Differences Between Full Cost Method and Successful Effort Method In Oil and Gas Accounting
Question
Compare and contrast and take a decision on the following methods:
1. Full cost method
2. Successful effort method in the exploration and evaluation of oil and gas
Solution
The alternatives used in financial accounting and reporting by oil and gas producing companies have been grouped under two basic methods of accounting which are:
i) The Full Cost Method ii) The Successful efforts method
The Full Cost Method
An accounting system 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. Under Full Cost Method, all property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties. These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves. The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.
Under this method, the Company capitalizes all acquisition, exploration and development costs for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these finding activities. Although some of these costs will ultimately result in no additional reserves, we expect the benefits of successful wells to more than offset the costs of any unsuccessful ones. the full cost (FC) method, allows all operating expenses relating to locating new oil and gas reserves, regardless of the outcome, to be capitalized. In addition, gains or losses on the sale or other disposition of oil and gas properties are not recognized unless the gain or loss would significantly alter
Compare and contrast and take a decision on the following methods:
1. Full cost method
2. Successful effort method in the exploration and evaluation of oil and gas
Solution
The alternatives used in financial accounting and reporting by oil and gas producing companies have been grouped under two basic methods of accounting which are:
i) The Full Cost Method ii) The Successful efforts method
The Full Cost Method
An accounting system 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. Under Full Cost Method, all property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties. These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves. The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.
Under this method, the Company capitalizes all acquisition, exploration and development costs for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these finding activities. Although some of these costs will ultimately result in no additional reserves, we expect the benefits of successful wells to more than offset the costs of any unsuccessful ones. the full cost (FC) method, allows all operating expenses relating to locating new oil and gas reserves, regardless of the outcome, to be capitalized. In addition, gains or losses on the sale or other disposition of oil and gas properties are not recognized unless the gain or loss would significantly alter
References: http://www.investopedia.com/ http://www.wikinvest.com/ http://www.slideshare.net/?ss Amernic, J.H. (1979). Accounting practices in the Canadian petroleum industry. CA Magazine , 112(3), 34-38. Anderson, S. & Cavanagh, J. (2000). Top 200: the rise of global corporate power . http://www.globalpolicy.org/socecon/tncs/top200.htm. Baker, C.R. (1976). Defects in full cost accounting in the petroleum industry. Abacus , 12 (2), 152-158. BHP Ltd. (2001). Comment letter . http://www.iasb.org/current/comment_letters_iasc.asp. British Petroleum plc. (2004). Annual Report. http://www.bp.com/sectiongenericarticle.do?categoryId=2011266&contentId=201 7033