ANOTHER. THE OBJECTIVES OF THE DISCLOSURE SHOULD BE TO (1)
NOTIFY THE READER OF THE DISCLOSURE DOCUMENTS THAT A STANDARD HAS BEEN
ISSUED WHICH THE REGISTRANT WILL BE REQUIRED TO ADOPT IN THE FUTURE AND
(2) ASSIST THE READER IN ASSESSING THE SIGNIFICANCE OF THE IMPACT THAT THE
STANDARD WILL HAVE ON THE FINANCIAL STATEMENTS OF THE REGISTRANT WHEN
ADOPTED. THE STAFF UNDERSTANDS THAT THE REGISTRANT WILL ONLY BE ABLE TO
DISCLOSE INFORMATION THAT IS KNOWN.
THE FOLLOWING DISCLOSURES SHOULD GENERALLY BE CONSIDERED BY THE
REGISTRANT:
o A BRIEF DESCRIPTION OF THE NEW STANDARD, THE DATE THAT ADOPTION
IS REQUIRED AND THE DATE THAT THE REGISTRANT PLANS TO ADOPT, IF
EARLIER.
o A DISCUSSION OF THE METHODS OF ADOPTION ALLOWED BY THE STANDARD
AND THE METHOD EXPECTED TO BE UTILIZED BY THE REGISTRANT, IF
DETERMINED.
o A DISCUSSION OF THE IMPACT THAT ADOPTION OF THE STANDARD IS
EXPECTED TO HAVE ON THE FINANCIAL STATEMENTS OF THE REGISTRANT,
UNLESS NOT KNOWN OR REASONABLY ESTIMABLE. IN THAT CASE, A
STATEMENT TO THAT EFFECT MAY BE MADE.
o DISCLOSURE OF THE POTENTIAL IMPACT OF OTHER SIGNIFICANT MATTERS
THAT THE REGISTRANT BELIEVES MIGHT RESULT FROM THE ADOPTION OF
THE STANDARD (SUCH AS TECHNICAL VIOLATIONS OF DEBT COVENANT
AGREEMENTS, PLANNED OR INTENDED CHANGES IN BUSINESS PRACTICES,
ETC.) IS ENCOURAGED.
As we are only required to file a form 40-F under MJDS annually, we have not
yet assessed the impact of SFAS 123(R) on our financial statements. We are
currently, assessing this impact for our 2006 fiscal year. Based on the above,
it appears that the staff has indicated that only known information is required
to be disclosed, we believe the disclosure in footnote 20 (h) of our 2005 year
end consolidated financial statements
August 18, 2006
Page 10
with respect to the issuance of FASB 123(R) that "Management has not yet
assessed the impact of this standard on its consolidated financial
statements.", is consistent with the requirements of SAB Topic 11:M.
EXHIBITS 31.1 AND 31.2
9. WE NOTE THAT THE WORDING OF YOUR CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002 DOES NOT PRECISELY MATCH THE LANGUAGE SET
FORTH IN THE ACT. IN THIS REGARD, YOUR CERTIFICATIONS INCLUDE THE TITLES
OF YOUR CERTIFYING OFFICERS WITHIN THE INTRODUCTORY SENTENCE. REFER TO
GENERAL INSTRUCTION B(6)(A) OF FORM 40-F FOR THE EXACT TEXT OF SECTION 302
CERTIFICATION AS REQUIRED BY RULE 13A-14(A) OR RULE 15D-14(A) OF THE
EXCHANGE ACT AND AMEND YOUR EXHIBITS AS APPROPRIATE.
RESPONSE:
We propose to amend future filings such that the first line of the
certification reads as follows:
"I, Robert W. Fotheringham, certify that:..." and
"I, John Zahary, certify that:..."
