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1. This Statement establishes standards of ? nancial accounting and reporting for the oil and gas producing activities of a business enterprise. Those activities involve the acquisition of mineral interests in properties, exploration (including prospecting), development, and production of crude oil, including condensate and natural gas liquids, and natural gas (hereinafter collectively referred to as oil and gas producing activities). 2. Existing authoritative accounting pronouncements do not explicitly or comprehensively establish standards of ? nancial accounting and reporting for those activities.
Numerous alternative accounting practices are presently followed by oil and gas producing companies, and the nature and extent of the information they disclose in their ? nancial statements about their oil and gas producing activities vary considerably from company to company. The Board is issuing this Statement to address the ? nancial accounting and reporting issues that led to the alternative practices. 3. Appendix A contains background information. Appendix B sets forth the basis for the Board’s conclusions, including alternatives considered and reasons for accepting some and rejecting others. Appendix C is a glossary of terms. 4. The accounting standards in this Statement adhere to the traditional historical cost basis.
Although the Board considered both discovery value and current value as alternative bases of accounting for oil and gas reserves, it determined for the reasons discussed in paragraphs 133? 141 that any decision on applying value accounting to oil and gas companies should await resolution of the broader issue of the general applicability of value accounting in the Board’s project, “Conceptual Framework for Financial Accounting and Reporting. ” 5. This Statement supersedes FASB Statement No. 9, “Accounting for Income Taxes—Oil and Gas Producing Companies. ” SCOPE 6. This Statement applies only to oil and gas producing activities; it does not address ? nancial accounting and reporting issues relating to the transporting, re? ning, and marketing of oil and gas. Also, this Statement does not apply to activities relating to the pro- uction of other wasting (nonregenerative) natural resources; nor does it apply to the production of geothermal steam or to the extraction of hydrocarbons as a by-product of the production of geothermal steam and associated geothermal resources as de? ned in the Geothermal Steam Act of 1970; nor does it apply to the extraction of hydrocarbons from shale, tar sands, or coal. 7. Accounting for interest on funds borrowed to ? nance an enterprise’s oil and gas producing activities is excluded from consideration in this Statement because the broader subject of accounting for interest costs in general is a project presently on the Board’s technical agenda. 8. This Statement prescribes disclosures related to an enterprise’s oil and gas producing activities that are considered necessary for fair presentation of the enterprise’s ? nancial position, results of operations, and changes in ? ancial position in conformity with generally accepted accounting principles. Those disclosures are only part of the information that may be needed for investment, regulatory, or national economic planning and energy policy decisions. 9. [This paragraph has been deleted. See Status page. ] STANDARDS OF FINANCIALACCOUNTING AND REPORTING De? nitions 10. The glossary in Appendix C de? nes the following terms as they are used in this Statement: a. Proved reserves. b. Proved developed reserves. c. Proved undeveloped reserves. d. Field. e. Reservoir. f. Exploratory well. g. Development well. h. Service well. i. Stratigraphic test well. i. Exploratory-type. ii. Development-type. j. Proved area. Basic Concepts 11.
An enterprise’s oil and gas producing activities involve certain special types of assets. Costs of those FAS19–3 FAS19 FASB Statement of Standards assets shall be capitalized when incurred. Those types of assets broadly de? ned are: a. Mineral interests in properties (hereinafter referred to as properties), which include fee ownership or a lease, concession, or other interest representing the right to extract oil or gas subject to such terms as may be imposed by the conveyance of that interest. Properties also include royalty interests, production payments payable in oil or gas, and other nonoperating interests in properties operated by others.
Properties include those agreements with foreign governments or authorities under which an enterprise participates in the operation of the related properties or otherwise serves as “producer” of the underlying reserves (see paragraph 59H); but properties do not include other supply agreements or contracts that represent the right to purchase (as opposed to extract) oil and gas. Properties shall be classi? ed as proved or unproved as follows: i. Unproved properties—properties with no proved reserves. ii. Proved properties—properties with proved reserves. b. Wells and related equipment and facilities,1 the costs of which include those incurred to: i.
Drill and equip those exploratory wells and exploratory-type stratigraphic test wells that have found proved reserves. ii. Obtain access to proved reserves and provide facilities for extracting, treating, gathering, and storing the oil and gas, including the drilling and equipping of development wells and development-type stratigraphic test wells (whether those wells are successful or unsuccessful) and service wells. c. Support equipment and facilities used in oil and gas producing activities, such as seismic equipment, drilling equipment, construction and grading equipment, vehicles, repair shops, warehouses, supply points, camps, and division, district, or ? ld offices. d. Uncompleted wells, equipment, and facilities, the costs of which include those incurred to: i. Drill and equip wells that are not yet completed. ii. Acquire or construct equipment and facilities that are not yet completed and installed. 12. The costs of an enterprise’s wells and related equipment and facilities and the costs of the related proved properties shall be amortized as the related oil and gas reserves are produced. That amortization plus production (lifting) costs become part of the cost of oil and gas produced. Unproved properties shall be assessed periodically, and a loss recognized if those properties are impaired. 13.
