Accounting is a common thread which unites even the smallest neighborhood business with an organization identified as a Fortune 500 company. Every company, regardless of size or mode of operation, needs to support this function. If accounting is so universal, then, how do companies involved in diverse industries with unique processes prepare their books in the same manner? Well, there exist a common set of standards for entities to follow, but there are also standards specific to organizations in certain industries. One particular sector which has its own considerations encompasses those organizations which operate within the oil and gas industry.
With that said, one particular area worth discussing relates to how outlays are accounted for when they are incurred for the purpose of locating sites where oil and gas can be found and then transforming those resources into marketable products. “Companies involved in the exploration and development of crude oil and natural gas have the option of choosing between two accounting approaches: the ‘successful efforts’ (SE) method and the ‘full cost’ (FC) method.” (Investopedia) The main issue which these techniques address is whether or not such outflows can be capitalized or need be treated as expenses on the income statement.
As the FASB Accounting Standards Codification only addresses the successful efforts method, it will receive the primary focus in this paper. The name “successful efforts” gives an indication as to how exploratory costs are treated. “Only those exploration and development costs that relate directly to specific oil and gas reserves are capitalized; costs that do not relate directly to specific reserves are charged to expense” (codification). This means that those events which do not yield resources are seen on the income statement in the form of expenses. Therefore, the bottom line is