Company Business Practice

Revenue Recognition and Revenue Accruals

Date Approved: January 30, 2018 Reference No.: 4-10977

PURPOSE

This business practice establishes requirements for recognizing revenue and recording revenue accruals.

SCOPE

This business practice applies to Company operations worldwide.

ROLES AND RESPONSIBILITIES

Country Finance and Accounting (F&A) Manager or NWA F&A Manager (F&A Manager):
Responsible for proper evaluation and recording of revenue on a monthly basis along with the
maintenance of the supporting documentation and approvals related to revenue accruals.
Review/approve all customer contracts and confirm appropriate revenue recognition for the performance
obligations contained therein.

Director of Global Operations Accounting (GOA): Responsible for providing guidance on all aspects
of revenue recognition as well as on contracts that contain consideration that is non-cash or payable to
the customer. Must also approve contracts that include embedded derivatives or unusual pricing
mechanisms.

Senior Manager, Technical Accounting Research: Resolves long-term project accounting issues and
ensures that financial reporting disclosures regarding projects are complete and factual and assists with
any Accounting Contracts that may contain variable consideration related to a significant financing
component.

Region F&A: Responsible for approving revenue accruals being re-accrued for the third month.

Senior F&A Manager, Consulting & Project Management (C&PM): Responsible for coordinating the
corporate reviews of C&PM contracts and documenting the impact of the conclusions of these reviews on
the accounting treatment of the contract. Responsible for documenting the conclusions of the accounting
review in an accounting white paper and receiving approval for that white paper prior to start-up of the
contract.

Country Lead Accountant: Advises Country Business Development and Country Product Service Line
(PSL) Manager(s) regarding the accounting treatment for pass through contract clauses. Monitors the
revenue and cost accounts used to record pass through third-party items. Confirms that revenue and
cost are posted in the appropriate reporting period. Performs initial review and documents all relevant
facts for contractual arrangements having a non-risk component for PSL Noncore Business then secures
the approval from the Director of GOA for using non-risk accounting by providing relevant contract terms
and other supporting documentation to substantiate the nature of the business risk to the Company.

Country PSL Service Coordinator and/or Service Planner: Work with the Country Lead Accountant
on contracts involving third-party rebillable amounts and confirm that the Country Lead Accountant is
aware of current period activity involving pass through items. Affirm that purchase requisitions for goods
and services that are rebillable to the customer have the correct cost elements associated with pass
through expense.

Landmark F&A Manager: Responsible for reviewing all Software Revenue Recognition Checklists and
providing guidance on revenue recognition for specific customer contracts or arrangements as needed.
Provides guidance for all Landmark revenue accruals.

Landmark Region/Country F&A Lead or Designee: Responsible for reviewing transactions,

contracts, worksheets, reports, and other source documents to make certain that revenues are recorded
properly on a monthly basis in conformity with GAAP and for making certain that authorization and

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documentation are obtained and maintained in accordance with Company policies and business
practices. For all software-related transactions in excess of USD500,000, they are responsible for
completing the Software Revenue Recognition Checklist and for gathering and attaching to the checklist
all documentation containing transaction level detail necessary to support timely revenue recognition.

BUSINESS PRACTICE

The Accounting Standard Codification (ASC) 606, Revenue from Contracts with Customers, provides
guidance for revenue recognition from customer contracts in a manner that depicts the transfer of goods
or delivery of services to a customer. The Company recognizes revenue by applying the five steps
described in ASC 606:

• Step 1: Identify the contract(s) with a customer.

• Step 2: Identify the performance obligations in the contract.

• Step 3: Determine the transaction price.

• Step 4: Allocate the transaction price to the performance obligations in the contract.

• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The five steps are explained in more detail below to help understand the application to contracts with
customers.

Step 1: Identify the contract(s) with a customer

A contract according to ASC 606, i.e., an Accounting Contract, is an agreement between two or more
parties that creates enforceable rights and obligations. Normally, the following criteria identify the
existence of a contract that creates rights and obligations:

• the contract is agreed (in writing or orally) and each party is committed to perform their
obligations;
• within the contract, the goods/services to be transferred/provided to the customer are identified;
• as a result of the Company’s performance, the Company expects to be paid;
• payment terms are contained within the contract; and
• the customer has the ability and intention to pay the Company for the goods/services delivered.

An Accounting Contract does not exist if either the Company or the customer can unilaterally cancel the
contract before any of the goods or services have been delivered without compensating the other party.

For example, a contract in the form of a Master Service Agreement (MSA) or a Statement of Work
(SOW) often includes general terms and conditions that identify the services to be provided under the
contract as well as pricing; however, these usually do not create enforceable rights and obligations on
either the Company or the customer. Also, many of the Company’s long-term customer contracts
contain provisions that allow the customer to unilaterally cancel the contract.

Enforceable rights and obligations for most of the Company’s work are generally created when
goods/services are requested by the customer. The Company documents the request through the
creation of a sales order, which is based upon a call from the customer, a written proposal, or other
similar documents that identify, individually or together, the goods/services to be transferred to the
customer, agreement on pricing and payment terms, and the customer’s ability and intention to pay the
Company. Therefore, the Company has determined that most Accounting Contracts are at the sales
order level.

For lump-sum turn-key, software, Pay-Out-Of-Production, and other similar customer contracts,
enforceable rights and obligations are usually created at the customer contract level so the customer
contract is the Accounting Contract.

All Accounting Contracts are to be classified as either short-term or long-term as follows:

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 • Short-term contracts – any Accounting Contract that creates enforceable rights and obligations
to provide goods/services for less than or equal to 12 months

• Long-term contracts – any Accounting Contract that creates enforceable rights and obligations to
provide goods/services for more than 12 months

As most of the Company’s Accounting Contracts are at the sales order level and the customer can
unilaterally cancel, most are classified as a short-term Accounting Contract.