Some costs incurred in an enterprise’s oil and gas producing activities do not result in acquisition of an asset and, therefore, shall be charged to expense. Examples include geological and geophysical costs, the costs of carrying and retaining undeveloped properties, and the costs of drilling those exploratory wells and exploratory-type stratigraphic test wells that do not ? nd proved reserves. 14. The basic concepts in paragraphs 11? 13 are elaborated on in paragraphs 15? 41. Accounting at the Time Costs Are Incurred Acquisition of Properties 15. Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved) shall be capitalized when incurred.
They include the costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers’ fees, recording fees, legal costs, and other costs incurred in acquiring properties. Exploration 16. Exploration involves (a) identifying areas that may warrant examination and (b) examining speci? c areas that are considered to have prospects of containing oil and gas reserves, including drilling exploratory wells and exploratory-type stratigraphic test wells. Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property. 17.
Principal types of exploration costs, which include depreciation and applicable operating costs of support equipment and facilities (paragraph 26) and other costs of exploration activities, are: a. Costs of topographical, geological, and geophysical studies, rights of access to properties to conduct those studies, and salaries and other expenses 1Often referred to in the oil and gas industry as “lease and well equipment” even though, technically, the property may have been acquired other than by a lease. FAS19–4 Financial Accounting and Reporting by Oil and Gas Producing Companies FAS19 b. c. d. e. of geologists, geophysical crews, and others conducting those studies. Collectively, those are sometimes referred to as geological and geophysical or “G&G” costs.
Costs of carrying and retaining undeveloped properties, such as delay rentals, ad valorem taxes on the properties, legal costs for title defense, and the maintenance of land and lease records. Dry hole contributions and bottom hole contributions. Costs of drilling and equipping exploratory wells. Costs of drilling exploratory-type stratigraphic test wells. 2 depreciation and applicable operating costs of support equipment and facilities (paragraph 26) and other costs of development activities, are costs incurred to: a. Gain access to and prepare well locations for drilling, including surveying well locations for the purpose of determining speci? development drilling sites, clearing ground, draining, road building, and relocating public roads, gas lines, and power lines, to the extent necessary in developing the proved reserves. b. Drill and equip development wells, developmenttype stratigraphic test wells, and service wells, including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly. c. Acquire, construct, and install production facilities such as lease ? ow lines, separators, treaters, heaters, manifolds, measuring devices, and production storage tanks, natural gas cycling and processing plants, and utility and waste disposal systems. d. Provide improved recovery systems. 22.
Development costs shall be capitalized as part of the cost of an enterprise’s wells and related equipment and facilities. Thus, all costs incurred to drill and equip development wells, development-type stratigraphic test wells, and service wells are development costs and shall be capitalized, whether the well is successful or unsuccessful. Costs of drilling those wells and costs of constructing equipment and facilities shall be included in the enterprise’s uncompleted wells, equipment, and facilities until drilling or construction is completed. Production 23. Production involves lifting the oil and gas to the surface and gathering, treating, ? ld processing (as in the case of processing gas to extract liquid hydrocarbons), and ? eld storage. For purposes of this Statement, the production function shall normally be regarded as terminating at the outlet valve on the lease or ? eld production storage tank; if unusual physical or operational circumstances exist, it may be more appropriate to regard the production function as terminating at the ? rst point at which oil, gas, or gas liquids are delivered to a main pipeline, a common carrier, a re? nery, or a marine terminal. 18. Geological and geophysical costs, costs of carrying and retaining undeveloped properties, and dry hole and bottom hole contributions shall be charged to expense when incurred. 19.
The costs of drilling exploratory wells and the costs of drilling exploratory-type stratigraphic test wells shall be capitalized as part of the enterprise’s uncompleted wells, equipment, and facilities pending determination of whether the well has found proved reserves. If the well has found proved reserves (paragraphs 31? 34), the capitalized costs of drilling the well shall become part of the enterprise’s wells and related equipment and facilities (even though the well may not be completed as a producing well); if, however, the well has not found proved reserves, the capitalized costs of drilling the well, net of any salvage value, shall be charged to expense. 20.
An enterprise sometimes conducts G&G studies and other exploration activities on a property owned by another party, in exchange for which the enterprise is contractually entitled to receive an interest in the property if proved reserves are found or to be reimbursed by the owner for the G&G and other costs incurred if proved reserves are not found. In that case, the enterprise conducting the G&G studies and other exploration activities shall account for those costs as a receivable when incurred and, if proved reserves are found, they shall become the cost of the proved property acquired. Development 21. Development costs are incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering, and storing the oil and gas. More speci? cally, development costs, including 2While the costs of drilling stratigraphic test wells are sometimes considered to be geological and geophysical costs, they are accounted for sepa- ately under this Statement for reasons explained in paragraphs 200? 202. FAS19–5 FAS19 FASB Statement of Standards 24. Production costs are those costs incurred to operate and maintain an enterprise’s wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities (paragraph 26) and other costs of operating and maintaining those wells and related equipment and facilities. They become part of the cost of oil and gas produced. Examples of production costs (sometimes called lifting costs) are: a. Costs of labor to operate the wells and related equipment and facilities. b. Repairs and maintenance. c.
Materials, supplies, and fuel consumed and services utilized in operating the wells and related equipment and facilities. d. Property taxes and insurance applicable to proved properties and wells and related equipment and facilities. e. Severance taxes. 25. Depreciation, depletion, and amortization of capitalized acquisition, exploration, and development costs also become part of the cost of oil and gas produced along with production (lifting) costs identi? ed in paragraph 24. Support Equipment and Facilities 26. The cost of acquiring or constructing support equipment and facilities used in oil and gas producing activities shall be capitalized.
