ZARISH SHAHID 1633

HAMZA ARSHAD 1607

OIL AND GAS
General Background
 Major impact on financial statements from method
of accounting for exploration and production
 Cash-flow must be a part of analysis
 Traditional ratios apply
Successful-Efforts versus Full-Costing Method

Successful-Efforts Method
 Direct relationship exist between cost incurred and

specific reserves discovered

 This cost should place on balance sheet

 Cost associated with unsuccessful efforts are period

expense and should be charged to expense

Successful-Efforts versus Full-Costing Method

Full-Costing Methods
 Takes position that drilling of all wells, successful

or unsuccessful, are part of process of finding

successful wells
 All costs should be placed on Balance sheet
Practical Implication
 Smaller companies choose full-costing method
 Large balance sheet due to full capitalization
 Short-run higher profit
 Presents more favourable picture to creditors and
investors
 Larger companies use variation of successful efforts
capitalized
 Short-run lower profit due to immediate expensing
of unsuccessful efforts
Supplementary Disclosure
 Proved oil and gas reserve quantities
 Results of operations for oil and gas producing
activities
 Capitalized costs relating to oil and gas producing
activities
 Companies depends upon bonds and stock as their
primary resources of outside capital