As part of Step 1, the Company must evaluate whether it is probable that the customer will pay
substantially all amounts owed. This analysis is performed at contract inception and is not revisited
unless there is a significant change in facts and circumstances related to the customer or the subject
matter of the contract, such as late payments or pending bankruptcy proceedings. All facts and
circumstances should be considered in the evaluation of a customer’s ability and intention to pay
amounts due, including past experience with the customer and expectations about the customer’s
financial stability. Customer Financial Services (CFS) performs this evaluation prior to the Company
agreeing to a contract and performing work for the customer. The evaluation of collectability is
considered complete if CFS has extended a credit line with an open balance currently sufficient to cover
the estimated revenue for the work. See Step 3: Determine the transaction price – Customer Credit
Limits for additional guidance.

Step 2: Identify the performance obligations in the Accounting Contract

To identify the performance obligations, all the goods or services promised in the Accounting Contract
are considered, whether explicitly stated or implied based on customary business practices (e.g.,
Warehousing Services for Customer-Owned Inventory or training implied in the contract).

Goods and services qualify as a performance obligation if (1) the customer can benefit from the goods or
services on its own or with resources available to the customer and (2) the transfer of goods or delivery
of services is separately identifiable from other promises in the contract (i.e., the goods/services are not
highly interrelated/interdependent, do not serve as an input to deliver a combined output, or do not
customize other goods/services in the contract).

In general, goods and services provided by each PSL/Sub-PSL represent a promise to deliver goods and
services that is distinct. In addition, the Company sells these goods and services separately to
customers. Therefore, the goods and services of each PSL/Sub-PSL will generally be recognized as one
separate performance obligation. An example of multiple performance obligations in a contract is when
the Completion Tools PSL sells a tool and also installs it. If the contract is silent on reselling or allows the
customer to resell the tool and the right to payment is not contingent on the successful installation of
the tool, then the sale and installation are considered two separate performance obligations and revenue
is recognized accordingly for each. Keep in mind in this example that to recognize revenue on the sale of
the tool, the customer must obtain control of the tool or have Customer-Owned Inventory (COI)
language agreed with the customer as described in Step 5 below. If right to payment is contingent on
the successful installation of the tool, then the sale and installation is considered one performance
obligation and revenue is recognized upon successful installation.

In some integrated project management contracts (i.e., C&PM), all individual PSLs, including project
management activities, are recognized as a single performance obligation. A C&PM contract usually calls
for the delivery of a well or multiple wells rather than the individual PSL/Sub-PSL discreet services as
seen in a typical contract.

Step 3: Determine the transaction price

After identifying the performance obligations in the contract, the F&A Manager determines the
transaction price that it expects to receive from the customer. In order to calculate the transaction price,
the F&A Manager identifies if the following components exist in the Accounting Contract:

• fixed consideration;
• variable consideration;
• noncash consideration;
• consideration payable to a customer; and

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 • the existence of a significant financing component.

Fixed consideration

Fixed consideration represents the guaranteed amount that the Company expects to earn from the
goods/services provided to the customer. For the Company, it is the agreed upon contracted price with
the customer that is not dependent upon any results subsequent to the delivery of the Company’s
service or product.

Variable consideration

Variable consideration usually relates to discounts, bonuses, penalties, job disputes/COPQ, etc. The
Company will need to estimate the variable consideration depending on the best estimate of the amount
of consideration we expect to receive.

The transaction price includes any payment that the Company is expected to receive, even if that
payment relates to goods/services that do not qualify as performance obligation (e.g., mobilization or
setup activities).

See the Other Considerations section for additional examples.

Noncash consideration

The calculation of the transaction price for contracts containing noncash consideration includes the fair
value of the noncash consideration to be received as of the contract inception date. An example of
noncash consideration would be receiving equity shares of the customer instead of cash. This is rare and
if you think a contract may contain noncash consideration, contact the Director of GOA.

Consideration payable to a customer

Consideration payable to a customer normally includes, but is not limited to, cash amounts, credits, or
coupons or vouchers that the Company pays or expects to pay to a customer or that can be applied
against amounts owed to the Company. This is a rare occurrence, but if a contract appears to contain
consideration payable to a customer, contact the Director of GOA for further guidance.

Significant financing component

The Company adjusts the transaction price for the time value of money if the timing of payments agreed
to by the parties (either explicitly or implicitly) are greater than 12 months from the point at which
control is transferred to the customer for goods/services promised.

The Company uses the discount rate that is reflective of a separate financing transaction between the
Company and the customer.

The expectation is that the application of significant financing component will be minimal since the
Company does not enter into arrangements where payments are expected to be received a year after
the services have been rendered. Statutory retention requirements expected to be over one year are
excluded from this requirement. If there is any question about whether this type of arrangement exists
in a contract, the Senior Manager of Technical Accounting Research should be consulted.

Step 4: Allocate the transaction price to the performance obligations in the contract

When Step 2 results in multiple performance obligations, the Country F&A Manager allocates the
transaction price to each performance obligation (distinct goods or services) on a relative standalone
selling price basis. The allocation of transaction price depicts the amount the Company expects to
receive for each performance obligation.

The best evidence of a standalone selling price is the observable price of the goods or services when the
Company sells that good or service separately in similar circumstances and to similar customers.

The most common example of allocating a transaction price for the Company is when access licenses are

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sold combined with maintenance and support (M&S). The overall transaction price has to be allocated
between the license and M&S.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Recognizing revenue for short-term Accounting Contracts

Revenue is recognized when (or as) the Company satisfies a performance obligation by transferring a
promised good or delivering a service to a customer. An asset is transferred when (or as) the customer
obtains control of that asset or receives value from a service. Control is the ability to prevent other
parties from directing the use of and obtaining the benefits from an asset. The F&A Manager is
responsible for determining, based on the Accounting Contract, when the customer has taken control of
a good or received value for a service.

Control can be transferred either over time or at a point in time.

