Oil and Gas Industry

For this reason, the oil and tartar gas industries financial statements for FIRS and US GAP has some form of differences. Many of the European countries converted to FIRS because of the tight timeliness that was introduced to the European regulations. Internationally, many of the vendors that the oil and gas industry does business already adhered to FIRS regulations. After further reviews, decision making, reviewing cost and benefits, the oil and gas Industries decided to make a switch from using any other regulations and standard such as US GAP except for FIRS.

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The OLL and gas Industries had to make sure that they understand the premise of both FIRS and US GAP. In this case, US GAP is more about systems based rules and FIRS is more about principles based standards. There are some benefits when a company makes a switch from US GAP to FIRS. The oil and gas company receives an exemption from exploration and evaluation assets (E &E). “E&E assets are classified as tangible or intangible assets depending on their nature.

Tangible E&E assets may include the items of plant and equipment used for exploration activity, such as vehicles and drilling rigs. Intangible E&E assets may include costs of exploration permits and licenses as ell as depreciation of tangible assets consumed in developing intangible assets such as exploratory well. ” (KEMP). This also assists the OLL and gas company to not re- examine previous financial statements but to use the current Information with the Depletion, depreciation and amortization (ID&A) are major parts of accounting for the oil and gas company.

In this case, “there are no cost-pool concept under FIRS, the standard does allow companies to group and depreciate components within the same asset class together, provided they have the same useful life and depreciation method. However, it is unlikely that development or production oil and gas assets will be able to be grouped at a level greater than a field; this is because each field may be significant and the lives of the fields, and therefore depreciation rates, will vary. ” KEMP. Under FIRS, the oil and gas industry can choose the depreciation methods once the units for the production are reported.

The oil and gas industry can even choose the reserve base but the final result should match the cost and production for the company. With the oil and the gas company adapting to FIRS they would have to make sure hat they understand that full cost method and successful methods are not used much. Full cost is only allowed with FIRS during the E & E phase since this is the first time adapting this standard. At this time, assets are classified as impairment and tangible. Once again this is a great benefit for the oil and gas industry. Success factor is accepted under FIRS the cost needs to take place before the E&E phase.

All these cost will be capitalized which is a benefit for the oil and gas industry. If the cost does incur during the E&E phase, “the cost needs to be recorded as assets and Ritter off when it is determined that the cost will not lead to economic benefits or to be expensed as incurred if the outcome is uncertain. The deferred cost of an undeveloped mineral right may be amortized over some determinable period, they may be subject to an impairment test each period with the amount of impairment charges to expense or the cost may be kept intact until it is determined whether the property contains mineral reserves. (Ernest and Young, 2008). The oil and gas industry is very familiar with the US GAP standards because this has been around for many years. US GAP is said to be difficult because of the requirements that needs to be adhered to. Once again, oil and gas industry is not making changes because the US GAP requirements but they Just need to be uniformed and make sure they work well with their vendor internationally. In the oil and gas industry, US GAP has a risk sharing arrangement which needs to be assessed carefully.

At this point, the oil and gas industry can choose between the full cost method and the successful efforts method. “Under the successful efforts method, the sale of an interest may result in a gain. FAST 19 provides the accounting or sales of unproven and proven property interests. Under the full cost method, a gain or loss on a partial or full sale of an interest is treated as an adjustment to the capitalized costs in the full cost center, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves. (Ernest & Young, 2009). This can be an issue for the oil and gas industry because they have to make sure that they choose the right method which will be benefit for the company. There are no benefits for the oil and gas company when they adopt the US GAP standards during the E & E phase. During the E & E phase carried interest is no gain or loss. In other word, the E & E cost is capitalized. At this time, there are no entries for this until the there is a payout for the carrying party. The carrying which was carried.

After reviewing this standard, the oil and gas industry should be able to have a disposal for the carried party and an acquisition should be done for the oil and gas property for the carrying party. In the oil and gas industries does business as a Joint venture. In definition, Joint venture involves a corporation owned but doing business as a small group. Since this is Jointly controlled, the oil and gas company has Joint controlled assets. In this case, the equity method will be used if the asset is carried as a separate entity.

On the other hand, if the company is UN-incorporated, it will be consolidated respectively. If the equity method is not followed correctly under US GAP, the information can be recorded with error which can cause much damage since this is a Joint controlled. According to the Ernest & Young (2009), “Under US GAP, an oil and gas company in a pure service contract will expense all costs as incurred as the contract s not deemed to be an oil and gas producing activity and will record the service fee into revenue as services are performed. ” (Ernest & Young 2009).

Also, under US GAP, revenue is not recognized until it’s earned in the company. The US GAP wants to make sure that consideration to be received from the different vendors or buyers are obtainable. If it’s not obtainable, this is going against the US GAP requirement. Impairment test of assets is done within the oil and gas industry. Under the US GAP the oil and gas company will have to prepare a two-step test. The company will eave make sure that the carrying value of the assets is related to the non-discounted cash flows on the statements.

There will be no adjustments if in this case; the value of the asset is below the non-discounted cash flow on the statement. With impairment, the oil and gas industry can once again choose to use the successful efforts or the full cost method. Under the successful efforts the oil and gas industry needs to make sure that they follow asset impairment under FAST 144. Under the full cost method, the oil and gas industry will need to make sure that the capitalized sots is more than the cost center. The greatest disadvantage with this is that impairment loss under the US GAP is not reversal.

Reverse are very important in the oil and gas industry which was already mentioned throughout this paper. US GAP only approves reserves if its proved reserved and also categorized as being undeveloped or developed for the oil and gas company. These reserves are mainly used to compute the ID&A which is needed for the requirement of US GAP. US GAP created its own definitions for proved reserves, proved developed reserves and proved undeveloped reserves. The reason US GAP introduced these definitions for the oil and gas industry is the fact that they were not abiding by the requirements. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, I. E. , prices and costs as of the date the estimate is made. ” (GE Energy, 2004). “Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. ” (GE Energy, 2004).

On the other hand, “proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on required for recompilation. Reserves on undefiled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. ” (GE Energy, 2004). It’s very imperative that the oil and gas industry abides the rules for the reserves. If the rules are not followed US GAP will not honor he information that is submitted for the ID;A which is based on the information for the reserve.

While many of the oil and gas industries are using the US GAP requirement, they welcome the challenges that they will have to deal with adapting FIRS. Many surveys were conducted by KEMP from 2008 to present and it’s showing that the industry is making the change. Many analysis and schedules are being created by the oil and gas industries Just to make sure this will not affect them a great way. The main analysis that they are focusing on are the risk assessments which has to do the way information will be reported.

They are also focusing on price and tax risks. There are no major requirements for pricing with FIRS standard but they want to make sure that they are uniform with pricing. Reporting taxes will change so the oil and gas industry is making sure that the analysis that is being done is with the regulations and one that they can work with. From reading the surveys, it’s clear that the oil and gas industry are focusing on the ID;A, cash flow, operating statements and time based if they are deciding to make the switch from US GAP to FIRS.