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

Oil and gas is a main source of revenue for many countries. Norway is one of them. Several companies operate in these countries. The companies demand accounting to communicate to their stakeholders. The two biggest accounting regimes, IASB and USA have their own standards for the upstream activities of those companies. The standard setting bodies mandatorily require companies to comply. Norwegian listed companies, as they are in the IASB regime, must comply with the IASB standard, IFRS 6.

The IASB standard has a problem of addressing the entire upstream activities of the companies Moreover, the standard has conceptual flaw. However, these oil and gas firms are required to follow it. As a remedy, the entities fill the gap by using the US GAAP, if they are listed, as the regulation requires them to follow IFRS. Thus, using these two standards coupled with the defect of the IASB standard is affecting them.

The entire chain is known as the petroleum industry. However, the industry is usually divided into three major components: upstream, midstream and downstream. The upstream industry finds and produces crude oil and natural gas. The upstream is sometimes known as the exploration and production (E&P) sector.

IFRS 6 divides upstream activities into two major groupings i.e. exploration & evaluation and development activities.

Exploration and evaluation

Examples of expenditures that can be categorized as exploration and evaluation. Accordingly, acquisition of right to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling costs are considered as exploration and evaluation costs. Moreover, activities performed in relation to evaluating the technical feasibility and commercial viability of extracting resource are exploration and evaluation activities. All these costs, depending up on their nature, are capitalized and classified as tangible or intangible.

Development

Oil and gas companies incur a huge amount of cost for developing the extractive activity. IFRS 6 paragraph 10 requires these expenditures not to be considered as part of exploration and evaluation activity. The standard considers these expenditures to be categorized as intangible assets and be treated as per the guideline provided on IAS 38.

Disclosure SFAS 19 requires the disclosure of proved oil and gas reserve quantities and location, capitalized costs and expenditures relating to oil and gas producing activities together with the support equipment. Furthermore, entities are required to disclose costs incurred in oil and gas property acquisition, exploration, and development activities, the results of operations for oil and gas producing activities. Moreover, standardized measure of discounted future net cash flows i.e. future net cash flows less the computed discount relating to prove oil and gas reserve quantities has to be disclosed. Disclosure of these facts is not made for interim statements. However, interim statements’ disclosure should include major events that can have impact on the statements.

Furthermore, entities are demanded to disclose the method of accounting they use in preparing their financial statements. Major economic or other factors that may have significant impact on the financial statements of entities are needed to be disclosed.