Comparative Analysis of Successful Efforts, Full Cost, and IFRS Project

Paper Type:  Essay
Pages:  4
Wordcount:  918 Words
Date:  2022-05-17

International Financial Reporting Standards (IFRS) is inevitable and remains the final destination for public companies in the United States and globally. While some of the companies would perceive benefits in embarking immediately, some of them would adopt a more calculated approach. Most of the companies having significant international operations are the oil and gas (O&G) companies. The companies are also known for their multiple regulatory and capital market considerations, complex organizational structures, and global competitors already reporting under IFRS (Deloitte, n.d.). Indeed, like any significant business decision, one needs to understand the potential costs and benefits to be able to determine the timing and pace of an IFRS conversion.

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Considering the technical accounting issues for the O&G companies, IFRS and U.S. GAAP differ in key ways, mainly their fundamental premise. At the highest level, while IFRS is more principle-based, the U.S. GAAP is more of a rules-based. The distinction proves more vexing than it may initially appear from the fact that most of the accounting and finance professionals in the U.S. have been acknowledged of the rules of the U.S. GAAP. The overriding schooling of the professionals from the years of study and work on the technical accounting issues provides two options: under U.S. GAAP, if one has an issue, he or she looks up to the voluminous guidance attempts to address nearly every conceivable accounting problem that might arise. And the guidance is created if at all it does not exist. Conversely, IFRS's is a far shorter volume of principle-based standards that consequently requires more judgment than the American accountants may be accustomed to. Other than the rules versus principles issues, IFRS also possess particular technical accounting challenges to the O&G companies (Deloitte, n.d.).

In terms of inventory, companies under U.S. GAAP apply LIFO rules to their inventory balances with the method leading to higher recognized costs and sales in periods of rising commodities, hence reducing the taxable income. However, IFRS does not allow for LIFO accounting forcing the companies under IFRS to recast recorded inventory balances under either a weighted average or FIFO rules for purposes of financial reporting (Deloitte, n.d.). In terms of property, plant, and equipment, IFRS requires componentization with major maintenance approach possibly differing. Certain FC practices may not be appropriate under IFRS in the case E&D costs. There also exist differing impairment assessments between standards, with IFRS impairments being reversible. In terms of derivative accounting, IFRS guidance is less prescriptive compared to U.S. GAAP, particularly in core businesses with significant contractual activities on a forward basis. Both IFRS and U.S. GAAP have similar initial treatments based on the asset and retirement obligations, but IFRS amounts adjusted for discount rate changes. Considering the environmental liabilities, U.S. GAAP has more specific rules than IFRS but lease classifications differ with the different standards (Deloitte, n.d.).

For exploration and development costs, most of the integrated super-majors in oil and gas industry apply two accounting methods: successful effort, SE method and full costs, FC method. Under successful methods, the costs associated with locating, developing and purchasing reserves are capitalized on a field-by-field basis. The capitalized costs are assigned to the discovery upon the approval of the reserves, and the expenditures are charged as an expense in a case that the discovery is not attained. Because the SE method only considers the costs related to successful production as relevant to the generation of future revenues, it is generally used by integrated and well-established extractive companies (Abdo, 2016). However, 'successful efforts' is by no means a universal method. In its place, "full cost" method of accounting for E&D is employed by a number of upstream companies. Contrary to the field-by-field approach by the successful efforts method, full cost method is based on the aggregation of fields around geographic costs centers, typically organized on a regional or country basis. The ideal application of full cost method under IFRS still remains unsettled. However, IFRS 6, Exploration for and Evaluation of Mineral Assets allows for the application of full cost but only for exploration and evaluation, after which the companies are forced to switch to the successful efforts method of accounting. The FC method is usually applied in smaller extractive companies because it creates an enhancement effect on earnings (Abdo, 2016).

Conclusion

In conclusion, therefore, while the FC method of accounting is applied by exploration and producing O&G companies by capitalizing all costs in the statement of financial position and amortized over the lifespan of proved reserves, the SE accounting methods only capitalizes costs that results to the discovery of oil and gas reserves while expensing any cost that may not result in the discovery of oil and gas as a period cost. As is revealed by Abdullahi et al. (2016), the fundamental difference between SE and FC is whether the cost is capitalized or expensed when incurred. This implies that the timing of the expense matched against revenue in any accounting period varies between the two methods.

References

Abdo, H. (2016). Accounting for Extractive Industries: Has IFRS 6 Harmonised Accounting Practices by Extractive Industries?. Australian Accounting Review, 26(4), 346-359. http://dx.doi.org/10.1111/auar.12106

Abdullahi, A., Abubakar, M., & Ahmad, S. (2017). International financial reporting standards (IFRS) adoption and oil & gas companies performance in Nigeria. International Journal Of Accounting And Economics Studies, 5(2), 146. http://dx.doi.org/10.14419/ijaes.v5i2.8209

Deloitte (n.d.). International Financial Reporting Standards: Considerations for the Oil & Gas Industry.

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Comparative Analysis of Successful Efforts, Full Cost, and IFRS Project. (2022, May 17). Retrieved from https://proessays.net/essays/comparative-analysis-of-successful-efforts-full-cost-and-ifrs-project

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