Negosentro.com | Common Accounting Challenges in the Gas and Oil Industry | Accounting is complicated for any company, but it’s especially true for oil and gas. That’s mainly because gas and oil have two different accounting methods that you’ll need to use depending on which agencies your company reports to. To help the process, you can use a consulting agency to help ensure your company avoids common accounting pitfalls.
Oil and gas bookkeeping and accounting don’t have to be a chore for you or your staff. Even if you have a small team, you can utilize a larger company’s resources by hiring a consultant agency. This group can help you learn the difference between successful-efforts and full-cost accounting and determine when to use each method.
Successful-Efforts vs. Full-Cost Accounting
Unlike most other industries, most oil and gas companies find that they have to use two different accounting methods if they’re part of multiple organizations. Various agencies require companies to use other methods because they differ on which method is better for transparency. Agencies play different roles in the gas and oil industry. As such, they believe one method of accounting is better for accomplishing their organization’s goals.
Successful-efforts accounting means a company will only capitalize on expenses associated with successful new oil and gas reserves. This method is used when companies or agencies believe it’s the goal of any gas and oil company is just that: to produce gas and oil. As such, any efforts to get gas and oil that are unsuccessful aren’t capitalized.
Full-cost accounting means a company will capitalize on all operating expenses, including those reserve expeditions that were unsuccessful. Some agencies require this method because they believe companies are supposed to explore new reservoirs, even if they’re not successful. Under this method, all costs are capitalized.
When to Use Successful-Efforts
Nearly all gas and oil companies will need to follow the full-cost method since the Securities and Exchange Commission (SEC) requires it. The SEC regulates public companies’ financial disclosures, so almost all gas and oil companies must report to this organization.
Companies who use this method often find it advantageous to showing a lower taxable include. As such, it helps you in the short term if you’ve found that many of your recent drilling expeditions haven’t resulted in more oil reserves. You can therefore write off these expeditions for the current financial period.
When to Use Full-Cost
While most companies will need to use successful-efforts accounting, you may also need to use full-cost if you report to the Financial Accounting Standards Board (FASB). Unlike the SEC, the FASB is an independent, private-sector, non-profit that determines how companies report their finances. While it’s not mandatory to join, many gas and oil companies do so for the sake of transparency and to capitalize on the FASB’s many resources.
It may be advantageous to use this method to capitalize on your operating expenses, including costs related to all new oil and gas reserves. This method will make you more likely to defer more costs during exploration.
Another accounting hurdle your company may face is keeping up with codification updates. Like any business, accounting codes may change with time, including which organizations require which accounting effort.
Codes have been updated to reflect changes to the industry caused by the COVID-19 pandemic. The FASB said companies could opt not to apply lease modification accounting to lease concessions made because of the pandemic.
Additionally, the FASB allows two alternatives for accounting for payment deferrals that don’t substantially change original contracts. You can either account for changes as if they were made during the original contract or count deferred payments as variable lease payments.
These codes are subject to change, and you should consult the FASB or other governing agencies to determine accounting changes relevant to your company. Be sure you know where to find accounting code updates for the organizations your business is part of.
If you’re confused about which accounting method to use or how to navigate codification updates during the pandemic, consider working with an outsourcing or consultant agency. Accounting for gas and oil is already a complicated process. Outsourcing can free up your full-time staff’s time and eliminate costly mistakes.
Eliminating Accounting Challenges
You can consult a gas and oil accounting agency to learn how to avoid some of the accounting challenges for gas and oil. This can especially be useful if you have to use both full-cost and successful-efforts accounting, as industry experts can ensure you’re using the correct method for the right agency. If your industry codes were affected by the pandemic, an agency could also help you navigate these ever-changing codes to ensure your company is compliant.