In connection with responding to comments by the SEC, we acknowledge that:
o We are responsible for the adequacy and accuracy of the disclosure in
the filing;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o We may not assert staff comments as a defence in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
I trust the foregoing, address the various queries which have been raised by
the Securities Exchange Commission, but if any items require clarification,
please do not hesitate to give me a call at your convenience at 403-268-3197.
Many thanks for your comments.
Yours truly,
HARVEST ENERGY TRUST
(Signed) "ROBERT W. FOTHERINGHAM"
Robert W. Fotheringham
[HARVEST OPERATIONS CORP LETTERHEAD]
October 17, 2006
United States Securities and Exchange Commission
Division of Corporate Finance
100 F. Street N.E., Stop 7010
Washington, D.C. 20549
Attention: Jill S. Davis
Dear Ms. Davis:
RE: HARVEST ENERGY TRUST ("HARVEST" OR THE "TRUST")
FORM 40-F FOR FISCAL YEAR ENDED DECEMBER 31, 2005
FILED MARCH 30, 2006
RESPONSE LETTER DATED AUGUST 18, 2006
FILE NO. 333-121627
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On behalf of Harvest, set forth below are the Trust's responses to the comments
of the Staff of the Securities and Exchange Commission regarding the above
referenced filing set forth in the letter dated September 15, 2006. For your
convenience, we have repeated each of the comments set forth in the Staff's
letter and followed each comment with the Trust's response.
FORM 40-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
GENERAL
1. We note that you have proposed to expand or revise your disclosure in
response to our prior comments 1, 4, 7, and 9, which you have indicated
will be incorporated into future filings. We are considering your
responses, and will not be in a position to conclude on your proposed
resolution until such time that all of your pending comments are resolved.
RESPONSE
Noted.
FINANCIAL STATEMENTS
NOTE 20 RECONCILIATIONS TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES,
PAGE 22
GOODWILL
2. We note your response and proposed disclosure to prior comment five
indicating that you have concluded that you have one reporting unit in
relation to your assessment of goodwill impairment. It is our
understanding that goodwill was recorded with your acquisition of Storm
Energy Ltd. For $192 million in
October 17, 2006
Page 2
2004 which included oil and gas operations in North Central Alberta. It is
also our understanding, based on your website disclosures under
"Operations," and according to your corporate structure as disclosed on
page 11 through 14, and material property disclosures on pages 68 through
69, that you distinguish capital budgets and operations in separate
geographical operating locations including Northern, Western Alberta,
Eastern Alberta, Southern Alberta, and Southeast Saskatchewan. As such, it
remains unclear how you have concluded that your business constitutes one
reporting unit as that term is defined under U.S. GAAP. Please address the
following:
o Demonstrate how you have concluded that you have only one reporting
unit and specifically describe to us your definition of a reporting
unit for U.S. GAAP purposes. Refer to paragraphs 30 and 31 of SFAS
142.
o Identify for us your chief operating decision makers as defined in
paragraph 12 of SFAS 131.
o Describe the process by which you report your results of operations,
including whether or not specific reports are submitted by geographic
location to your chief operating decision makers.
o Describe how your chief operating decision makers determined capital
budget allocations by geographic location and tell us whether or not
they base these allocations on any specific financial reports.
o Submit a management organizational chart showing all personnel
involved in managing your organization at the executive and senior
management levels, clearly indicating the name of the employee and the
job function and identify the types of reports, financial summaries,
schedules, and information memoranda given to your chief operating
decision makers and board of directors.
RESPONSE
IDENTIFY FOR US YOUR CHIEF OPERATING DECISION MAKERS AS DEFINED IN PARAGRAPH 12
OF SFAS 131.
Our chief operating decision makers as defined under paragraph 12 of SFAS 131
are John Zahary, President and Chief Executive Officer, Rob Morgan, Vice
President Engineering and Chief Operating Officer, and I, Robert Fotheringham,
Vice President Finance and Chief Financial Officer. These individuals approve
decisions recommended regarding the allocation of resources and assess the
operating performance of our organization. For certain decisions such as
significant acquisitions and dispositions, our annual capital and operating
budget, and monthly unitholder distributions, additional approval is required
by the Board of Directors.