Over Time

The Company satisfies a performance obligation over time if it meets any of the following criteria:

• the customer receives and consumes the benefits from the services the Company
provides simultaneously (e.g., M&S services for software licenses);

• the Company’s services create or enhance an asset (e.g., a well) that the customer
controls as the asset is created or enhanced; or

• the Company’s services do not create an asset that has any alternate use to the
Company (e.g., the asset created cannot be sold to another customer). In addition, the
Company has an enforceable right to payment for services delivered to date.

The F&A Manager calculates the measure of progress of the performance obligation over time and
recognizes revenue based on one of the following two methods:

Input Methods

Input methods recognize revenue on the basis of an entity’s efforts or inputs toward satisfying a
performance obligation. Examples of input methods include:

• resources consumed;
• labor hours expended;
• costs incurred;
• time elapsed; and
• machine hours used.

Output Methods

Output methods recognize revenue on the basis of direct measurements of the value to the customer of
the goods or services transferred to date relative to the remaining goods or services promised under the
contract. Examples of output methods include:

• surveys of performance completed to date;

• appraisals of results achieved;
• milestones reached;
• time elapsed;
• units produced; and
• units delivered.

Example of Over Time: When the Company engages in Production Enhancement activities, the
well is enhanced in stages over time. Revenue recognition would be based on some measure of
progress over time (e.g., stages completed or footage drilled – this represents an output
method). Another example is when the Company’s performance obligation is to supply the

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drilling equipment and people on a day rate basis; revenue would be accrued based on the
number of days the equipment and people were available.

If none of the above criteria are met, then the revenue is to be recognized at a point in time.

Point in Time

Indicators of the transfer of control for performance obligations satisfied at a point in time include, but
are not limited to, the following:

• the Company has a present right to payment for the asset;

• the customer has legal title to the asset;
• the Company has transferred physical possession of the asset;
• the customer has the significant risks and rewards of ownership of the asset; or
• the customer has accepted the asset.

Example of Point in Time: When the Company sells a drill bit to a customer, assuming control
passes to the customer when delivered based on shipping terms and passage of title per the
contract.

Normally, services are delivered over time and goods are sold at a point in time. However, certain
contracts would preclude the Company from recognizing revenue over time for services unless the whole
job is successfully completed. Hence, there would be situations where the Company would deem the
performance obligation is satisfied at a point in time.

Evidence to Support Revenue Accrual

Evidence of a customer’s signature is not required in order to recognize revenue, as long as control has
been transferred to the customer and appropriate evidence exists that proves the services or goods were
provided to the customer. However, customers typically will not accept invoices without a signature, so it
is still required to get customer signatures in order to bill.

In most situations, the amount of revenue recorded is based on the amount of work performed at the
end of a reporting period. In certain long-term Accounting Contracts, other methods need to be
considered when determining revenue to be recognized in a given period.

Recognizing revenue for long-term Accounting Contracts

The Company recognizes revenue for the performance obligation in a long-term Accounting Contract
using a method that most appropriately depicts its progress toward complete satisfaction of the
performance obligation.

Appropriate methods of measuring progress include input methods and output methods as discussed
above. In determining the appropriate method for measuring progress, the Company considers the
nature of the goods or services that the Company promised to transfer to the customer.

The method(s) selected must be applied consistently to all Accounting Contracts having similar
characteristics. When applying a method for measuring progress, the Company excludes any goods or
services for which the entity does not transfer control to a customer. Conversely, the Company should
include in the measure of progress any goods or services for which the entity has transferred control to a
customer when satisfying that performance obligation.

Due to the complexity of long-term contracts, the technical accounting treatment for each contract,
other than software contracts, is to be evaluated, determined, and documented by the local F&A
Manager in an Accounting white paper, reviewed and approved by the Senior Manager, Accounting
Research and the Senior F&A Manager, C&PM, if applicable.

Contract Lifecycle Management System

As required by Company Business Practice 4-44161, Halliburton Customer Contract Repository

Contract Lifecycle Management (CLM), all long-term Accounting Contracts are required to be entered

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into the CLM system. When entering long-term contracts into CLM, the box indicating that it is a long-
term Accounting Contract must be checked, which will create an approval workflow through GOA to
validate the long-term Accounting Contract designation.

Other considerations

Variable Consideration

A few of the forms of variable consideration are discussed below:

Discounts

Volume discounts are estimated and deducted from the total transaction price identified in the contract.

A discount to a pricing sheet provided to a customer is not considered variable consideration but rather
an adjustment to the fixed consideration. The price discount is taken into account as a reduction of the
total transaction.

Bonus/Malus Consideration

A bonus/malus item dependent upon certain performance milestones achieved during the delivery phase
represents variable consideration. Bonus/malus are only included in the total transaction price if the
Company is able to make a reasonable estimate regarding the amount to be collected based on past
history or current indicators of earning the bonus.

Right of Returns

When selling a product and granting the customer a right to return the product, the right of return
represents a form of variable consideration that is estimated when determining the transaction price of
the contract. Revenue is not recognized for the products expected to be returned.

Estimated returns should be calculated based on historical data when available.

See the Other Revenue Recognition Matters section for additional information on booking to constrained
accounts.

Buybacks

For Baroid chemical product returns and fluid buybacks, see Company Business Practice 4-44019, Baroid
Chemical Product Returns and Fluid Buybacks.

Mobilization Costs/Demobilization Costs

Mobilization Costs/Demobilization Costs are included in the transaction price and are not considered a
separate performance obligation.

Mobilization Costs paid by customers benefit either the entire customer contract or only the Accounting
Contract and should be spread over the contract period they benefit starting the day the customer starts
receiving benefits from the Company’s delivery of the performance obligation.

If there is one lump-sum fee for both Mobilization Costs and Demobilization Costs, revenue recognition
should follow that of the Mobilization Costs described above.

If there is a separately identifiable Demobilization Cost, the fee should be recognized with the
completion of the final performance obligation in the customer contract.

