What Are Successful-E💙fforts and🐓 Full-Cost Accounting?

Companies involved in the exploration and development of crude oil and natural gas can choose between two accounting approaches: the successful-efforts (SE) method and the full-cost (FC) method. These approaches differ in how they treat specific operating expenses related to the industry. 

Understanding Successful-Efforts an🧸d Full-Cost Accounting

The 澳洲幸运5开奖号码历史查询:accounting method that a company chooses affects how its 澳洲幸运5开奖号码历史查询:net income and c🐼ash flow numbers are reported. Th𒈔erefore, the accounting method is an important consideration when analyzing companies involved in the exploration and development of oil and natural gas.

Companies record exploration costs 澳洲幸运5开奖号码历史查询:capitalized under either method on the balance sheet as part of their 澳洲幸运5开奖号码历史查询:long-term assets. This is because, like the machinery used by a manufacturing company, oil and natural gas reserves are considered productive assets for an oil and gas company. 澳洲幸运5开奖号码历史查询:Ge♓nerally accepted accounting principles (GAAP) require that companies charge costs to acq🧔uire those assets against revenues as ﷽they use the assets.

The reason that two different methods exist for recording oil and gas exploration and development expenses is that people are divided on which method they believe best achieves transparency of a company's earnings and 澳洲幸运5开奖号码历史查询:cash flows.

The 澳洲幸运5开奖号码历史查询:Fi🔴nancial Accounting Standards Board (FASB), which is responsible for establishing and governing GAAP, and the 澳洲幸运5开奖号码历史查询:Securities and Exchange ꦡCommission (SEC), which regulates the financial reporting format and content of publicly-traded companies, are divided over which is the correct method.

In Statement of Financial Accounting Standards No. 19, the FASB requires that oil and gas companies use the SE method.  The SEC allows companies to use the FC method. These two governing bodies haꦦve yet to find the ideological common ground needed to establish a single accounting approach.

Successful-Efforts Accounting

The SE method allows a company to capitalize on only those expenses associated with successfully locating new oil and natural gas reserves. For unsuccessful (or "dry hole") results, the company charges associated 澳洲幸运5开奖号码历史查询:operating costs immediately against revenues for that period.

According to the theory behind the SE method, the ultimate objective of an 🔯oil and gas company is to produce the oil or natural gas from reserves it locates and develops, so the company should only capitalize on those costs relating to successful efforts. Conversely, because there is no change in productive assets with unsuccessful results𝕴, companies should expense costs incurred from those efforts.

Full-Cost Accounting

The alternative approach, known as the FC method, allows companies to capitalize on all 澳洲幸运5开奖号码历史查询:operating expenses related to locating new oil and gas reserves regardless of the outcome.

The theory behind the FC method holds that, in general, the dominant activity o♊f an oil and gas company is simply the exploration and development of oil and gas reserves. Therefore, companies should capitalize all costs they incur in pursuit of that activity and then write them off over the course of a full operating cycle.

Key Differences

The effect of choosing one accounting method over another is apparent when periodic financial results involving the income and cash flow statement are compared. Each method highlights the individual costs, which fall into the categories of 澳洲幸运5开奖号码历史查询:acquisition,😼 exploration, development, and production, differently. However, such a comparison als🍷o points out the impact on periodic results caused by differing levels of capitalized assets under the two accounting methods.

The financial results of a manufacturing company are impacted by 澳洲幸运5开奖号码历史查询:depreciation expense for 澳洲幸运5开奖号码历史查询:plant, property, and equipment. Similarly, the financial results for an oil and gas company are equally affected by periodic charges in depreciation, depletion, and 澳洲幸运5开奖号码历史查询:amortization (DD&A) of costs relating to expenditures for the acquisition, exploration, and development of new oil and natural gas reserves. The charges include the depreciation of certain long-lived operating equipment, the depletion of costs relating to the acquisition of property or property 澳洲幸运5开奖号码历史查询:mineral rights, and the amortization of tangible non-drilling costs incurred with developing🐬 the reserves.

The periodic 澳洲幸运5开奖号码历史🥀查询:depreciation, depletion, and amortization expense charged to the income statement are determined by the "units-of-production" method, for which the percent of total production for the period to total 澳洲幸运5开奖号码历史查询:proven reserves at the beginning of the period is applied to the gross total of costs capitalized on the澳洲幸运5开奖号码历史查询: balance sheet.

Special Considerations

Income Statement

DD&A, production expenses, and exploration costs incurred from unsuccessful efforts to discover new reserves are recorded on the 澳洲幸运5开奖号码历史查询:income statement. Initially, net income for both an SE and an FC company is impacted by the periodic charges for DD&A and production expenses, but net income for the SE company is further impacted by ex🥂ploration costs that may have been incurred for that period.

However, without the subsequent discovery of new reserves, the resulting decline in periodic production rates will later begin to negatively impact revenues and the calculation of DD&A for both a SE and FC company. Due to an FC company's higher level of 澳洲幸运5开奖号码历史查询:capitalized costs and resulting periodic DD&A expenses in the face of declining revenues, the periodic net earnings of the SE company will improve relative to those of the🐼 FC company and will eventually exceed those costs.

Statement of Cash Flows

As with the income statement for a company following the FC accounting method, when identical operational outcomes are assumed, near-term results (shown in the cash flows from the operations (CFO) portion of the 澳洲幸运5开奖号码历史查询:statement of cash flows) will be superior to those for a company following the SE method. CFO is basically net income with non-cash charges like DD&A added back, so, despite a relatively lower charge for DD&A, CFO f﷽or an SE company will reflect the net income impact from expenses relating to unsuccessful explo🍎ration efforts.

However, when there are no new reserves added, each company's CFO will be the same. This is because adding back the 澳洲幸运5开奖号码历史查询:non-cash charge for DD&A effectively negates t𝓰he relatively larger impact to net income under the FC accounting met📖hod.