GUIDE

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(Impairment)

CASE STUDY: ACCOUNTING FOR IMPAIRMENT

Assumptions

 Proved oil and gas properties and related equipment are grouped on a field basis for
impairment purposes.
 The company has 20 proved fields.
 During the current reporting period, management made downward revisions in
proved crude oil reserve estimates of three non-operated fields (Fields A, B, and C).
The downward reserve revisions are due to significantly reduced planned
development activities as a result of recent changes in regulations pertaining to the
disposal of produced water for these offshore Louisiana properties.
 Field A, B, and C have fair values of $3, $5, and $4 million, respectively (using
expected future cash flows from reserves discounted at the market's current rate of
return).

(in million $)
Field A Field B Field C
Capitalized cost of proved properties 5 20 10
Accumulated DD&A (2) (8) (3)
Decommissioning liability 0 (2) (1)
Deferred revenue for volume production
payment on Field C 0 0 (3)
Net book value 3 10 3

Is any of the fields (A, B or C) impaired? Justify your answers.

If there is an impairment, calculate the impairment loss to be recognised.

Prepare the resulting accounting entries.

Field B – 5 mil
Dr Cr
Impairment loss Accumulated depreciation in field B - 5 mil (10 mil NBV– 5 mil FV)

Dr Cr
Different taxes Income taxes - 2 mil

NBV = 16 (sum NBV Field)

FV = 12 (sum FV Field)
<4> diferenta NBV si FV
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(Exploration & Evaluation)