If there are multiple mobilization charges related to specific actions, then any fee received can only be
recognized when the individual trigger points associated with them are achieved. The initial Mobilization
Costs are treated as a period expense rather than amortized over the contract terms as there is no
linkage between the smaller multi-charged mobilization fee and the initial Mobilization Cost.

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For example, the Company incurs an initial Mobilization Cost of USD500,000 to put a tool in place for a
contract. Each time a tool is shipped to the rig, a USD2,000 mobilization fee is charged to the customer.
The USD2,000 is recognized at the time the tools are shipped to the rig. The initial mobilization of the
tool (USD500,000) at contract start-up is treated as a period expense when the liability falls due.

Costs to fulfill a contract are costs that are necessary to deliver a performance obligation.
Common examples of Mobilization Costs may include:

• costs to move equipment to a work area (importation, transportation, etc.);

• costs of relocating personnel; and
• costs of modifying equipment to meet the specific needs of the contract.

Mobilization Costs would not include any cost that would normally be capitalized as a fixed asset or
included as inventory and would not include training of personnel. Mobilization Costs should be
capitalized. However, in most cases, Mobilization Costs are deemed as inconsequential since the
majority of the Company’s Accounting Contracts are short-term in nature and will be expensed as
incurred.

If the Accounting Contract is long-term, then Mobilization Costs should be capitalized and amortized over
the contract term, regardless of whether a mobilization fee was received.

Start-up Costs

Start-up, pre-operating, or preopening costs are costs incurred prior to the commencement of a new
operation (e.g., a new plant, sales outlet, or process or service). Examples of Start-up Costs include, but
are not limited to:

• costs of operating personnel who initiate the new operations;

• costs of hiring and training new employees;
• initial operating losses incurred in the period subsequent to when a new plant, store, production
line, etc., becomes available for use but prior to the achievement of a reasonable level of
activity;
• costs of connecting utilities;
• remodeling costs for an existing facility;
• occupancy costs before opening; and
• expenditures for commencing new operations or launching new products or processes.

Start-up Costs should always be expensed as incurred.

Customer Credit Limits

In the event that a PSL provides goods or services to a customer that does not have a CFS approved
credit line and has made no prepayment, revenue is not recognized until either:

• the customer pays for the goods or services;

• the customer provides a bank guarantee or unconditional letter of credit that has been approved
by the Treasury Department; or
• CFS has established a credit limit exceeding the amount of the unbilled sales order(s).

The revenue and associated accounts receivable need to be constrained to not exceed the credit limit.
Cost of goods sold related to the work performed, whether or not revenue is recognized at the full
amount, must be recorded/accrued as an expense in the period incurred.

See the Other Revenue Recognition Matters section for additional information on booking to constrained
accounts.

Job Disputes/COPQ

Known disputes on sales orders or cost of poor quality (COPQ) at the time of accrual should be estimated
for revenue recognition and based on the amount that the Company expects to receive after the
resolution of the dispute. Recording no revenue when there is a known dispute or COPQ incident is not

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acceptable unless it is expected that nothing will be collected from the customer.

For situations in which a fully priced invoice is needed to pursue dispute resolution, a sales order is
completed, delivered, and billed per the original job pricing. A corresponding journal entry is required to
reverse the estimated revenue the Company does not expect to collect until final resolution is obtained.

For additional guidance, see Company Business Practice 4-44052, Accounting for Customer Disputes.

Customer-Owned Inventory (COI)/Bill and Hold Stored at a Company Warehouse

In certain situations, most commonly in the Completion Tools PSL, the customer orders equipment but
requests that the equipment be shipped to one of the Company’s field warehouses, usually near the well
site. This delivery method is requested by the customer and the customer agrees contractually to accept
title and all risks of ownership when the inventory is delivered to the Company’s warehouse.

Before recognizing revenue on a sale of COI to a customer, the F&A Manager performs a thorough
review of the customer contracts and related purchase orders to ensure that transfer of title and risk of
ownership to the customer has occurred when the inventory is delivered to the Company’s warehouse.
The use of the Company’s warehouse must be requested by the customer and addressed specifically in
the contract and/or purchase order shipping terms.

Below are key conditions that must be met before revenue is recorded on inventory that is being stored
for the customer. Revenue can only be recognized if the following conditions have been clearly
documented in the terms and conditions of the Accounting Contract, related PO, or supplemental COI
letter and agreed to by the customer.

• Contract terms and conditions clearly provide for title to transfer to the customer upon delivery
to the Company’s warehouse. Verbal agreement by the customer is not sufficient; the
acknowledgment must be clearly stated in the contract and/or purchase order.

• All risk of loss with respect to loss or damage arising from any cause or theft, etc., is clearly
defined as belonging to the customer. The Company acts only as Bailee for the convenience of
the customer (with no significant additional obligations). The Company does not insure COI in its
warehouse, except for coverage resulting from the Company’s negligence.

• The Company has right to payment from the customer and payment cannot be contingent on
providing future services to the customer.

• There should be no right of return provision provided to the customer.

The COI must be segregated from the Company’s inventory and not subject to being used to fill other
orders and is ready for physical transfer to the customer. This is required by the Company but does not
have to be agreed with the customer.

In cases where an Accounting Contract does not meet the criteria for revenue recognition and the
Company is holding customer inventory, the revenue and cost is deferred until either the customer takes
physical possession of the inventory or the customer agrees in writing that it no longer wants the
inventory and allows it to be destroyed.

The Company has determined that the Warehousing Services provided to the customer are considered a
separate performance obligation but the Warehousing Services are deemed to be inconsequential and
the Company will not allocate any part of the transaction price to the Warehousing Service. This
determination will require a periodic analysis of COI/Bill and Hold Transactions to validate the materiality
of the Warehousing Services. This will be performed as part of the Company’s semi-annual COI
reporting. If the Warehousing Services are billable to the customer, then the warehousing is a separate
performance obligation and revenue should be recognized over the service period identified in the
contract.