Examples of support equipment and facilities include seismic equipment, drilling equipment, construction and grading equipment, vehicles, repair shops, warehouses, supply points, camps, and division, district, or ? eld of? ces. Some support equipment or facilities are acquired or constructed for use exclusively in a single activity—exploration, development, or production. Other support equipment or facilities may serve two or more of those activities and may also serve the enterprise’s transportation, re? ning, and marketing activities. To the extent that the support equipment and facilities are used in oil and gas producing activities, their depreciation and applicable operating costs become an exploration, development, or production cost, as appropriate.
Disposition of Capitalized Costs 27. The effect of paragraphs 15? 26, which deal with accounting at the time costs are incurred, is to recognize as assets: (a) unproved properties; (b) proved properties; (c) wells and related equipment and facilities (which consist of all development costs plus the costs of drilling those exploratory wells and exploratory-type stratigraphic test wells that ? nd proved reserves); (d) support equipment and facilities used in oil and gas producing activities; and (e) uncompleted wells, equipment, and facilities. Paragraphs 28? 41 which follow deal with disposition of the costs of those assets after capitalization.
Among other things, those paragraphs provide that the acquisition costs of proved properties and the costs of wells and related equipment and facilities be amortized to become part of the cost of oil and gas produced; that impairment of unproved properties be recognized; and that the costs of an exploratory well or exploratory-type stratigraphic test well be charged to expense if the well is determined not to have found proved reserves. Assessment of Unproved Properties 28. Unproved properties shall be assessed periodically to determine whether they have been impaired. A property would likely be impaired, for example, if a dry hole has been drilled on it and the enterprise has no ? rm plans to continue drilling.
Also, the likelihood of partial or total impairment of a property increases as the expiration of the lease term approaches if drilling activity has not commenced on the property or on nearby properties. If the results of the assessment indicate impairment, a loss shall be recognized by providing a valuation allowance. Impairment of individual unproved properties whose acquisition costs are relatively signi? cant shall be assessed on a property-by-property basis, and an indicated loss shall be recognized by providing a valuation allowance. When an enterprise has a relatively large number of unproved properties whose acquisition costs are not individually signi? ant, it may not be practical to assess impairment on a property-byproperty basis, in which case the amount of loss to be recognized and the amount of the valuation allowance needed to provide for impairment of those properties shall be determined by amortizing those properties, either in the aggregate or by groups, on the basis of the experience of the enterprise in similar situations and other information about such factors as the primary lease terms of those properties, the average holding period of unproved properties, and the relative proportion of such properties on which proved reserves have been found in the past. Reclassi? cation of an Unproved Property 29. A property shall be reclassi? ed from unproved properties to proved properties when proved reserves are discovered on or otherwise attributed to the FAS19–6 Financial Accounting and Reporting by Oil and Gas Producing Companies
FAS19 property; occasionally, a single property, such as a foreign lease or concession covers so vast an area that only the portion of the property to which the proved reserves relate—determined on the basis of geological structural features or stratigraphic conditions— should be reclassi? ed from unproved to proved. For a property whose impairment has been assessed individually in accordance with paragraph 28, the net carrying amount (acquisition cost minus valuation allowance) shall be reclassi? ed to proved properties; for properties amortized by providing a valuation allowance on a group basis, the gross acquisition cost shall be reclassi? ed.
Amortization (Depletion) of Acquisition Costs of Proved Properties 30. Capitalized acquisition costs of proved properties shall be amortized (depleted) by the unit-ofproduction method so that each unit produced is assigned a pro rata portion of the unamortized acquisition costs. Under the unit-of-production method, amortization (depletion) may be computed either on a property-by-property basis or on the basis of some reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or ? eld. When an enterprise has a relatively large number of royalty interests whose acquisition costs are not individually signi? ant, they may be aggregated, for the purpose of computing amortization, without regard to commonality of geological structural features or stratigraphic conditions; if information is not available to estimate reserve quantities applicable to royalty interests owned (paragraph 59E), a method other than the unit-of-production method may be used to amortize their acquisition costs. The unit cost shall be computed on the basis of the total estimated units of proved oil and gas reserves. (Joint production of both oil and gas is discussed in paragraph 38. ) Unit-ofproduction amortization rates shall be revised whenever there is an indication of the need for revision but at least once a year; those revisions shall be accounted for prospectively as changes in accounting estimates—see paragraphs 19? 22 of FASB Statement No. 154, Accounting Changes and Error Corrections. Accounting When Drilling of an Exploratory Well or an Exploratory-Type Stratigraphic Well Is Completed* 31. As speci? d in paragraph 19, the costs of drilling an exploratory well or an exploratory-type stratigraphic well are capitalized as part of the enterprise’s uncompleted wells, equipment, and facilities pending the determination of whether the well has found proved reserves. If proved reserves are found, the capitalized costs of drilling the well shall be reclassi? ed as part of the costs of the enterprise’s wells and related equipment and facilities at that time. If proved reserves are not found, the capitalized costs of drilling the well shall be charged to expense. However, an exploratory well or an exploratory-type stratigraphic well may be determined to have found oil and gas reserves, but those reserves cannot be classi? ed as proved when drilling is completed.
