Question

what are the pertinent accounting pronouncements which are applicble to up-streem oil and gas entites? please list them with explainations. Thank you

Answer 1

Companies which are functioning in the exploration and development of crude oil and natural gas generally have two accounting approaches: the "successful efforts" (SE) method and the "full cost" (FC) method. The main difference of these approaches are the treatment of specific operating expenses relating to the exploration of new oil and natural gas reserves. Before the amendment happen in 2008 there were two more approaches, discovery value accounting method and current value accounting method. However, FASB rejected the use of discovery value accounting and current value accounting methods due to reasons stated on the Amended SFAS 19 (2008 paragraph 133 - 141).

The successful efforts (SE) method

SE method is commonly known to divide costs into successful and unsuccessful, whereby the successful drillings result in the extraction of economically recoverable oil and gas, and the unsuccessful drillings end up in a dry hole. This method allows a company to capitalize only those expenses associated with successfully locating new oil and natural gas reserves. For unsuccessful (or "dry hole") results, the associated operating costs are immediately charged against revenues for that period.

The full cost (FC) method

The full-cost method is used by companies that incur exploration costs for oil and natural gas that does not differentiate between operating expenses associated with successful and unsuccessful exploration projects. Regardless of the outcome, successful and unsuccessful operation expenses are capitalized.

Exploration costs capitalized under either method are recorded on the balance sheet as long-term assets. Because the lathes, presses and other machinery used by a manufacturing concern, oil and natural gas reserves are considered productive assets for an oil and gas company, GAAP (Generally Accepted Accounting Principles) require that the costs to acquire those assets be charged against revenues as the assets are used.