Embedded Derivatives

Accounting Contracts with pricing mechanisms linked to commodities (i.e., crude and natural gas prices)

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or indices other than normal cost of living inflation index should be evaluated for embedded derivatives
in accordance with ASC 815-15-10 Derivatives and Hedging, and approved by the Director of GOA or
designee. Additionally, contracts with unusual pricing mechanisms require review and approval by GOA.

Shipping and Handling Activities

Shipping and handling activities performed before the control of a product is transferred to the customer
do not constitute a promised service to the customer in the Accounting Contract but represent fulfillment
costs and are expensed as incurred. In such cases, revenue is recognized when control of the good
transfers to the customer. If revenue is recognized before contractually agreed shipping and handling
activities occur, the costs are accrued when the related revenue is recognized.

Principal vs. Agent Considerations (Gross/Net Revenue)

When a third party is involved in providing goods or services to a customer, the Company determines
whether the nature of its promise is a performance obligation to provide the specified goods or services
itself (the Company is a Principal) or to arrange for those goods or services to be provided by the other
party (the Company is an Agent). The analysis should be performed for each distinct good or service
rather than at the Accounting Contract level.

The Company is a Principal in a transaction if it controls the specified goods or services before they are
transferred to the customer. Usually, the Company acting as a Principal obtains control of any of the
following:

• a good or another asset from the other party that then transfers to the customer;
• the ability to direct a third party to provide the service to the customer on the Company’s behalf;
or
• a good or service from the other party that it then combines with other goods or services in
providing the specified good or service to the customer.

Indicators that the Company controls a good/service before it is transferred include, but are not limited
to, the following:

• The Company is primarily responsible for fulfilling the promise to provide the specified good or
service.

• The Company has inventory risk before the specified good or service has been transferred to a
customer or after transfer of control to the customer (e.g., if the customer has a right of return
and the Company will take the product back even if provided by a third party).

• The Company has discretion in establishing the price for the specified good or service indicating
that the Company has the ability to direct the use of that good or service and obtain
substantially all or most of the remaining benefits.

If the Company is a Principal in a transaction, the revenues are recorded on gross basis; therefore,
presenting rebillable costs plus any markup as gross revenue.

If the Company is an Agent, the revenue or any fees collected are recorded on a net basis. The expense
is credited when the third-party item is recharged to the customer and only the customer allowed
markup or handling fee is credited to Company revenue. It is rare that the Company is considered an
Agent in a transaction because the Company usually takes on some sort of risk.

If it is not clear whether the Company is a Principal or an Agent, consult the Director of GOA.

After determining whether the Company is the Principal or the Agent in a transaction, there is another
step for management reporting related to pass-through revenue and costs. This step is to determine
whether the product or service being provided is a PSL Core or a PSL Noncore Business of the Company.

If the product or service is considered a PSL Core Business of the Company, the transaction is recorded
in the normal revenue and cost accounts. If the product or service is considered a PSL Noncore Business
of the Company, the transaction is recorded to the applicable pass-through revenue and cost accounts.

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Accounting for Third-Party Invoices

• Pass-through (PSL Noncore Business) third-party invoices where the Company is Principal and
that are rebillable to the customer are recorded as follows:

The customer is billed and revenue is credited to SAP account 400800, Pass-Through Revenue
at Risk. Any markup on the third-party invoice is credited to revenue using SAP account
400900, Pass-Through Revenue Markup. The third-party invoice is debited to SAP account
500850 Pass-Through Expense at Risk-Manual PO.

• Pass-through (PSL Noncore Business) third-party invoices where the Company is acting as an
Agent and that are rebillable to the Company’s customer are recorded as follows:

Billing to the Company customer is credited to SAP expense account 500900, Owner
Furnished/Pass-Through Billing. The markup is credited to revenue using SAP account 400900,
Pass-Through Revenue Markup. The third-party invoice is debited to expense using the
following SAP accounts:

1. 500910, Owner Furnished/Pass-Through Materials

2. 500911, Owner Furnished/Pass-Through Subcontractor’s Costs
3. 500912, Owner Furnished/Pass-Through Freight
4. 500913, Owner Furnished/Pass-Through Equipment
5. 500914, Owner Furnished/Pass-Through Other

Note that the credits recorded in 500900 represent the offset to the expenses charged to
500910, 500911, 500912, 500913, and 500914, though not always in the same month. The
accounts are utilized to provide some reasonable assurance that costs recorded as rebillable are
invoiced to the customer in the appropriate reporting period while applying relevant accounting
principles for revenue and expense recognition.

Pass-through revenue accounts do not garner any indirect allocations.

Processes for Third-Party Invoices

The Country Lead Accountant, Country Business Development Manager, Country PSL Service
Coordinator/Service Planner, and Country PSL Manager communicate regarding contracts under
negotiation and signed contracts that allow Company billings for amounts paid to third-party suppliers
and subcontractors.

The Country PSL Service Coordinator in particular remains in close communication with the Country F&A
Manager or Country Lead Accountant regarding current period activity for contracts involving pass-
through billings. The Country Procurement Manager also obtains input from the Country PSL
Coordinator/Service Planner regarding any pass-through arrangements. In this regard, it is critical that
the Country PSL Coordinator/Service Planner confirms the correct coding of purchase requisitions for
goods and services that are re-billable to the customer.

The Country Lead Accountant affirms that the Accounts Payable clerk and the Accounts Receivable clerk
are informed regarding which contracts allow rebilling of amounts paid to third parties and proper
classification for pass-through treatment. On a monthly basis, the Country Lead Accountant reviews
activity in all pass-through revenue and expense accounts and the Owner Furnished/Pass-Through
revenue and expense accounts to see that transactions are correctly classified and recorded in a timely
manner. As part of the monthly review, the Country Lead Accountant reviews the credits recorded in
account 500900 and the expenses charged to 500910, 500911, 500912, 500913, and 500914 for
reasonableness and correct classification and are recorded in the appropriate reporting period.