In those cases, the capitalized drilling costs shall continue to be capitalized if the well has found a sufficient quantity of reserves to justify its completion as a producing well2a and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. 2b (Refer to paragraphs 32? 34 for guidance on assessing whether an enterprise is making sufficient progress on assessing the reserves and the economic and operating viability of the project. ) 31A. If either of those criteria is not met, or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well or exploratory-type stratigraphic well shall be assumed to be impaired and its costs, net of any salvage value, shall be charged to expense.
Further, an enterprise shall not continue to capitalize exploratory well costs on the chance that (a) current market conditions will change (for example, an increase in the market price of oil or gas), or (b) technology will be developed to make the development of the project economically and operationally viable. Progress on Assessing Reserves 32. All relevant facts and circumstances shall be evaluated when determining whether an enterprise is *Refer to paragraphs 10–12 of FASB Staff Position FAS19-1, “Accounting for Suspended Well Costs,” for guidance on disclosures and effective date. 2a To meet this criterion, an enterprise is not required to complete the exploratory or exploratory-type stratigraphic well as a producing well. bFor purposes of determining whether capitalized drilling costs shall continue to be capitalized pending the determination of proved reserves, a project may include more than one exploratory well or exploratory-type stratigraphic well if the reserves are intended to be extracted in a single, integrated producing operation (for example, the producing wells will operate with shared infrastructure). FAS19–7 FAS19 FASB Statement of Standards making sufficient progress on assessing the reserves and the economic and operating viability of the project. The following are some indicators, among others, that an enterprise is making sufficient progress. No single indicator is determinative.
An entity should evaluate indicators in conjunction with all other relevant facts and circumstances. a. Commitment of project personnel who are at the appropriate levels and who have the appropriate skills b. Costs are being incurred to assess the reserves and their potential development c. An assessment process covering the economic, legal, political, and environmental aspects of the potential development is in progress d. Existence (or active negotiations) of sales contracts with customers for the oil and gas e. Existence (or active negotiations) of agreements with governments, lenders, and venture partners f. Outstanding requests for proposals for development of any required facilities g. Existence of ? m plans, established timetables, or contractual commitments, which may include seismic testing and drilling of additional exploratory wells h. Progress is being made on contractual arrangements that will permit future development i. Identi? cation of existing transportation and other infrastructure that is or will be available for the project (subject to negotiations for use). 33. Long delays in the assessment or development plan (whether anticipated or unexpected) may raise doubts about whether the enterprise is making sufficient progress to continue the capitalization of exploratory well or exploratory-type stratigraphic well costs after the completion of drilling.
The longer the assessment process for the reserves and the project, the more difficult it is to conclude that the enterprise is making sufficient progress to continue the capitalization of those exploratory well or exploratory-type stratigraphic well costs. 34. If an enterprise has not engaged in substantial activities to assess the reserves or the development of the project in a reasonable period of time after the drilling of the well is completed or activities have been suspended, any capitalized costs associated with that well shall be expensed net of any salvage value. After a reasonable period of time, the planning of future activities without engaging in substantial activities is not sufficient to continue the capitalization of exploratory well or exploratory-type stratigraphic well costs. However, brief interruptions in ctivities required to assess the reserves or the project, or other delays resulting from governmental or other third-party evaluation of a proposed project, do not require capitalized exploratory well or exploratory-type stratigraphic well costs to be expensed. Amortization and Depreciation of Capitalized Exploratory Drilling and Development Costs 35. Capitalized costs of exploratory wells and exploratory-type stratigraphic test wells that have found proved reserves and capitalized development costs shall be amortized (depreciated) by the unit-ofproduction method so that each unit produced is assigned a pro rata portion of the unamortized costs.
It may be more appropriate, in some cases, to depreciate natural gas cycling and processing plants by a method other than the unit-of-production method. Under the unit-of-production method, amortization (depreciation) may be computed either on a propertyby-property basis or on the basis of some reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or ? eld. The unit cost shall be computed on the basis of the total estimated units of proved developed reserves, rather than on the basis of all proved reserves, which is the basis for amortizing acquisition costs of proved properties. If signi? ant development costs (such as the cost of an off-shore production platform) are incurred in connection with a planned group of development wells before all of the planned wells have been drilled, it will be necessary to exclude a portion of those development costs in determining the unit-of-production amortization rate until the additional development wells are drilled. Similarly it will be necessary to exclude, in computing the amortization rate, those proved developed reserves that will be produced only after signi? cant additional development costs are incurred, such as for improved recovery systems. However, in no case should future development costs be anticipated in computing the amortization rate. (Joint production of both oil and gas is discussed in paragraph 38. Unit-of-production amortization rates shall be revised whenever there is an indication of the need for revision but at least once a year; those revisions shall be accounted for prospectively as changes in accounting estimates—see paragraphs 19? 22 of Statement 154. Depreciation of Support Equipment and Facilities 36. Depreciation of support equipment and facilities used in oil and gas producing activities shall be accounted for as exploration cost, development cost, or production cost, as appropriate (paragraph 26). FAS19–8 Financial Accounting and Reporting by Oil and Gas Producing Companies FAS19 Dismantlement Costs and Salvage Values 37. Obligations for dismantlement, restoration, and abandonment costs shall be accounted for in accordance with the provisions of FASB Statement No. 143, Accounting for Asset Retirement Obligations.
