Accounting and financial reporting of the oil and gas industry is specialist area which requires thorough understanding of the industry and expertise. It is a complex topic whose challenge stems from the treatment of unsuccessful exploration costs.
Oil and Gas costs and their treatments are as follows:
- Acquisition Costs – Capitalised & amortised
- Exploration Costs – Depends as below
- Development Costs - Capitalised & amortised
- Production Costs - Expensed
Exploration Costs: There are 2 accounting methods: ‘Successful efforts’ and ‘Full cost’ accounting. Both are considered acceptable accounting methods and are up to the discretion of the company adopting them.
Full costs (FC) method
• All exploration results (dry holes and discoveries) can be capitalised and then amortized over their estimated lives
• Impairment tests should be carried out on the book value of Oil and Gas assets
Successful efforts (SE) method
• Unsuccessful exploration results (dry holes) should be expensed as incurred
• Only successful explorations are capitalised and then amortized over their estimated lives
• Impairment tests are not required to be carried out