Use of Agents and Resellers/Distributors

In customer arrangements involving Agents and resellers, it is necessary to determine who has the
ultimate obligation to pay the Company for the goods, licenses, services, hardware, and services sold.

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In most agency arrangements, the Agent is a facilitator of the transaction but the payment obligation
resides with the end user as the end customer or licensee. As such, the sale and earnings process is
complete and revenue is recognized upon final delivery to the end user. In agreements where an Agent
is part of the arrangement, a copy of the executed agreement between the end user and the Agent is
required to determine appropriate revenue recognition.

On the other hand, in reseller/distributor arrangements, the reseller generally has the obligation to pay
the Company. However, an evaluation should be made by the F&A Manager to ascertain the probability
of collection of fees from the reseller if the end user defaults on payment to the reseller. If collectability
from the reseller is dependent on the end user satisfying the obligation, revenue is deferred until
delivery to the end user's site is complete and all significant vendor obligations are met.

ASC 606 Applicability to Software

In determining if a software license transfers to a customer at a point in time or over time, the nature of
the Company’s promise in granting the license to a customer must be evaluated to determine if that
promise is to provide the customer with either:

• a right-to-access the license – revenue is recognized over time; or

• a right-to-use the license as it exists at the point in time – revenue is recognized at a point in
time.

There are two types of licenses:

• functional license; and

• symbolic license.

Functional License

Functional licenses have significant standalone functionality and derive a substantial portion of their
utility (that is, its ability to provide benefit or value) from that standalone functionality. Revenue
recognition for functional licenses depends on whether the license is either a right-to-use or right-to-
access license. For example, when the Company sells a software license to a customer, the customer can
benefit from the license on its own without the updates or the Company’s involvement to maintain the
license; therefore, the license is right-to-use. Alternatively, if the Company hosts its software on the
cloud and the customer is reliant on the Company’s constant updates and patches, the license would be
right-to-access.

Primarily, the Company sells functional licenses which grant a right to use the license; therefore, the
revenue is recognized at a point in time. The Company sells the following types of functional licenses
that would generally qualify for right-to-use:

• Perpetual – Perpetual licenses are permanent license grants that do not expire. Maintenance is
sold separately for an additional fee. The entire perpetual license fee is recognized upfront based
on the contract value.

• Access term/subscription/rental – These include both a software and maintenance component for
a single fee. The transaction price is allocated between the software and maintenance
component based on relative stand-alone selling price. The amount allocated to the license is
recognized upfront while the revenue related to maintenance is recognized straight-line over the
contract life.

Symbolic Licenses

In general, the Company does not enter into agreements for symbolic licenses. A symbolic license does
not have significant stand-alone functionality and all of its utility is substantially derived from its
association with past or ongoing activities. Examples of this include licenses related to brands, trade
names, or other similar intellectual property. If entering into this type of agreement is contemplated,
contact the Director of GOA for further guidance.

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Software-Related Services

Software Implementation Fees

Software implementation fees relate to activities needed for successful implementation of software.
Software implementation activities include, but are not limited to, implementation planning, loading of
the software, training of customer personnel, data conversion, building simple interfaces, running test
data, and assisting in the development and documentation of procedures. If the customer elects to
purchase software implementation, then this is considered a performance obligation. These fees are
normally billed on a time and material basis per list price or established pricing in an existing MSA. The
Company recognizes the fees collected as revenue when the performance obligation is satisfied using the
appropriate method for measuring progress towards complete satisfaction of the performance obligation.

Reinstatement of Post Contract Customer Support (PCS), also known as Maintenance and
Support (M&S)

There are situations in which a customer receives previous upgrades or enhancements upon
reinstatement of an inactive PCS arrangement. Upon reinstatement of PCS, the customer is often
entitled to receive any bug fixes/patches/upgrades/enhancements that were regularly provided during
the inactive period to other customers that were under active PCS arrangements. If the customer
receives bug fixes/patches/upgrades/enhancements, the reinstated fee should be allocated between (1)
bugs/patches delivered on day one for previously released updates and (2) future PCS services relative
to stand-alone selling prices. The Company will generally recognize revenue immediately for the fee
allocated to PCS provided during the lapsed period since control of the updates released during the
lapsed PCS period transfers to the customer at reinstatement. If the order is for reinstatement and PCS
only (no other elements are sold) and no bug fixes/patches/upgrades/enhancements were released on
any of the products being reinstated during the period in which the customer was inactive, the
reinstatement fee should be ascribed to future PCS services and recognized ratably over the going
forward term of the PCS arrangement.

Hosting Arrangements

In hosting arrangements, the customer purchases the right to use software that resides on either the
vendor’s hardware or on a third-party’s hardware. Software in a hosting arrangement is excluded from
the scope of the licensing guidance in the new revenue standard unless both of the following criteria are
met:

• the customer has the contractual right to take possession of the software at any time
during the hosting period without significant penalty; and

• it is feasible for the customer to either run the software on its own hardware or contract
with another party unrelated to the vendor to host the software.

Hosting arrangements may include a contractual license, but since the customer is unable to take
possession of the software subject to the license without significant penalty, the customer is required to
make a separate buying decision before control of any software is truly transferred to the customer.
These transactions are accounted for as service transactions (rather than licensing transactions) since
the Company is providing the functionality of the software through a hosting arrangement rather than
through the actual software license. The revenue related to hosting arrangements is recognized over
time as the control of the promised goods/services are transferred to the customer.

The following types of arrangements are considered hosting arrangements:

• Software as a Service (SaaS);

• Cloud 365; and
• Neftex.

Software Leases

If a lease involves software and hardware and the software is not incidental to the hardware as a whole,
the revenue attributable to the equipment is accounted for in accordance with ASC 840, and any revenue

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attributable to the software, including PCS, is accounted for separately in accordance with ASC 606. If
the equipment contains software that is incidental to the functionality of the equipment as a whole, the
software is not accounted for separately.