DESCRIBE THE PROCESS BY WHICH YOU REPORT YOUR RESULTS OF OPERATIONS, INCLUDING
WHETHER OR NOT SPECIFIC REPORTS ARE SUBMITTED BY GEOGRAPHIC LOCATION TO YOUR
CHIEF OPERATING DECISION MAKERS.
The following reports and processes are in place to assist our chief operating
decision makers in the management of our operations.
CHIEF FINANCIAL OFFICER, CHIEF OPERATING OFFICER AND THE PRESIDENT AND CHIEF
EXECUTIVE OFFICER
On a monthly basis a management report, which provides financial results on a
consolidated basis for the current month and the year to date, is distributed
to the chief operating decision makers. There is no financial information on a
geographic basis included in this report. The monthly management report
includes capital expenditures and net operating information on a property by
property basis. The purpose of this report is to monitor financial performance
at a consolidated level and production volumes.
October 17, 2006
Page 3
On a weekly basis a management meeting takes place which is attended by the
chief operating decision makers, the managers that report directly to them and
the supervisors of each of the geographic locations (who report to the
managers). Prior to the meeting information is collected from each supervisor
and a package is distributed to all of the meeting attendees which includes a
summary of the weekly production volumes for the properties in each geographic
location and also includes a report organized by geographic location as to the
status of significant activities underway at each of the properties. A brief
summary of the total operating expense and capital expenditures is also
included in each report for the geographic location. The focus and purpose of
the weekly meetings is to analyze and discuss the status of activities at the
property level relating to drilling, production volumes and any other major
capital or maintenance activities rather than to discuss financial performance.
On a quarterly basis, a drilling summary is prepared and presented to the chief
decision makers that accumulates the number of wells drilled on a year to date
basis. This information is not presented on a geographic location basis. No
financial information is included in this report.
Also on a quarterly basis, the monthly management report includes a quarter to
date summary of the results. In addition, the quarterly interim financial
statements and management discussion and analysis are distributed for review,
analysis and comment to the chief operating decision makers prior to
distribution to the Board of Directors for approval and released to the public.
In addition to the reports above, the chief operating decision makers have
access to software which allows them to produce reports which enable them to
review financial results for each property as needed. Furthermore, on a daily
basis the Chief Financial Officer receives a report from the treasury group
summarizing the daily cash and debt position on a consolidated basis. This
report is used to make cash management decisions.
BOARD OF DIRECTORS AND AUDIT COMMITTEE
On a quarterly basis the Board of Directors receives the quarterly consolidated
financial statements and Management Discussion and Analysis for their review.
At this time the Audit Committee will receive the same information but
supplemented with a summary memorandum discussing the significant accounting
issues affecting the quarter. None of these items include information on a
geographic operating location basis.
The Board of Directors is responsible for approving the budget and
distributions. The budget is presented to and approved by the Board of
Directors at a corporate level. Additional budget details are provided at
geographic and property levels where a significant amount of activity is
planned.
Monthly distributions are approved by the Board of Directors on a monthly or
quarterly basis. A summary memorandum outlining corporate financial results and
forecasts is presented to the Board of Directors to assist them in the approval
of future monthly distributions. Information is not included on a geographic
operating location basis.
For acquisitions, an analysis of reserve and production information for the
acquisition is presented to the Board of Directors. In addition, a cash flow
forecast for the potential acquisition and pro forma information on a
consolidated basis are also distributed. There is no consideration of the
impact of the acquisition on a particular geographic location.
No other reports are formally and consistently distributed to the chief
operating decision makers.
October 17, 2006
Page 4
DESCRIBE HOW YOUR CHIEF OPERATING DECISION MAKERS DETERMINED CAPITAL BUDGET
ALLOCATIONS BY GEOGRAPHIC LOCATION AND TELL US WHETHER OR NOT THEY BASE THESE
ALLOCATIONS ON ANY SPECIFIC FINANCIAL REPORTS.