Estimated residual salvage values shall be taken into account in determining amortization and depreciation rates. Amortization of Costs Relating to Oil and Gas Reserves Produced Jointly 38. The unit-of-production method of amortization requires that the total number of units of oil or gas reserves in a property or group of properties be estimated and that the number of units produced in the current period be determined. Many properties contain both oil and gas reserves. In those cases, the oil and gas reserves and the oil and gas produced shall be converted to a common unit of measure on the basis of their approximate relative energy content (without considering their relative sales values).
However, if the relative proportion of gas and oil extracted in the current period is expected to continue throughout the remaining productive life of the property, unit-of-production amortization may be computed on the basis of one of the two minerals only; similarly, if either oil or gas clearly dominates both the reserves and the current production (with dominance determined on the basis of relative energy content), unit-of-production amortization may be computed on the basis of the dominant mineral only. Information Available after the Balance Sheet Date 39. Information that becomes available after the end of the period covered by the ? nancial statements but before those ? ancial statements are issued shall be taken into account in evaluating conditions that existed at the balance sheet date, for example, in assessing unproved properties (paragraph 28) and in determining whether an exploratory well or exploratorytype stratigraphic test well had found proved reserves (paragraphs 31? 34). Surrender or Abandonment of Properties 40. When an unproved property is surrendered, abandoned, or otherwise deemed worthless, capitalized acquisition costs relating thereto shall be charged against the related allowance for impairment to the extent an allowance has been provided; if the allowance previously provided is inadequate, a loss shall be recognized. 41.
Normally, no gain or loss shall be recognized if only an individual well or individual item of equipment is abandoned or retired or if only a single lease or other part of a group of proved properties constituting the amortization base is abandoned or retired as long as the remainder of the property or group of properties continues to produce oil or gas. Instead, the asset being abandoned or retired shall be deemed to be fully amortized, and its cost shall be charged to accumulated depreciation, depletion, or amortization. When the last well on an individual property (if that is the amortization base) or group of properties (if amortization is determined on the basis of an aggregation of properties with a common geological structure) ceases to produce and the entire property or property group is abandoned, gain or loss shall be recognized.
Occasionally, the partial abandonment or retirement of a proved property or group of proved properties or the abandonment or retirement of wells or related equipment or facilities may result from a catastrophic event or other major abnormality. In those cases, a loss shall be recognized at the time of abandonment or retirement. Mineral Property Conveyances and Related Transactions 42. Mineral interests in properties are frequently conveyed to others for a variety of reasons, including the desire to spread risks, to obtain ? nancing, to improve operating efficiency, and to achieve tax bene? ts. Conveyances of those interests may involve the transfer of all or a part of the rights and responsibilities of operating a property (operating interest).
The transferor may or may not retain an interest in the oil and gas produced that is free of the responsibilities and costs of operating the property (a nonoperating interest). A transaction may, on the other hand, involve the transfer of a nonoperating interest to another party and retention of the operating interest. 43. Certain transactions, sometimes referred to as conveyances, are in substance borrowings repayable in cash or its equivalent and shall be accounted for as borrowings. The following are examples of such transactions: a. Enterprises seeking supplies of oil or gas sometimes make cash advances to operators to ? nance exploration in return for the right to purchase oil or gas discovered.
Funds advanced for exploration that are repayable by offset against purchases of oil or gas discovered, or in cash if insufficient oil or gas is produced by a speci? ed date, shall be FAS19–9 FAS19 FASB Statement of Standards accounted for as a receivable by the lender and as a payable by the operator. b. Funds advanced to an operator that are repayable in cash out of the proceeds from a speci? ed share of future production of a producing property, until the amount advanced plus interest at a speci? ed or determinable rate is paid in full, shall be accounted for as a borrowing. The advance is a payable for the recipient of the cash and a receivable for the party making the advance.
Such transactions, as well as those described in paragraph 47(a) below, are commonly referred to as production payments. The two types differ in substance, however, as explained in paragraph 47(a). 44. In a pooling of assets in a joint undertaking intended to ? nd, develop, or produce oil or gas from a particular property or group of properties, gain or loss shall not be recognized at the time of the conveyance. 45. In the following types of conveyances, gain shall not be recognized at the time of the conveyance: a. A part of an interest owned is sold and substantial uncertainty exists about recovery of the costs applicable to the retained interest. b.
A part of an interest owned is sold and the seller has a substantial obligation for future performance, such as an obligation to drill a well or to operate the property without proportional reimbursement for that portion of the drilling or operating costs applicable to the interest sold. 46. If a conveyance is not one of the types described in paragraphs 44 and 45, gain or loss shall be recognized unless there are other aspects of the transaction that would prohibit such recognition under accounting principles applicable to enterprises in general. 47. In accordance with paragraphs 44? 46, the following types of transactions shall be accounted for as indicated in each example. 3 No attempt has been made to include the many variations of those arrangements that occur, but paragraphs 44? 6 shall, where applicable, determine the accounting for those other arrangements as well. a. Some production payments differ from those described in paragraph 43(b) in that the seller’s obligation is not expressed in monetary terms but as an obligation to deliver, free and clear of all expenses associated with operation of the property, a speci? ed quantity of oil or gas to the purchaser out of a speci? ed share of future production. Such a transaction is a sale of a mineral interest for which gain shall not be recognized because the seller has a substantial obligation for future performance. The seller shall account for the funds received as unearned revenue to be recognized as the oil or gas is delivered.