Landmark Revenue Recognition Checklist

A Software Revenue Recognition Checklist must be prepared and signed by the Landmark
Region/Country F&A Lead or designee and submitted to the Landmark F&A Manager or designee on a
monthly basis, according to the closing calendar for all software and software-related transactions that
exceeded USD 500,000 for which any revenue was recognized during the month. The signatures of the
Landmark Region/Country F&A Lead or designee and the Landmark F&A Manager must be affixed to
each checklist.

Additionally, the Landmark Region/Country F&A Lead or designee makes certain that all documentation
containing transaction level detail necessary to support revenue recognition is attached to the checklist
before sending it to the Landmark F&A Manager for review. If a customer has multiple transactions
during a given quarter that collectively exceed USD500,000, a Software Revenue Recognition Checklist
of all the transactions will need to be prepared.

For time-based agreements, the USD500,000 threshold relates to the total contracted software-related
value, not just the pro rata amount recognized in the current month. If the pro rata amount recognized
in future months of a time-based agreement exceeds USD500,000, a Software Revenue Recognition
Checklist must be prepared only for the initial month revenue is recognized and in the initial month for
each renewal thereafter. Additionally, for time-based agreements, a worksheet is prepared that shows
how revenue for each revenue type is calculated and recognized with the amounts calculated
corresponding to the actual amounts recorded. This worksheet is included in the documentation
supporting the Software Revenue Recognition Checklist.

Other Revenue Recognition Matters

• Inventory on consignment is not accounted for as a sale until the goods are converted to use or
sold by the consignee. In order to determine whether the good is sold on a consignment basis,
the Company determines who has control of the goods.

• Inco-terms by themselves do not address title transfer. When delivery is quoted per inco-terms,
the contract should explicitly make reference to when title is transferred.

• If required to constrain revenue and accounts receivable when billing the customer or making an
accrual (e.g., customer’s credit limit has been exceeded, a right of return clause, or other
variable consideration situations), use the following accounts:

o 220120-Constrained Revenue billed

o 220122-Constrained Revenue Accruals
o 400300-Unearned Revenue Services
o 401300-Unearned Revenue Products

Cost of goods sold related to the work performed, whether or not revenue is recognized at the full
amount, must be recorded/accrued as expense in the period incurred.

• Deferred revenue and customer prepayments are recorded using the SAP general ledger
accounts as detailed in Appendix A.

• For situations in which no priced invoice is required and the outcome is a no charge situation, a
sales order is completed and delivered with zero revenue.

• Payments related to lost-in-hole/damaged-beyond-repair/damaged-after-use are classified as

variable consideration. The Company recognizes revenue related to these revenue streams when
the amount is agreed to with the customer. Any cost (e.g., write-off of an asset) associated with
this should be expensed as incurred.

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Revenue Accruals Documentation and Approval Requirements

Every effort is made to record invoices in a timely manner each month. However, when invoices are not
recorded before month end close, revenue is accrued subject to the support and approvals described
below. Evidence of a customer signature is not required in order to recognize revenue as long as
control has been transferred to the customer and appropriate evidence exists that proves the goods or
services were provided to the customer and the Company has satisfied the performance obligation.

Revenue accruals require the following support and approvals:

• Customer sales order/ticket or daily drilling report (customer signature is not required for
accrual but is still required for billing) confirming goods or services were
delivered/transferred/used. The evidence should lead to the objective determination that the
control of goods has been transferred or services have been provided to the customer as per
agreed contractual specifications. If the evidence is insufficient, revenue is not accrued. End-of-
well and partial billings revenue accruals are documented with sufficient support to determine
the amount accrued, including any calculations and explanations that are necessary, as well as
being cross-referenced to the terms and conditions of the contract. E-mail requests to accrue
revenue without detailed support are inadequate and will not be approved.

• Documented approval by the local Accounting Supervisor is required for all first month revenue
accruals. Reaccruals for the second month require Country F&A Manager approval. Reaccruals
for the third month (or more) require approval by the Regional F&A Manager. Supporting
documentation includes the sales order/ticket number or a daily drilling report confirming goods
or services were delivered/transferred/used, amounts, service dates, and a reason for not
invoicing the customer.

• All revenue accruals must be recorded in the billing currency. Record all revenue and associated
cost accruals as automatically reversing entries.

• The ZSAA revenue accrual dashboard automatically requires and documents the proper levels of
F&A management approval for each accrual. Further documentation of F&A approvals is optional
as described below.

• Documented F&A approvals as described above are required for revenue accruals made through
Excel upload ZFAC_UP. This is because the only user ID recorded in SAP for a ZFAC_UP entry is
that of the person making the upload posting. Any other approvals are not captured at the time
of posting.

• The Revenue Accrual Matrix details the accrual estimation process and corresponding support for
the accruals based on revenue recognition guidelines under ASC 606. The matrix also includes
high-level PSL examples. For more in-depth examples and PSL-specific issues, refer to FAQs and
the white paper repository.

• For all Landmark revenue accruals, contact the Landmark F&A Manager for guidance.
Documentation should be in accordance with the guidelines set forth in the Landmark Revenue
Recognition Checklist section.

• For Sperry Drilling System revenue accruals, see Appendix B for further guidance.

Revenue accruals are recorded using the ZSAA revenue accrual dashboard whenever possible. When
ZSAA use is not possible (or realistic), revenue accruals are uploaded using the ZFAC_UP Excel upload
template. Excel upload template ZFPT is not the preferred tool for accruing revenue (including COPQ)
because it does not post the accrual at the customer level. Revenue posted using the Excel upload
template ZFPT will cause revenue-by-customer reporting to be inaccurate on a global basis.

All revenue accruals are posted to the following revenue accrual accounts and at the customer level.
They are also posted at the Sales Order level whenever possible.