Capital budget allocations are made at the property level and an overall
corporate capital budget is approved. The capital allocations are based on
reserve, production and financial data for an individual property, not for
geographic locations. The largest portion of our capital budget is directed
towards the drilling of new wells. We determine which drilling locations to
pursue based on seismic data, reserve data, drilling results from adjacent
wells and cost estimates provided by the engineers and geologists. The cost
estimates are considered in conjunction with future oil and gas price curves to
determine if the potential well is economically viable. The capital budget may
be aggregated to a geographic location basis for the purposes of external
reporting to our investors so to provide them with a general view as to which
areas we plan to focus on in future periods, however, internally our focus is
on a project basis.
SUBMIT A MANAGEMENT ORGANIZATIONAL CHART SHOWING ALL PERSONNEL INVOLVED IN
MANAGING YOUR ORGANIZATION AT THE EXECUTIVE AND SENIOR MANAGEMENT LEVELS,
CLEARLY INDICATING THE NAME OF THE EMPLOYEE AND THE JOB FUNCTION AND IDENTIFY
THE TYPES OF REPORTS, FINANCIAL SUMMARIES, SCHEDULES, AND INFORMATION MEMORANDA
GIVEN TO YOUR CHIEF OPERATING DECISION MAKERS AND BOARD OF DIRECTORS.
Please see the attached organizational chart. We have described the reports
distributed to the chief operating decision makers above. Additional financial
summaries and schedules may be provided to the chief operating decision makers
on an as needed basis however, those distributed formally and consistently are
described above. None of the ad hoc reports distributed to the chief operating
decision makers would be on a geographic operating location basis. All decision
making is performed on a consolidated basis for financing decisions and
financial performance analysis.
DEMONSTRATE HOW YOU HAVE CONCLUDED THAT YOU HAVE ONLY ONE REPORTING UNIT AND
SPECIFICALLY DESCRIBE TO US YOUR DEFINITION OF A REPORTING UNIT FOR U.S. GAAP
PURPOSES. REFER TO PARAGRAPHS 30 AND 31 OF SFAS 142.
In determining what constitutes a reporting unit we have considered our
internal reporting processes in the context of the guidance described in
paragraphs 30 and 31 of SFAS 142 and paragraphs 10 through 16 of SFAS 131, as
noted below
. REPORTING UNIT
FAS142, PAR. 30
30. A REPORTING UNIT IS AN OPERATING SEGMENT OR ONE LEVEL BELOW AN
OPERATING SEGMENT (REFERRED TO AS A COMPONENT). 17 A COMPONENT OF AN
OPERATING SEGMENT IS A REPORTING UNIT IF THE COMPONENT CONSTITUTES A
BUSINESS 18 FOR WHICH DISCRETE FINANCIAL INFORMATION IS AVAILABLE AND
SEGMENT MANAGEMENT 19 REGULARLY REVIEWS THE OPERATING RESULTS OF THAT
COMPONENT. HOWEVER, TWO OR MORE COMPONENTS OF AN OPERATING SEGMENT
SHALL BE AGGREGATED AND DEEMED A SINGLE REPORTING UNIT IF THE
COMPONENTS HAVE SIMILAR ECONOMIC CHARACTERISTICS. 20 AN OPERATING
SEGMENT SHALL BE DEEMED TO BE A REPORTING UNIT IF ALL OF ITS
COMPONENTS ARE SIMILAR, IF NONE OF ITS COMPONENTS IS A REPORTING UNIT,
OR IF IT COMPRISES ONLY A SINGLE COMPONENT. THE RELEVANT PROVISIONS OF
STATEMENT 131 AND RELATED INTERPRETIVE LITERATURE SHALL BE USED TO
DETERMINE THE REPORTING UNITS OF AN ENTITY.
