ASC

ASC 720-932

Extractive Activities—Oil and Gas

720 Other Expenses

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In brief

IntermediateRecognitionIndustry-specificInitial measurement

This Subtopic identifies costs unique to oil- and gas-producing activities that do not result in acquisition of an asset and therefore must be charged to expense as incurred. Under the successful efforts framework, geological and geophysical (G&G) costs, costs of carrying and retaining undeveloped properties, dry hole and bottom hole contributions, and the costs of exploratory wells (and exploratory-type stratigraphic test wells) that do not find proved reserves are expensed immediately. It also notes the customary practice of accumulating an in-house exploration department's costs and allocating them to exploration activities using standardized charges.

Key points (7)
  • Costs incurred in oil- and gas-producing activities that do not result in acquisition of an asset shall be charged to expense (720-932-25-1).
  • Examples of immediately expensed costs are geological and geophysical costs, costs of carrying and retaining undeveloped properties, and costs of drilling exploratory wells and exploratory-type stratigraphic test wells that do not find proved reserves (720-932-25-1).
  • Geological and geophysical costs, carrying and retaining costs of undeveloped properties, and dry hole and bottom hole contributions are charged to expense when incurred (720-932-25-1).
  • Carrying costs are expensed because they are incurred to maintain, not acquire, the entity's rights and do not enhance the properties' potential to contain reserves or the future benefits from the entity's assets (720-932-25-1).
  • Where an entity maintains its own exploration department, its costs are customarily accumulated and allocated to exploration activities and projects using standardized charges (e.g., cost per day for a crew, cost per shot-point for seismic work, hourly rates for engineers) (720-932-30-1).
  • Employment contracts with geologists or geophysicists frequently provide the employee ownership interests in leases acquired as a result of exploration (720-932-30-1).
  • The scope follows that of the Overall Subtopic in Section 932-10-15 (720-932-15-1).

For students. This is the expense side of the successful efforts method: the key test is whether the cost acquired an asset (proved reserves or property rights) or merely maintained/searched. Students often wrongly assume all exploration outlays can be capitalized pending outcome — G&G and carrying costs are expensed immediately regardless of later drilling success.

geological and geophysical costscarrying and retaining undeveloped propertiesexploratory wellsstratigraphic test wellsdry hole and bottom hole contributionssuccessful efforts methodexpense as incurredexploration department cost allocation

Machine-generated study aid for ASC 720-932. Check the source paragraphs below.

720-932-00Status

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720-932-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
Exploratory WellAmendedAccounting Standards Update No. 2010-0301/06/2010
ProductionAmendedAccounting Standards Update No. 2010-0301/06/2010
PropertiesAmendedAccounting Standards Update No. 2010-0301/06/2010
Stratigraphic Test WellAmendedAccounting Standards Update No. 2010-0301/06/2010

720-932-05Overview and Background

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720-932-05-1
This Subtopic addresses costs unique to the oil and gas industry that are to be expensed immediately.

720-932-15Scope and Scope Exceptions

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Overall Guidance

720-932-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 932-10-15.

720-932-25Recognition

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720-932-25-1
Some costs incurred in an entity's oil- and gas-producing activities do not result in acquisition of an asset and, therefore, shall be charged to expense. Examples include:
  1. a
    Geological and geophysical costs
  2. b
    The costs of carrying and retaining undeveloped properties
  3. c
    The costs of drilling those exploratory wells and exploratory-type stratigraphic test wells that do not find proved reserves.
Geological and geophysical costs, costs of carrying and retaining undeveloped properties, and dry hole and bottom hole contributions shall be charged to expense when incurred. Costs of carrying and retaining undeveloped properties do not increase the potential of those properties to contain oil and gas reserves. Carrying costs are incurred to maintain an entity's rights, not to acquire those rights. In a sense, they are penalties for having delayed drilling and development activities and, thereby, having delayed potential production of oil and gas. Because carrying costs do not enhance the future benefits from the entity's properties and other assets, they are charged to expense when incurred.

720-932-30Initial Measurement

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720-932-30-1
When the operating entity maintains its own exploration department, it is customary for costs of that department to be accumulated and allocated to exploration activities and projects. The allocation is based on standardized charges, such as cost per day for a crew, costs per shot-point for seismic work, hourly basis for engineers, and the like. Frequently, employment contracts with geologists or geophysicists call for the employee to receive ownership interests in leases acquired as the result of exploration.

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