Chapter 15: Oil & Gas Accounting
Full cost (FC) versus
successful efforts (SE)
accounting
Standards setting
Reserve recognition
accounting
SFAS No. 69
Conceptual Differences Between FC & SE
Both methods are allowed
under GAAP
Both present as assets only
the costs incurred in
exploration and
development
Basic difference is the size
of the cost center used in
the capitalize/expense
decision for exploration
costs
Trends
SE accounting was the
only method used
prior to the late 1950s
and early 1960s
Problems with
application of the
historical cost model
led to increasing use
of FC model in late
1960s
Full Cost Accounting
Results in a smoothing of reported income
because costs that are written off in the current
period under the SE method are capitalized and
amortized against revenues of a number of future
periods
Generally, the larger, more mature and fully
integrated enterprises in the oil and gas industry
use SE, while the smaller, less integrated
enterprises use FC
Standards Setting in Oil & Gas
AICPA commissioned ARS (1964)
ARS 11 (1969) published recommending use of
SE accounting, not FC
APB’s Committee on Extractive Industries
Reviewed ARS 11 and published its report 1971
Accounting and Reporting Practices in the Petroleum
Industry reviewed in public hearing
Favored SE method
Standards Setting in Oil & Gas
Federal Power
Commission issued
order which required
the FC method
APB’s Committee on
Extractive Industries
was unable to finalize
its paper
FASB formation
begins
Standards Setting in Oil & Gas
1972, SEC proposed that those enterprises
that do not follow SE should disclose what
net income would have been under that
method ... later retreated from proposal
1973 foreign oil embargo
The Energy Policy and Conservation Act of
1975
Standards Setting in Oil & Gas
FASB worked closely with the SEC
Issued a discussion memorandum in 1976
Held a public hearing in the spring of 1977.
July 1977, the FASB issued an exposure draft, which
required the SE method of accounting
SEC issued ”Securities Act Release No. 5861,”
which proposed to amend regulations to
incorporate the accounting standards set forth in
the exposure draft in the event a statement of
financial accounting standards was not issued ...
Standards Setting in Oil & Gas
December 1977. SFAS No. 19 required SE
and eliminated FC.
Bending to political pressure
The SEC effectively circumvented SFAS No.
19 in ASR 253, which permitted either FC or
SE
As a result, SFAS No. 25, which suspended the
mandatory SE provisions of SFAS No. 19, was
issued in February 1979
Survey of all financial analysts
involved with the oil and gas industry
Conducted primarily to determine whether
analysts favored FC or SE
Over 40 percent responded
They overwhelmingly favored the SE method
83% of the analysts thought that the value of
recoverable reserves should be disclosed in
financial reports.
Response suggests the historical cost model
simply does not provide adequate information to
decision makers.
Reserve Recognition Accounting (RRA)
Perceived failure of
the historical cost
method led the SEC to
advocate RRA
August 1978, the SEC
issued Release 335969, which ushered
in RRA on an
experimental basis for
three years
RRA Valuation Method
1. Estimate the timing of future production of
proven reserves, based on current economic
conditions
2. Estimate future revenue by using estimate from
(1) and applying current prices for oil & gas,
adjusted only for fixed contractual escalations.
3. Estimate future net revenue by deducting from
the estimate in (2) the costs to develop and
produce the proven reserves
4. Determine the PV of future net revenue by
discounting the estimate in (3) at 10 %
SFAS No. 69
Represents an attempt by the FASB to
combat the standards-overload problem
Is not applicable to enterprises that are not
publicly traded nor to publicly traded
Requires the disclosure of financial
information outside the basic financial
statements or notes
SFAS No. 69 Required Disclosures
Proven oil and gas reserve quantities
Capitalized costs relating to oil & gas-producing
activities
Costs incurred in oil & gas property ...
Results of operations for oil & gas-producing
activities
A standardized measure of discounted future net
cash flows relating to proven oil and gas reserves.
Chapter 15: Oil & Gas Accounting
Full cost (FC) versus
successful efforts (SE)
accounting
Standards setting
Reserve recognition
accounting
SFAS No. 69