ASC

ASC 740-932

Extractive Activities—Oil and Gas

740 Income Taxes

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In brief

AdvancedIncome taxesIndustry-specificRecognitionDisclosure

This subtopic covers income tax accounting peculiar to oil- and gas-producing activities. Its core rules: the tax benefit of statutory depletion in excess of cost depletion is recognized only in the period the excess is deducted on the tax return (no deferred tax asset before then), and the likelihood that future statutory depletion will reduce or eliminate future taxable income must be weighed in the more-likely-than-not realizability assessment for deferred tax assets. It also notes that costs such as intangible drilling and development costs and geological and geophysical costs are deducted for tax purposes in periods different from when they are expensed or amortized for book purposes, creating temporary differences.

Key points (6)
  • The scope follows the Overall Subtopic for extractive activities—oil and gas (740-932-15-1, referencing 932-10-15).
  • The tax benefit of the excess of statutory (percentage) depletion over cost depletion shall be recognized in the period in which the excess is deducted for income tax purposes (740-932-25-1).
  • In applying comprehensive interperiod income tax allocation, the possibility that future statutory depletion will reduce or eliminate future taxable income must be considered in judging whether it is more likely than not that deferred tax asset benefits will not be realized (740-932-30-1).
  • Intangible drilling and development costs are deducted for tax when incurred but capitalized and amortized for book purposes for successful exploratory wells and all development wells, creating temporary differences (740-932-45-1).
  • Some geological and geophysical costs are expensed as incurred for book purposes but deferred and deducted in later periods for tax purposes (740-932-45-1).
  • Disclosure requirements for oil and gas income taxes are located at paragraph 932-235-50-25 (740-932-50-1).

For students. Exam trap: statutory (percentage) depletion in excess of cost depletion is a permanent-type benefit recognized only when deducted on the return—students often try to set up a deferred tax asset for it. Remember too that expected future statutory depletion cuts future taxable income and therefore weakens the case for realizing existing deferred tax assets (valuation allowance analysis).

statutory depletioncost depletionintangible drilling and development costsgeological and geophysical costsdeferred tax asset realizabilitymore likely than notinterperiod tax allocationtemporary differences

Machine-generated study aid for ASC 740-932. Check the source paragraphs below.

740-932-00Status

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740-932-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
Exploratory WellAmendedAccounting Standards Update No. 2010-0301/06/2010

740-932-05Overview and Background

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740-932-05-1
This Subtopic addresses the accounting for taxes specific to the oil and gas industry, for example, statutory tax depletion.

740-932-15Scope and Scope Exceptions

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Overall Guidance

740-932-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 932-10-15.

740-932-25Recognition

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740-932-25-1
The tax benefit of the excess of statutory depletion over cost depletion for tax purposes shall be recognized in the period in which the excess is deducted for income tax purposes.

740-932-30Initial Measurement

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740-932-30-1
In applying the comprehensive interperiod income tax allocation provision, the possibility that statutory depletion in future periods will reduce or eliminate taxable income in future years shall be considered in determining whether it is more likely than not that the tax benefits of deferred tax assets will not be realized.

740-932-45Other Presentation Matters

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740-932-45-1
Some costs incurred in an entity's oil- and gas- producing activities enter into the determination of taxable income and pretax accounting income in different periods. A principal example is intangible drilling and development costs, which are deductible in determining taxable income when incurred but which, for successful exploratory wells and for all development wells, are capitalized and amortized for financial accounting purposes under the provisions of this Topic. As another example, some geological and geophysical costs, which are charged to expense when incurred under the provisions of this Topic, are deferred and deducted in subsequent periods for income tax purposes.

740-932-50Disclosure

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740-932-50-1
See paragraph 932-235-50-25 for various disclosure requirements for oil and gas income taxes.

740-932-S25RecognitionSEC

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740-932-S25-1
See paragraph 932-10-S99-1, Regulation S-X Rule 4-10(d), for requirements pertaining to the interperiod tax allocation for intangible drilling and development costs that enter into the determination of taxable income and pretax accounting income in different periods.

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