The purchaser of such a production payment has acquired an interest in a mineral property that shall be recorded at cost and amortized by the unit-of-production method as delivery takes place. The related reserve estimates and production data shall be reported as those of the purchaser of the production payment and not of the seller (paragraphs 59E–59L). b. An assignment of the operating interest in an unproved property with retention of a nonoperating interest in return for drilling, development, and operation by the assignee is a pooling of assets in a joint undertaking for which the assignor shall not recognize gain or loss. The assignor’s cost of the original interest shall become the cost of the interest retained. The assignee shall account for all costs incurred as speci? ed by paragraphs 15? 1 and shall allocate none of those costs to the mineral interest acquired. If oil or gas is discovered, each party shall report its share of reserves and production (paragraphs 59E–59L). c. An assignment of a part of an operating interest in an unproved property in exchange for a “free well” with provision for joint ownership and operation is a pooling of assets in a joint undertaking by the parties. The assignor shall record no cost for the obligatory well; the assignee shall record no cost for the mineral interest acquired. All drilling, development, and operating costs incurred by either party shall be accounted for as provided in paragraphs 15? 41 of this Statement.
If the conveyance agreement requires the assignee to incur geological or geophysical expenditures instead of, or in addition to, a drilling obligation, those costs shall likewise be accounted for by the assignee as provided in paragraphs 15? 41 of this Statement. If reserves are discovered, each party shall report its share of reserves and production (paragraphs 59E–59L). 3Costs of unproved properties are always subject to an assessment for impairment as required by paragraph 28. FAS19–10 Financial Accounting and Reporting by Oil and Gas Producing Companies FAS19 d. A part of an operating interest in an unproved property may be assigned to effect an arrangement called a “carried interest” whereby the assignee (the arrying party) agrees to defray all costs of drilling, developing, and operating the property and is entitled to all of the revenue from production from the property, excluding any third party interest, until all of the assignee’s costs have been recovered, after which the assignor will share in both costs and production. Such an arrangement represents a pooling of assets in a joint undertaking by the assignor and assignee. The carried party shall make no accounting for any costs and revenue until after recoupment (payout) of the carried costs by the carrying party. Subsequent to payout the carried party shall account for its share of revenue, operating expenses, and (if the agreement provides for subsequent sharing of costs rather than a carried interest) subsequent development costs.
During the payout period the carrying party shall record all costs, including those carried, as provided in paragraphs 15? 41 and shall record all revenue from the property including that applicable to the recovery of costs carried. The carried party shall report as oil or gas reserves only its share of proved reserves estimated to remain after payout, and unit-of-production amortization of the carried party’s property cost shall not commence prior to payout. Prior to payout the carrying party’s reserve estimates and production data shall include the quantities applicable to recoupment of the carried costs (paragraphs 59E–59L). e. A part of an operating interest owned may be exchanged for a part of an operating interest owned by another party.
The purpose of such an arrangement, commonly called a joint venture in the oil and gas industry, often is to avoid duplication of facilities, diversify risks, and achieve operating ef? ciencies. No gain or loss shall be recognized by either party at the time of the transaction. In some joint ventures which may or may not involve an exchange of interests, the parties may share different elements of costs in different proportions. In such an arrangement a party may acquire an interest in a property or in wells and related equipment that is disproportionate to the share of costs borne by it. As in the case of a carried interest or a free well, each party shall account for its own cost under the provisions of this Statement.
No gain shall be recognized for the acquisition of an interest in joint assets, the cost of which may have been paid in whole or in part by another party. f. In a unitization all the operating and nonoperating participants pool their assets in a producing area (normally a ? eld) to form a single unit and in return receive an undivided interest (of the same type as previously held) in that unit. Unitizations generally are undertaken to obtain operating efficiencies and to enhance recovery of reserves, often through improved recovery operations. Participation in the unit is generally proportionate to the oil and gas reserves contributed by each.
Because the properties may be in different stages of development at the time of unitization, some participants may pay cash and others may receive cash to equalize contributions of wells and related equipment and facilities with the ownership interests in reserves. In those circumstances, cash paid by a participant shall be recorded as an additional investment in wells and related equipment and facilities, and cash received by a participant shall be recorded as a recovery of cost. The cost of the assets contributed plus or minus cash paid or received is the cost of the participant’s undivided interest in the assets of the unit. Each participant shall include its interest in reporting reserve estimates and production data (paragraphs 59E–59L). g.
If the entire interest in an unproved property is sold for cash or cash equivalent, recognition of gain or loss depends on whether, in applying paragraph 28 of this Statement, impairment had been assessed for that property individually or by amortizing that property as part of a group. If impairment was assessed individually, gain or loss shall be recognized. For a property amortized by providing a valuation allowance on a group basis, neither gain nor loss shall be recognized when an unproved property is sold unless the sales price exceeds the original cost of the property, in which case gain shall be recognized in the amount of such excess. h.
