The following guidance addresses successful efforts accounting. The Securities and Exchange Commission (SEC) literature addresses full cost accounting issues.
The unit-of-production method of amortization requires that the total number of units of oil or gas reserves in a property or group of properties be estimated and that the number of units produced in the current period be determined. Many properties contain both oil and gas reserves. In those cases, the oil and gas reserves and the oil and gas produced shall be converted to a common unit of measure on the basis of their approximate relative energy content (without considering their relative sales values). However, if the relative proportion of gas and oil extracted in the current period is expected to continue throughout the remaining productive life of the property, unit-of-production amortization may be computed on the basis of one of the two minerals only; similarly, if either oil or gas clearly dominates both the reserves and the current production (with dominance determined on the basis of relative energy content), unit-of-production amortization may be computed on the basis of the dominant mineral only.
Typically the evaluation of oil and gas producing properties is on a field-by-field basis or by logical grouping of assets if there is a significant shared infrastructure (for example, platform). The undiscounted future cash flows shall be based on total proved and risk-adjusted probable and possible reserves. That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. The impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.
The following paragraphs provide guidance specific to the oil and gas industry on asset impairment. However the general rules (see the
Impairment or Disposal of Long-Lived Assets Subsection of Section 360-10-15 and the
Impairment or Disposal of Long-Lived Assets Subsection of Section 360-10-35) for asset impairment shall also be followed.
Unproved properties shall be assessed periodically to determine whether they have been impaired. A property would likely be impaired, for example, if a dry hole has been drilled on it and the entity has no firm plans to continue drilling. Also, the likelihood of partial or total impairment of a property increases as the expiration of the lease term approaches if drilling activity has not commenced on the property or on nearby properties. If the results of the assessment indicate impairment, a loss shall be recognized by providing a valuation allowance. Impairment of individual unproved properties whose acquisition costs are relatively significant shall be assessed on a property-by-property basis, and an indicated loss shall be recognized by providing a valuation allowance. When an entity has a relatively large number of unproved properties whose acquisition costs are not individually significant, it may not be practical to assess impairment on a property-by-property basis, in which case the amount of loss to be recognized and the amount of the valuation allowance needed to provide for impairment of those properties shall be determined by amortizing those properties, either in the aggregate or by groups, on the basis of the experience of the entity in similar situations and other information about such factors as the primary lease terms of those properties, the average holding period of unproved properties, and the relative proportion of such properties on which proved reserves have been found in the past.
An illustration of specialized equipment impairment can be seen in Example 12 (see paragraphs
).
If proved reserves are found, the capitalized costs of drilling the well shall be reclassified as part of the costs of the entity's wells and related equipment and facilities at that time (even though the well may not be completed as a producing well). If proved reserves are not found, the capitalized costs of drilling the well shall be charged to expense.
An exploratory well or an exploratory-type stratigraphic well may be determined to have found oil and gas reserves, but those reserves cannot be classified as proved when drilling is completed. In those cases, the capitalized drilling costs shall continue to be capitalized if the well has found a sufficient quantity of reserves to justify its completion as a producing well and the entity is making sufficient progress assessing the reserves and the economic and operating viability of the project. Note that an entity is not required to complete the exploratory or exploratory-type stratigraphic well as a producing well. For purposes of determining whether capitalized drilling costs shall continue to be capitalized pending the determination of proved reserves, a project may include more than one exploratory well or exploratory-type stratigraphic well if the reserves are intended to be extracted in a single, integrated producing operation (for example, the producing wells will operate with shared infrastructure).
If an entity has not engaged in substantial activities to assess the reserves or the development of the project in a reasonable period of time after the drilling of the well is completed or activities have been suspended, any capitalized costs associated with that well shall be expensed net of any salvage value. After a reasonable period of time, the planning of future activities without engaging in substantial activities shall not be sufficient to continue the capitalization of exploratory well or exploratory-type stratigraphic well costs. However, brief interruptions in activities required to assess the reserves or the project, or other delays resulting from governmental or other third-party evaluation of a proposed project, do not require capitalized exploratory well or exploratory-type stratigraphic well costs to be expensed.