Streamlined production accounting Production accountants are freed from time-consuming data entry and conversions allowing them to concentrate on complex allocations and strategic initiatives that deliver the most value to the business. Faster processing of acquisition and divestitures PAS ensures revenue, royalty and processing fee calculation accuracy, as well as government reporting at the moment assets are acquired or divested. Automated compliance reporting PAS efficiently meets evolving regulatory reporting requirements.
These differ in the treatment of specific operating expenses relating to the exploration of new oil and natural gas reserves. The accounting method that a company chooses affects how its net income and cash flow numbers are reported.
Therefore, when analyzing companies involved in the exploration and development of oil and natural gas, the accounting method used by such companies is an important consideration.
Two Approaches The successful efforts SE 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. Exploration costs capitalized under either method are recorded on the balance sheet as part of long-term assets.
This is because like 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; Generally Accepted Accounting Principles GAAP require that the costs to acquire those assets be charged against revenues as the assets are used.
Why the Two Methods? Two alternative methods for recording oil and gas exploration and development expenses is the result of two alternative views of the realities of exploring and developing oil and gas reserves.
According to the view behind the SE method, the ultimate objective of an oil and gas company is to produce the oil or natural gas from reserves it locates and develops so that only those costs relating to successful efforts should be capitalized.
Conversely, because there is no change in productive assets with unsuccessful results, costs incurred with that effort should be expensed. On the other hand, the view represented by the FC method holds that, in general, the dominant activity of an oil and gas company is simply the exploration and development of oil and gas Accounting for oil platform and downward.
Therefore, all costs incurred in pursuit of that activity should first be capitalized and then written off over the course of a full operating cycle. The choice of accounting method in effect receives regulatory approval because the Financial Accounting Standards Board FASBwhich is responsible for establishing and governing GAAP, and the Securities and Exchange Commission SECwhich regulates the financial reporting format and content of publicly-traded companies, are divided over which is the correct method.
These two governing bodies have yet to find the ideological common ground needed to establish a single accounting approach. In general, SE and FC methods differ in their approach to treating costs associated with the unsuccessful discovery of new oil or natural gas reserves. Although both methods are indifferent as to the type of reserves, oil versus natural gas, that are associated with the costs incurred, the specific treatment of those costs by each method is responsible for the difference in the resulting periodic net income and cash flows numbers.
Regardless of the method it chooses to follow, an oil and gas company engaged in the exploration, development and production of new oil or natural gas reserves will incur costs that are identified as belonging to one of four categories: Acquisition Costs Acquisition costs are incurred in the course of acquiring the rights to explore, develop and produce oil or natural gas.
They include expenses relating to either purchase or lease the right to extract the oil and gas from a property not owned by the company. Also included in acquisition costs are any lease bonus payments paid to the property owner along with legal expenses, and title searchbroker and recording costs.
Under both SE and FC accounting methods acquisition costs are capitalized. Exploration Costs Typical of exploration, costs are charges relating to the collection and analysis of geophysical and seismic data involved in the initial examination of a targeted area and later used in the decision of whether to drill at that location.
Other costs include those associated with drilling a well, which are further considered as being intangible or tangible. Intangible costs in general are those incurred to ready the site prior to the installation of the drilling equipment whereas tangible drilling costs are those incurred to install and operate that equipment.
All tangible drilling costs associated with the successful discovery of new reserves will be capitalized while those incurred in an unsuccessful effort are also added to operating expenses for that period.
Development Costs Development costs involve the preparation of discovered reserves for production such as those incurred in the construction or improvement of roads to access the well site, with additional drilling or well completion work, and with installing other needed infrastructure to extract e.
Both SE and FC methods allow for the capitalization of all development costs. Production Costs The costs incurred in extracting oil or natural gas from the reserves are considered production costs. Typical of these costs are wages for workers and electricity for operating well pumps.
Production costs are considered part of periodic operating expenses and are charged directly to the income statement under both accounting methods. The Impact of Differing Levels of Capitalized Assets The effect of choosing one accounting method over another is apparent when periodic financial results involving the income and cash flow statement are compared with the effect of highlighting the way each method treats the individual costs falling into these four categories.
But such a comparison will also point out the impact to periodic results caused by differing levels of capitalized assets under the two accounting methods. The periodic depreciation, depletion and amortization expense charged to the income statement is determined by the "units-of-production" method, in which the percent of total production for the period to total proven reserves at the beginning of the period is applied to the gross total of costs capitalized on the balance sheet.
Thus, when identical operational results are assumed, an oil and gas company following the SE method can be expected to report lower near-term periodic net income than its FC counterpart.Accounting for Oil Platform and Downward Adjustments to Expected Cost Essay. April 17, Grimwald Glenshaw, CFO Pumpjack Petrol, Ltd - Accounting for Oil Platform and Downward Adjustments to Expected Cost Essay introduction.
Nordhoff Street Northridge, CA Dear Mr. Glenshaw: Upon your request, I have researched the codifications on how to account for the future dismantling .
ACCOUNTING FOR NON CURRENT ASSETS. Example 1: impairment loss • A company that extracts natural gas and oil has a drilling platform in the Gulf of Guinea (Cape Three Points).
At the end of , the asset is valued again, and a downward valuation of GHC is required.
Required • State the accounting treatment for the downward. Designed for production accountants by production accountants, CGI's Production Accounting Solution (PAS) was designed and is continuously evolved in collaboration with six major E&P companies in Canada incorporating collective best practices, process excellence, compliance standards and the latest technologies.
Premier Oil, an oil producer based in the UK, also switched accounting methods from full cost to successful efforts in , resulting in a downward restatement of profits from $44 million to .
Asset retirement obligation involves the retirement of a tangible, long-lived asset that depends on a future event beyond the control an obligated party. It is an accounting rule and legal. 0 Oil & Gas Accounting – Terminology. To be able to work effectively in Oil & Gas Accounting, you need to understand some of the terminology for the oil & gas industry. Companies involved in the exploration and development of crude oil and natural gas have the option of choosing between two accounting approaches: the "successful efforts" (SE) method and the "full.
The decline in oil and natural gas prices is likely to have operation and accounting impacts on many oil and gas companies, and it can be expected to have an impact on non-oil and gas companies that participate in the industry.
Asset retirement obligation involves the retirement of a tangible, long-lived asset that depends on a future event beyond the control an obligated party. It is an accounting rule and legal.