If a part of the interest in an unproved property is sold, even though for cash or cash equivalent, substantial uncertainty usually exists as to recovery of the cost applicable to the interest retained. Consequently, the amount received shall be treated as a recovery of cost. 4 However, if the sales price exceeds the carrying amount of a property whose impairment has been assessed individually in accordance with paragraph 28 of this 4The carrying amount of the interest retained shall continue to be subject to the assessment for impairment as required by paragraph 28. FAS19–11 FAS19 FASB Statement of Standards i. j. k. l. Statement, or exceeds the original cost of a property amortized by providing a valuation allowance on a group basis, gain shall be recognized in the amount of such excess.
The sale of an entire interest in a proved property that constitutes a separate amortization base is not one of the types of conveyances described in paragraph 44 or 45. The difference between the amount of sales proceeds and the unamortized cost shall be recognized as a gain or loss. The sale of a part of a proved property, or of an entire proved property constituting a part of an amortization base, shall be accounted for as the sale of an asset, and a gain or loss shall be recognized, since it is not one of the conveyances described in paragraph 44 or 45. The unamortized cost of the property or group of properties a part of which was sold shall be apportioned to the interest sold and the interest retained on the basis of the fair values of those interests.
However, the sale may be accounted for as a normal retirement under the provisions of paragraph 41 with no gain or loss recognized if doing so does not signi? cantly affect the unit-of-production amortization rate. The sale of the operating interest in a proved property for cash with retention of a nonoperating interest is not one of the types of conveyances described in paragraph 44 or 45. Accordingly, it shall be accounted for as the sale of an asset, and any gain or loss shall be recognized. The seller shall allocate the cost of the proved property to the operating interest sold and the nonoperating interest retained on the basis of the fair values of those interests. The sale of a proved property subject to a retained production payment that is expressed as a ? xed sum of money payable only from a speci? ed share of production from that property, with the purchaser of the property obligated to incur the future costs of operating the property, shall be accounted for as follows: i. If satisfaction of the retained production payment is reasonably assured. The seller of the property, who retained the production payment, shall record the transaction as a sale, with recognition of any resulting gain or loss. The retained production payment shall be recorded as a receivable, with interest accounted for in accordance with the provisions of APB Opinion No. 21, “Interest on Receivables and Payables. The purchaser shall record as the cost of the assets acquired the cash consideration paid plus the present value of the retained production payment, which shall be recorded as a payable. The oil and gas reserve estimates and production data, including those applicable to liquidation of the retained production payment, shall be reported by the purchaser of the property (paragraphs 59E–59L). ii. If satisfaction of the retained production payment is not reasonably assured. The transaction is in substance a sale with retention of an overriding royalty that shall be accounted for in accordance with paragraph 47(k). m. The sale of a proved property subject to a retained production payment that is expressed as a right to a speci? ed quantity of oil or gas out of a speci? d share of future production shall be accounted for in accordance with paragraph 47(k). 48? 59. [These paragraphs have been deleted. See Status page. ] Disclosure Applicability and Scope 59A. All enterprises engaged in oil and gas producing activities shall disclose in their ? nancial statements the method of accounting for costs incurred in those activities and the manner of disposing of capitalized costs relating to those activities. 59B. In addition, publicly traded enterprises that have signi? cant oil and gas producing activities shall disclose with complete sets of annual ? nancial statements, the information required by paragraphs 59E–59CC of this Statement.
Those disclosures relate to the following and are considered to be supplementary information: a. Proved oil and gas reserve quantities b. Capitalized costs relating to oil and gas producing activities 5 A retained production payment denominated in money is not a mineral interest (see paragraphs 11(a) and 43). FAS19–12 Financial Accounting and Reporting by Oil and Gas Producing Companies FAS19 c. Costs incurred for property acquisition, exploration, and development activities d. Results of operations for oil and gas producing activities e. A standardized measure of discounted future net cash ? ows relating to proved oil and gas reserve quantities. 59C.
For purposes of this Statement, an enterprise is regarded as having signi? cant oil and gas producing activities if it satis? es one or more of the following tests. The tests shall be applied separately for each year for which a complete set of annual ? nancial statements is presented. a. Revenues from oil and gas producing activities, as de? ned in paragraph 59T (including both sales to unaffiliated customers and sales or transfers to the enterprise’s other operations), are 10 percent or more of the combined revenues (sales to unaffiliated customers and sales or transfers to the enterprise’s other operations) of all of the enterprise’s industry segments. 5a b.
Results of operations for oil and gas producing activities, excluding the effect of income taxes, are 10 percent or more of the greater of: (1) The combined operating pro? t of all industry segments that did not incur an operating loss (2) The combined operating loss of all industry segments that did incur an operating loss. c. The identi? able assets of oil and gas producing activities (tangible and intangible enterprise assets that are used by oil and gas producing activities, including an allocated portion of assets used jointly with other operations) are 10 percent or more of the assets of the enterprise, excluding assets used exclusively for general corporate purposes. 59D. The disclosures set forth in this Statement are not required in interim ? nancial reports. However, interim ? ancial reports shall include information about a major discovery or other favorable or adverse event that causes a signi? cant change from the information presented in the most recent annual ? nancial report concerning oil and gas reserve quantities. Disclosure of Proved Oil and Gas Reserve Quantities 59E. Net quantities of an enterprise’s interests in proved reserves and proved developed reserves of (a) crude oil (including condensate and natural gas liquids)5b and (b) natural gas shall be disclosed as of the beginning and the end of the year. “Net” quantities of reserves include those relating to the enterprise’s operating and nonoperating interests in properties as de? ned in paragraph 11(a) of this Statement.
