INTERNATIONAL HARMONIZATION OF ACCOUNTING STANDARDS: WHAT DOES IT MEAN FOR THE OIL INDUSTRY?

Petroleum Accounting and Financial Management Journal, Summer 2007 by Nichols, Linda M

The oil and gas industry is by far one of the most international industries, with most companies having operations or interests of some kind in multiple countries. Because of this, the industry is very concerned with die movement toward international harmonization of accounting standards. Many companies now must report to local governments for foreign operations using standards different than their home country standards.

This article will examine several aspects of the effect of international accounting standards and global harmonization on the oil and gas industry:

* The history of international standards for the industry and the current project undertaken by the International Accounting Standards Board (IASB) to formulate comprehensive standards for the industry;

* The global debate over reserves definitions;

* The overall "roadmap" to accounting convergence;

* How Canada is proceeding in its adoption of international standards and the industry effects on Europe's adoption of international standards for consolidated accounts; and

* Some basic differences found in international accounting.

History of International Accounting Standards in the oil and Gas Industry

In 1998, the International Accounting Standards Committee (IASC), the forerunner to the IASB, established a steering committee to work on a standard for extractive activities. The committee released an issues paper in November 2000 with an invitation to comment. A final statement was not forthcoming following that issues paper, but the IASB announced in 2001 that the extractive industries project would be restarted when time permitted. In 2002, the European Union (EU) made a decision to require listed companies issuing consolidated statements to conform with international accounting standards beginning with the 2005 fiscal year. The IASB recognized the importance of the oil and gas industry and ideally would have liked to issue an industry standard in time for the 2005 EU implementation. However, the IASB decided in 2002 that it would not be possible to issue a comprehensive standard before 2005. Instead, International Financial Reporting Standard (IFRS) Number 6, Explorationfor and Evaluation of Mineral Resources, was issued in 2004. The IASB then began the research stage of a project with the goal of the eventual issuance of a comprehensive standard for extractive industries.

An Overview of IFRS 6

The objective of IFRS 6 was to make limited improvements to accounting practices for exploration and evaluation expenditures before a comprehensive standard could be issued. The following examples of exploration and evaluation assets are provided in the standard:

1. Acquisition rights to explore;

2. Topographical, geological, geochemical, and geophysical studies;

3. Exploratory drilling;

4. Trenching;

5. Sampling; and

6. Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource (IASB 2004).

The standard mandates that exploration and evaluation assets be initially measured and recorded at cost. Subsequent to initial recognition, either the cost model or the revaluation model can be used to value the assets. These assets must be assessed for impairment when "facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount" (IFRS 6, 2004, par. IN5(b)). The statement identifies the following as a nonexhaustive list of circumstances which might indicate the need for an impairment test:

1. The period for which the entity has the right to explore in me specific area has expired during the period or will expire in the near future, and is not expected to be renewed;

2. Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;

3. Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources, and the entity has decided to discontinue such activities in the specific area; and

4. Sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale (IFRS 6, 2004, par. 20).

The Board also stated that exploration and evaluation assets need not be tested for impairment until such time as sufficient data were available to determine the technical feasibility and commercial viability associated with the assets.

Impairment is measured and reported in accordance with IAS 36, Impairment of Assets, with assets assigned to cash-generating units. While many companies group at the field level, the statement permits aggregation of fields but requires that the level to be used for assessment be no larger than a segment in accordance with IAS 14, Segment Reporting. IAS 36 requires that an impairment be taken into profit and loss when the recoverable amount of an asset group is less than its carrying amount. The recoverable amount of an asset group is the higher of its fair value less cost to dispose and its value in use, which may be determined by discounting future cash flows associated with the group. Reversal is required if an upward change in the estimate of the recoverable amount occurs. The following disclosures regarding impairment of exploration and evaluation assets are required: