Case Studies

Equitable Cost Splitting for IT System of a Petroleum Joint Venture (MPSAS

2 Fortune 500 companies formed a joint venture for producing petroleum products. The production complex uses shared IT system.

The IT system is based on the main system of one the JV partner and the cost is meant to be split equitably.

The JV company however does not use all the functions of the main architecture of the entire IT system. Thus, for splitting the cost equitably, only the shared functions should be borne by the partners.

The IT system of the JV entity is therefore built by one of the JV partner and consisted of cost that are directly allocated and/or apportioned.

The JV company is then billed for the cost of the system. The claim consisted of highly voluminous details i.e. vendors’ invoices, allocations and stages of apportionments. For processing the claims by the JV partner, the Management of the JV company would like for cost verification to be done.

The IT system cost several hundred million Ringgits and is the second highest expenses after the cost of production of the petroleum products.

Request by the JV Entity

01

To verify the reasonableness of the cost charging methodology.

02

To substantially verify the veracity of the vendors’ invoices.

03

To substantially verify those directly allocated costs.

04

To substantially verify the cost apportionment and their basis.

What we delivered

  • We explained to the Management of the concept applied for cost charging.
  • We made it easier to the Management to identify those functions that should not be charged to the JV Company.
  • Highlighted important issues concerning cost allocation and apportionments.
  • Information on charges that are verified as proper and reasonable, charges that are not verifiable either due to unavailability of adequate supporting documentation or unverifiable basis for cost apportionment (due to limitation of our scope and access).

The result

  • The understanding of management of the JV Company of the expenditure of IT system has significantly increase.
  • Assisting the management to Identify those costs that should not be borne by the JV Company.
  • Providing the Management important points for negotiating the shared cost.
  • Significant savings of IT expenditure to the tune of several tenths of millions Ringgit.

Verification of cost allocation between jV partners

(Sample, one of the cost allocated)