Petroleum Accounting

ACCOUNTING PRINCIPLES FOR OIL AND GAS PRODUCING ACTIVITIES

Acquisition Costs

Disposition of Capitalized costs

Unproved prosperities, proved prosperities , wells and related facilities (which consist of all development costs plus the costs of drilling those exploratory wells that find and produce proved reserves), support equipment and facilities used in oil and gas producing activities, and uncompleted wells, equipment, and facilities are capitalized costs (assets).

These capitalized costs are disposed after capitalization. The acquisition costs of proved properties and the costs of wells and related equipment and facilities are unamortized to become part of the cost of oil and gas produced. The impairment of unproved properties is recognized, and the costs of an exploratory well are charged to expense if the well is determined not to have found proved reserves.

Assessment of unproved properties

Unproved properties shall be assessed periodically (but at least once a year) to determine whether they have been impaired. A property would likely be impaired, for example: (A) If a dry hole has been drilled on the lease, and the enterprise has no firm plan to continue drilling. (B) If negative G & G information has been obtained.

(C) 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 an 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, an indicated loss shall be recognized by providing a valuation allowance

Example 3-3 page 99

Surrender or Abandonment of property

When all unproved property is surrendered, abandoned, or otherwise deemed worthless, capitalized acquisition costs shall be charged against the related allowance for impairment to the extent an allowance has been provided. if allowance previously provided is inadequate, a loss shall be recognized.

Example 3-4 page 102

Reclassification of an unproved property.

A property shall be reclassified from unproved properties to proved properties when proved reserves are discovered on or otherwise attributed to the property. For prosperities that have been assessed individually because they are relatively significant, the net carrying value ( Total acquisition cost minus the related impairment allowance for the lease ) should be transferred from unproved to proved properly.

For prosperities that have been assessed on a group basis because they are individually insignificant, the gross acquisition cost should be transferred from unproved property to proved properly.

For a property to be proved, it is not necessary that the whole property be classified as a proved area, only proved reserves are found on the property. So, a small portion of a proved property may be actually a proved area.

Example 3-5 page 105

Demonstration Problem 1