In the corporate world, exploration of oil and gas fields are involved an advance technology and skilled persons.Being an Accountant or Auditor is required to make an understanding of costing approach for oil and gas exploration.
Financial Accounting Standard Board (FASB) refers to Successful Effort Method while Securities & Exchange Commission (SEC) refers to Full Cost Method.
SUCCESSFUL EFFORT APPROACH :
- Capitalizing those cost only which relates to successful outcomes (successful oil & gas exploration). - Cost of an unsuccessful exploration should be charged against for the current period.
FULL COST APPROACH :
- All cost should be capitalized irrespective the successful outcome of oil & gas exploration.
ACQUISITION COST :
- Cost for acquiring rights to explore, develop reserves and produce oil & gas. - Cost for purchasing or leasing the right to extract from the property which is not owned by company - The above costs are capitalized under both methods.
EXPLORATION COST :
- Cost for collection of data ( Geophysical & Seismic ) - Intangible cost is incurred to ready the site perior to the installation of drilling equipment. - Tangible cost is incurred to install and operate that equipment ( Drilling Cost )
- Under SE Method :.
a) Intangible cost is charged to income statement. b) Tangible drilling cost is capitalized ( for successful outcomes )
- Under FC Method :.
a) Intangible and Tangible drilling costs are capitalized and represented as long term asset in balance sheet.
DEVELOPMENT COST :
a) They are involved in the construction or improvement of roads to access the well site. b) Infrastructure for - Extraction (Pumps) - Gathering (Pipelines) - Storage ( Tanks )
- Development cost are capitalized under both methods.
PRODUCTION COST :
It means cost which is incurred in extracting oil and gas reserve
- It included wages for workers, electricity for operating pumps. - Production costs are considered part of periodic operating expense and charged directly to income statement under both methods
DISCLAIMER : This article is only for understanding , no responsibility for any act or omission.