31. AN ENTITY THAT IS NOT REQUIRED TO REPORT SEGMENT INFORMATION IN
ACCORDANCE WITH STATEMENT 131 IS NONETHELESS REQUIRED TO TEST GOODWILL
FOR IMPAIRMENT AT THE REPORTING
October 17, 2006
Page 5
UNIT LEVEL. THAT ENTITY SHALL USE THE GUIDANCE IN PARAGRAPHS 10-15 OF
STATEMENT 131 TO DETERMINE ITS OPERATING SEGMENTS FOR PURPOSES OF
DETERMINING ITS REPORTING UNITS.
OPERATING SEGMENTS
FAS131, PAR. 10
DEFINITION
FAS131, PAR. 10
10. AN OPERATING SEGMENT IS A COMPONENT OF AN ENTERPRISE:
a. THAT ENGAGES IN BUSINESS ACTIVITIES FROM WHICH IT MAY EARN
REVENUES AND INCUR EXPENSES (INCLUDING REVENUES AND EXPENSES RELATING
TO TRANSACTIONS WITH OTHER COMPONENTS OF THE SAME ENTERPRISE),
b. WHOSE OPERATING RESULTS ARE REGULARLY REVIEWED BY THE
ENTERPRISE'S CHIEF OPERATING DECISION MAKER TO MAKE DECISIONS ABOUT
RESOURCES TO BE ALLOCATED TO THE SEGMENT AND ASSESS ITS PERFORMANCE,
AND
c. FOR WHICH DISCRETE FINANCIAL INFORMATION IS AVAILABLE.
AN OPERATING SEGMENT MAY ENGAGE IN BUSINESS ACTIVITIES FOR WHICH IT
HAS YET TO EARN REVENUES, FOR EXAMPLE, START-UP OPERATIONS MAY BE
OPERATING SEGMENTS BEFORE EARNING REVENUES.
11. NOT EVERY PART OF AN ENTERPRISE IS NECESSARILY AN OPERATING
SEGMENT OR PART OF AN OPERATING SEGMENT. FOR EXAMPLE, A CORPORATE
HEADQUARTERS OR CERTAIN FUNCTIONAL DEPARTMENTS MAY NOT EARN REVENUES
OR MAY EARN REVENUES THAT ARE ONLY INCIDENTAL TO THE ACTIVITIES OF THE
ENTERPRISE AND WOULD NOT BE OPERATING SEGMENTS. FOR PURPOSES OF THIS
STATEMENT, AN ENTERPRISE'S PENSION AND OTHER POSTRETIREMENT BENEFIT
PLANS ARE NOT CONSIDERED OPERATING SEGMENTS.
12. THE TERM CHIEF OPERATING DECISION MAKER IDENTIFIES A FUNCTION,
NOT NECESSARILY A MANAGER WITH A SPECIFIC TITLE. THAT FUNCTION IS TO
ALLOCATE RESOURCES TO AND ASSESS THE PERFORMANCE OF THE SEGMENTS OF AN
ENTERPRISE. OFTEN THE CHIEF OPERATING DECISION MAKER OF AN ENTERPRISE
IS ITS CHIEF EXECUTIVE OFFICER OR CHIEF OPERATING OFFICER, BUT IT MAY
BE A GROUP CONSISTING OF, FOR EXAMPLE, THE ENTERPRISE'S PRESIDENT,
EXECUTIVE VICE PRESIDENTS, AND OTHERS.
