Introduction to Oil & Gas Accounting
Four basic type of costs:
• Acquisition costs: costs incurred in acquiring property
• Exploration costs: costs incurred in exploring property.
• Development costs: costs incurred in preparing proved reserves for production
• Production costs: costs incurred in lifting the oil and gas to the surface and in gathering,
treating, and storing the oil and gas.
Some definitions:
Some definitions:
• Field.
• Proved area
• Development well
• Service well
• Exploratory well
• Oil and gas producing activities
• Proved properties
• Unproved properties
HISTORICAL COST ACCOUNTING METHODS
• Successful-efforts accounting (SE)
• Full-cost accounting (FC).
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities adopting the standard for
the first time to use accounting policies for exploration and evaluation assets that were applied before adopting IFRSs.
It also modifies impairment testing of exploration and evaluation assets by introducing different impairment indicators
and allowing the carrying amount to be tested at an aggregate level (not greater than a segment).
IFRS 6 was issued in December 2004 and applies to annual periods beginning on or after 1 January 2006.
Summary of IFRS 6
Definitions
Exploration for and evaluation of mineral resources means the search for mineral resources, including minerals, oil,
natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific
area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral
resource. [IFRS 6.Appendix A]
Exploration and evaluation expenditures are expenditures incurred in connection with the exploration and evaluation
of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource is
demonstrable. [IFRS 6.Appendix A]
Accounting policies for exploration and evaluation
IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation expenditures as
assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors. [IFRS 6.9] Thus, an entity adopting IFRS 6 may continue to use the accounting
policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement
practices that are part of those accounting policies.
IFRS 6 Exploration for and Evaluation of Mineral Resources (continued)
Impairment
IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and evaluation assets
recognised by an entity under its accounting policy. Specifically:
Entities recognising exploration and evaluation assets are required to perform an impairment test on those assets
when specific facts and circumstances outlined in the standard indicate an impairment test is required. The facts and
circumstances outlined in IFRS 6 are non-exhaustive, and are applied instead of the 'indicators of impairment' in IAS 36
[IFRS 6.19-20]
Entities are permitted to determine an accounting policy for allocating exploration and evaluation assets to cash-
generating units or groups of CGUs. [IFRS 6.21] This accounting policy may result in a different allocation than might
otherwise arise on applying the requirements of IAS 36
If an impairment test is required, any impairment loss is measured, presented and disclosed in accordance with IAS 36.
[IFRS 6.18]
Presentation and disclosure
An entity treats exploration and evaluation assets as a separate class of assets and make the disclosures required by
either IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets consistent with how the assets are classified.
[IFRS 6.25]
IFRS 6 requires disclosure of information that identifies and explains the amounts recognised in its financial statements
arising from the exploration for and evaluation of mineral resources, including: [IFRS 6.23–24]
its accounting policies for exploration and evaluation expenditures including the recognition of exploration and
evaluation assets
the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the
exploration for and evaluation of mineral resources.
