UNIVERSITY OF DODOMA

COLLEGE OF BUSINESS STUDIES AND ECONOMICS

DEPARTMENT OF BUSINESS ADMINISTRATION AND MANAGEMENT

COURSE NAME: OIL AND GAS ACCOUNTING

COURSE CODE: AF 317

COURSE INSTRUCTOR: DR. SIFUNI MSECHU

NATURE OF WORK: ASSIGNMENT

GROUP NO; 4

NO NAMES REG NO PROGRAM SIGN

1 MHINA JANJA T/UDOM/2020/02227 BCOM-FN
2 SALMA ALLY T/UDOM/2020/02253 BCOM-FN
3 CLAUD CHUNGWA T/UDOM/2020/02226 BCOM-FN
4 SAMWEL URASSA T/UDOM/2020/02209 BCOM-FN
5 MICHAEL MAEDA T/UDOM/2020/02194 BCOM-FN
6 ANNAMARIA GAUDENCE T/UDOM/2020/02201 BCOM-FN
7 MAGRETH KATEMBO T/UDOM/2020/02208 BCOM-FN
8 DOREEN MASSUWE T/UDOM/2020/02241 BCOM-FN
9 JOYCE SANGA T/UDOM/2020/02190 BCOM- FN
Question 3
Describe the two methods currently used by oil and gas companies to account for future
dismantlement, restoration and abandonment costs. Discuss the financial statement consequences
of the use of each method.
ANSWERS.

Oil and gas companies in exploration and production activities must be accounted for using one
of two generally accepted historical cost methods:

a) Successful-efforts accounting (SE)

b) Full-cost accounting (FC).

In connection with the four costs, the fundamental accounting issue is whether to capitalize or
expense the incurred cost.

From the Successful-efforts accounting (SE), a company is allowed to capitalize on only those
expenses associated with successfully locating new oil and natural gas reserves. That is to say the
unsuccessful cost are treated as operating costing immediately against revenues for the period.
According toe the SE method, aim of the of an oil and gas company is to produce the oil or
natural gas from reserves it locates and develops, so for this the company is to capitalize only the
cost related to the successful efforts and due to that there is no change in the productivity of the
asset, the unsuccessful costs are expensed as the period costs.

From the Full cost accounting (FC), allows companies to capitalize on all operating expenses
related to locating new oil and gas reserves regardless of the outcome. Generally, from the FC
method, the dominant activity of 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.

Under both methods, acquisition and development costs are capitalized and production costs are
expensed. Though the development cost includes the both unsuccessful and successful, under the
SE all the development cost are capitalized, this is because the purpose of development activities
is considered to be building a producing system of wells and related equipment and facilities and
not only searching for oil and gas.

The effect of the SE and FC to the financial statement.

Under Successfully- effort accounting (SE) A company with a large exploratory drilling program
and a normal unsuccessful drilling rate would a significant amount of dry-hole expense the
adverse effect on net income of expensing exploratory dry-hole costs under SE may be especially
significant for smaller companies SE method results in a much greater loss than the FC method,
this is because of the consideration of the unsuccessful wells as part of assets of the company.
This tends to over value the asset of the company. The greater difference is in the treatment of
the G&G costs and dry hole costs; under the SE method the costs were expensed.

Under Full costing accounting (FC) a full-cost company would capitalize exploratory dry-hole
costs, and therefore, these costs would typically have no immediate effect on net income. They
would, however, reduce net income through future amortization. costs were capitalized. Another
difference is the amount of amortization (DD&A) recognized under each method; under the FC
method more costs were capitalized, resulting in a greater amortization expense.