13. FOR MANY ENTERPRISES, THE THREE CHARACTERISTICS OF OPERATING
SEGMENTS DESCRIBED IN PARAGRAPH 10 CLEARLY IDENTIFY A SINGLE SET OF
OPERATING SEGMENTS. HOWEVER, AN ENTERPRISE MAY PRODUCE REPORTS IN
WHICH ITS BUSINESS ACTIVITIES ARE PRESENTED IN A VARIETY OF DIFFERENT
WAYS. IF THE CHIEF OPERATING DECISION MAKER USES MORE THAN ONE SET OF
SEGMENT
October 17, 2006
Page 6
INFORMATION, OTHER FACTORS MAY IDENTIFY A SINGLE SET OF COMPONENTS AS
CONSTITUTING AN ENTERPRISE'S OPERATING SEGMENTS, INCLUDING THE NATURE
OF THE BUSINESS ACTIVITIES OF EACH COMPONENT, THE EXISTENCE OF
MANAGERS RESPONSIBLE FOR THEM, AND INFORMATION PRESENTED TO THE BOARD
OF DIRECTORS.
14. GENERALLY, AN OPERATING SEGMENT HAS A SEGMENT MANAGER WHO IS
DIRECTLY ACCOUNTABLE TO AND MAINTAINS REGULAR CONTACT WITH THE CHIEF
OPERATING DECISION MAKER TO DISCUSS OPERATING ACTIVITIES, FINANCIAL
RESULTS, FORECASTS, OR PLANS FOR THE SEGMENT. THE TERM SEGMENT MANAGER
IDENTIFIES A FUNCTION, NOT NECESSARILY A MANAGER WITH A SPECIFIC
TITLE. THE CHIEF OPERATING DECISION MAKER ALSO MAY BE THE SEGMENT
MANAGER FOR CERTAIN OPERATING SEGMENTS. A SINGLE MANAGER MAY BE THE
SEGMENT MANAGER FOR MORE THAN ONE OPERATING SEGMENT. IF THE
CHARACTERISTICS IN PARAGRAPH 10 APPLY TO MORE THAN ONE SET OF
COMPONENTS OF AN ORGANIZATION BUT THERE IS ONLY ONE SET FOR WHICH
SEGMENT MANAGERS ARE HELD RESPONSIBLE, THAT SET OF COMPONENTS
CONSTITUTES THE OPERATING SEGMENTS.
15. THE CHARACTERISTICS IN PARAGRAPH 10 MAY APPLY TO TWO OR MORE
OVERLAPPING SETS OF COMPONENTS FOR WHICH MANAGERS ARE HELD
RESPONSIBLE. THAT STRUCTURE IS SOMETIMES REFERRED TO AS A MATRIX FORM
OF ORGANIZATION. FOR EXAMPLE, IN SOME ENTERPRISES, CERTAIN MANAGERS
ARE RESPONSIBLE FOR DIFFERENT PRODUCT AND SERVICE LINES WORLDWIDE,
WHILE OTHER MANAGERS ARE RESPONSIBLE FOR SPECIFIC GEOGRAPHIC AREAS.
THE CHIEF OPERATING DECISION MAKER REGULARLY REVIEWS THE OPERATING
RESULTS OF BOTH SETS OF COMPONENTS, AND FINANCIAL INFORMATION IS
AVAILABLE FOR BOTH. IN THAT SITUATION, THE COMPONENTS BASED ON
PRODUCTS AND SERVICES WOULD CONSTITUTE THE OPERATING SEGMENTS.
REPORTABLE SEGMENTS
FAS131, PAR. 16
16. AN ENTERPRISE SHALL REPORT SEPARATELY INFORMATION ABOUT EACH
OPERATING SEGMENT THAT (A) HAS BEEN IDENTIFIED IN ACCORDANCE
WITH PARAGRAPHS 10-15 OR THAT RESULTS FROM AGGREGATING TWO OR
MORE OF THOSE SEGMENTS IN ACCORDANCE WITH PARAGRAPH 17 AND (B)
EXCEEDS THE QUANTITATIVE THRESHOLDS IN PARAGRAPH 18. PARAGRAPHS
19-24 SPECIFY OTHER SITUATIONS IN WHICH SEPARATE INFORMATION
ABOUT AN OPERATING SEGMENT SHALL BE REPORTED. APPENDIX B
INCLUDES A DIAGRAM THAT ILLUSTRATES HOW TO APPLY THE MAIN
PROVISIONS IN THIS STATEMENT FOR IDENTIFYING REPORTABLE
OPERATING SEGMENTS.