Quantities of reserves relating to royalty interests owned shall be included in “net” quantities if the necessary information is available to the enterprise; if reserves relating to royalty interests owned are not included because the information is unavailable, that fact and the enterprise’s share of oil and gas produced for those royalty interests shall be disclosed for the year. “Net” quantities shall not include reserves relating to interests of others in properties owned by the enterprise. 59F. Changes in the net quantities of an enterprise’s proved reserves of oil and of gas during the year shall be disclosed. Changes resulting from each of the following shall be shown separately with appropriate explanation of signi? cant changes: a. Revisions of previous estimates.
Revisions represent changes in previous estimates of proved reserves, either upward or downward, resulting from new information (except for an increase in proved acreage) normally obtained from development drilling and production history or resulting from a change in economic factors. b. Improved recovery. Changes in reserve estimates resulting from application of improved recovery techniques shall be shown separately, if signi? cant. If not signi? cant, such changes shall be included in revisions of previous estimates. c. Purchases of minerals in place. d. Extensions and discoveries. Additions to proved reserves that result from (1) extension of the proved acreage of previously discovered (old) reservoirs through additional drilling in periods subsequent to discovery and (2) discovery of new ? lds with proved reserves or of new reservoirs of proved reserves in old ? elds. 5aFor purposes of this Statement, an industry segment is a component of an enterprise engaged in providing a product or service or a group of 5bIf signi? cant, the reserve quantity information shall be disclosed separately for natural gas liquids. related products or services primarily to external customers (that is, customers outside the enterprise) for a pro? t. FAS19–13 FAS19 FASB Statement of Standards e. Production. f. Sales of minerals in place. 59G. If an enterprise’s proved reserves of oil and of gas are located entirely within its home country, that fact shall be disclosed.
If some or all of its reserves are located in foreign countries, the disclosures of net quantities of reserves of oil and of gas and changes in them required by paragraphs 59E and 59F shall be separately disclosed for (a) the enterprise’s home country (if signi? cant reserves are located there) and (b) each foreign geographic area in which signi? cant reserves are located. Foreign geographic areas are individual countries or groups of countries as appropriate for meaningful disclosure in the circumstances. 59H. Net quantities disclosed in conformity with paragraphs 59E–59G shall not include oil or gas subject to purchase under long-term supply, purchase, or similar agreements and contracts, including such agreements with governments or authorities.
However, quantities of oil or gas subject to such agreements with governments or authorities as of the end of the year, and the net quantity of oil or gas received under the agreements during the year, shall be separately disclosed if the enterprise participates in the operation of the properties in which the oil or gas is located or otherwise serves as the “producer” of those reserves, as opposed, for example, to being an independent purchaser, broker, dealer, or importer. 59I. In determining the reserve quantities to be disclosed in conformity with paragraphs 59E–59H: a. If the enterprise issues consolidated ? nancial statements, 100 percent of the net reserve quantities attributable to the parent company and 100 percent of the net reserve quantities attributable to its consolidated subsidiaries (whether or not wholly owned) shall be included. If a signi? cant portion of those reserve quantities at the end of the year is attributable to a consolidated subsidiary(ies) in which there is a signi? ant noncontrolling interest, that fact and the approximate portion shall be disclosed. b. If the enterprise’s ? nancial statements include investments that are proportionately consolidated, the enterprise’s reserve quantities shall include its proportionate share of the investees’ net oil and gas reserves. c. If the enterprise’s ? nancial statements include investments that are accounted for by the equity method, the investees’ net oil and gas reserve quantities shall not be included in the disclosures of the enterprise’s reserve quantities. However, the enterprise’s (investor’s) share of the investees’ net oil and gas reserves shall be separately disclosed as of the end of the year. 59J.
In reporting reserve quantities and changes in them, oil reserves and natural gas liquids reserves shall be stated in barrels, and gas reserves in cubic feet. 59K. If important economic factors or signi? cant uncertainties affect particular components of an enterprise’s proved reserves, explanation shall be provided. Examples include unusually high expected development or lifting costs, the necessity to build a major pipeline or other major facilities before production of the reserves can begin, and contractual obligations to produce and sell a signi? cant portion of reserves at prices that are substantially below those at which the oil or gas could otherwise be sold in the absence of the contractual obligation. 59L.
If a government restricts the disclosure of estimated reserves for properties under its authority, or of amounts under long-term supply, purchase, or similar agreements or contracts, or if the government requires the disclosure of reserves other than proved, the enterprise shall indicate that the disclosed reserve estimates or amounts do not include ? gures for the named country or that reserve estimates include reserves other than proved. Disclosure of Capitalized Costs Relating to Oil and Gas Producing Activities 59M. The aggregate capitalized costs relating to an enterprise’s oil and gas producing activities (paragraph 11) and the aggregate related accumulated depreciation, depletion, amortization, and valuation allowances shall be disclosed as of the end of the year. Paragraph 5 of APB Opinion No. 12, Omnibus Opinion—1967, requires disclosure of “balances of major classes of depreciable assets, by nature or function. Thus, separate disclosure of capitalized costs for asset categories (a) through (d) in paragraph 11 or for a combination of those categories often may be appropriate. 59N. If signi? cant, capitalized costs of unproved properties shall be se