• 400200 – Accrued Revenue Services

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 • 400490 – Accrued Discounts – Services
• 401200 – Accrued Revenue Products
• 401490 – Accrued Discounts – Products
• 401420 – Accrued Job Adjustment (COPQ)
• 400890 – Accrued Pass-Through Revenue At Risk
• 400990 – Accrued Pass-Through Revenue Markup
• 400233 – Accrued Revenue – Lost in Hole

Costs related to revenue accruals should be recorded in the appropriate cost accounts since there is no
automatic accrual of the costs related to the revenue accrued. The ZSAA process will still include COGS.

It is the responsibility of the applicable F&A Manager to ensure that the supporting documentation is
properly maintained for future reference or audit purposes in accordance with Company Policy 3-10130,
Records Management, and Company Business Practice 4-44043, SAP General Ledger Posting
Documentation. However, attaching supporting documentation within the ZSAA revenue accrual
dashboard is optional. Users may attach supporting documentation to the accrual journal document.
Any supporting documents attached to a ZSAA accrual will be attached to the final journal document
upon posting.

In all cases, great care should be taken to confirm that all associated costs are properly recorded in the
same month as the original revenue accrual to achieve proper matching.

DEFINITIONS

Accounting Contract means an agreement between two or more parties that creates enforceable
rights and obligations. Normally, the following criteria identify the existence of a contract which creates
rights and obligations:

• The contract is approved (in writing or orally) and each party is committed to perform their
obligations.
• Within the contract, the goods/services to be transferred to the customer are identified.
• As a result of the Company’s performance of obligations, the Company’s cash flows are expected
to change.
• Payment terms are contained within the contract.
• Customer has the ability and intention to pay the Company for the goods/services delivered by
the performance obligations.

Agent means that the Company does not obtain control of a good or service before that good or
service is transferred to a customer, the entity is acting as an agent. That is, the entity’s performance
obligation is to arrange for another party to transfer the good or service to the customer.

Bailee means a person or entity with whom some article is left, usually pursuant to a contract (called a
contract of bailment), who is responsible for the safe return of the article to the owner when the
contract is fulfilled. A Bailee only takes possession of goods; the ownership remains with the customer.

Bill and Hold Transactions means sales transactions that have been billed to the customer but the
products have not been delivered and are being stored by the Company at the customer’s request.

Company means Halliburton Company, a Delaware corporation, its successors and subsidiaries and
their divisions.

Customer-Owned Inventory is inventory that is legally owned by the customer (i.e., transfer of title
and risk of loss has been transferred to the customer) and the customer has contractually
acknowledged the Company warehouse as the Intermediate Delivery Site.

Demobilization Costs are related to activities performed at the termination of a specific arrangement
with a specific customer to remove resources related to the arrangement.

Intermediate Delivery Site is a delivery site designated by the customer at which it accepts legal title
and risk of ownership and that is other than its place of business or the site of the manufacture of the
product.

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Master Service Agreement (MSA) is a contract between the Company and another party containing
most of the terms that will govern future transactions or agreements between the two parties.

Mobilization Costs are related to activities performed at the inception of a specific arrangement with a
specific customer to enable an entity to perform under the terms of the arrangement.

Owner Furnished/Pass-Through Billings means the SAP account 500900 that is used to record
pass-through billings or client offset entries for owner furnished goods. This account is used when the
Company has no risk associated with the goods or services provided.

Principal means that the Company controls the specified good or service before that good or service is
transferred to a customer.

PSL Core Business is any PSL product or service (or an equivalent product or service that is sourced
from a third party) provided as part of its ongoing tactical and strategic business activity. Core products
and services are provided in master price lists or have an assigned Company material reference
number. Whether or not a product or service is commonly offered within the location in question is not
a determining factor, i.e., a logging job such as a cement dump bailer test might be rare in country
XYZ, but it is commonly offered by the logging PSL (commonly offered although not commonly
performed).

PSL Noncore Business means products or services not included by the Company's tactical or strategic
business offerings. The specifications for these goods and services are determined by the customer,
and are generally provided by the Company as a convenience to the customer. Examples may include
drilling rigs, supply boats, seismic services, or food catering for the well site.

Product Service Line (PSL) means the way the Company manages its delivery of certain products
and services in groups that are managed together as a unit. A PSL is not a separate company or legal
entity, nor is it an unincorporated operating division of a company. A PSL is analogous to a department
within a company like the Accounting, Procurement, or Tax Departments.

Start-up Costs means, according to ASC 720-15, start-up activities to include costs to open a new
facility, introduce a new product or service, conduct business in a new geographical area or territory,
conduct business with a new class of customer, initiate a new process in an existing facility, commence
a new operation, and organize a new entity.

Warehousing Services involve the warehousing or storing of inventory at a Company field camp
facility.

U.S. GAAP COMPLIANCE

Is U.S. GAAP applicable to this business practice?

No

_X_ Yes

KEY AUTHORITATIVE PRONOUNCEMENTS

• Accounting Standards Codification (ASC) 606-10

• ASC 840

OTHER KEY REFERENCES

• Revenue Accrual Matrix

• White Paper Repository

• Appendix A

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 • Appendix B

• Landmark Software Revenue Recognition Checklists

• Company Policy 3-10130, Records Management

• Company Policy 3-20000, Contract Requirements for Oilfield Services (including Project
Management)

• Company Policy 3-20004, Contract Requirements for Pipeline Process Services and Industrial
Cleaning Services

• Company Business Practice 4-44019, Baroid Chemical Product Returns and Fluid Buybacks

• Company Business Practice 4-44043, SAP General Ledger Posting Documentation

• Company Business Practice 4-44052, Accounting for Customer Disputes

• Company Business Practice 4-44062, Accounting for Oil & Gas Investments

• Company Business Practice 4-44190, F&A Review of Customer Contracts

APPROVED BY: CFO

For further assistance: FHOUPOLPRO

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