In assessing whether the geographic locations constitute a component of an
operating segment and a reporting unit we noted the following:
o Full discrete financial information for each geographic location is not
available. As we have only one full cost pool of assets, discrete
financial information regarding total assets and depletion assigned to
each geographic location is not available
o Operating results on a geographic by geographic basis are not reviewed by
management. Production volume of oil, gas and natural gas liquids, are
reviewed on a property by property basis although they are available by
geographic location.
October 17, 2006
Page 7
o Corporate financial results are reviewed on a consolidated basis.
Operating expense information and capital expenditures by geographic
location is available but this information is not detailed enough to make
investment and resource allocation decisions.
o The geographic operating locations are arbitrarily determined and may be
frequently adjusted to accommodate acquisitions or dispositions and serve
mainly to allocate responsibility to supervisors and managers but not to
assess operating results. In certain regulatory filings and public
information, we provide information on a geographic location basis to
provide a frame of reference in terms of where our properties are located
geographically. The main focus of the external information is generally on
a consolidated basis and when discussing capital projects and variances in
production volumes information is discussed on a major property or project
basis.
o As a conventional oil and gas company our operations have similar economic
characteristics, are relatively homogeneous and external market factors
similarly impact each of our geographic locations. The geographic location
does not provide additional shelter from or exposure to variability in
pricing or costs of production. Pricing is driven by market indexes and
each geographic location is equally impacted by pricing changes.
Similarly, increases or decreases in our main cost drivers such as fuel,
power and contractor costs are realized in all geographic locations.
o Harvest Energy Trust is a conventional oil and gas trust with all of our
drilling operations occurring in the western sedimentary basin in Canada.
We follow the full cost method of accounting for our oil and gas
operations. Regulation SX Article 4-10 requires that cost centers under
the full cost method of accounting be determined on a country by country
basis and the impairment be determined on a country by country basis. Our
chief operating decision makers view our operations as one cost centre.
Accordingly all of our oil and gas operations are organized into one cost
centre.
Based on these facts, we have determined that geographic locations do not
constitute a reporting unit.
In conclusion, as the chief operating decision makers do not use geographic
operating location results to make investment decisions or to assess
performance, we believe that we have one reporting unit. Therefore, for the
purposes of the goodwill impairment test under U.S GAAP it continues to be
appropriate to evaluate goodwill by comparing our total unitholders' equity
book value and the related fair value (assessed based on the trading price of
our trust units at December 31, 2005), to determine if a potential goodwill
impairment existed.
I trust the foregoing addresses the additional query raised by the Securities
Exchange Commission, but if any items require clarification, please do not
hesitate to give me a call at your convenience at 403-268-3197. Many thanks for
your comments.
Yours truly,
HARVEST ENERGY TRUST
(Signed) "ROBERT W. FOTHERINGHAM"
Robert W. Fotheringham
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John Zahary
President and
CEO
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Rob Morgan Bob Fotheringham Jake Roorda Cindy Gray
Vice President Vice President Vice President Manager Investor
Engineering Finance and CFO Corporate Relations
and COO
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Jim Sheasby Pat McCarron Matt Mazuryk Darcy Tupechka Wayne Sampson Gary Boukall Jim Look Neil Sinclair
Manager Manager EH&S Manager Drilling Manager Land Manager Manager Manager
Exploitation Exploitation Manager Negotiation Geosciences Geosciences Operations
North/East West/South, North/ East West/South
/SE Sask. /SE Sask.
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|_ Darcy Erickson |_ |_ Gerard Butts |_
Manager Well Joint Venture Manager Land Facilities
Servicing/Compliance Administration
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