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dear all,
Depreciation of "future cost" in oil & gas assets.
this is a bit specialised oil and gas industry accounting where unit of production method is being used for depreciation. eventhough I have been in the industry for a while, in this new place , it is first that i have heard of depreciating cost which we have not capitalised nor incurred. The argument given was that because the numerator use is the remaining 2P reserves (proved and probable reserves) , thus the remaining future cost of the oil & gas facilities is matching with the remaining reserves. It seems to me that this is contradicting to fundamental accounting that we take in future cost as "depreciable amount" which we have not even capitalised. I feel there is a conflict between "substance over form" principle and "matching" principle. Has anyone encountered this before ? Is this type of accounting (i.e. depreciation of future cost) acceptable under IAS or IFRS ?
Note 1 - For question above we can use the example of 2 wells which started producing oil out of say 15 wells being planned. Thus following the future cost rules, (even though we only capitalised 2 wells cost, the depreciable amount would be the whole 15 wells multiply by the production of the 2 wells for the year divide by the remaining 2P reserves at the start of the year for all 15 wells? Will the concept be different then if it is a platform facility where you can attach any reserves to ?
Note 2- The company is not bound by SEC rules and not listed in US thus US GAAP is not applicable.
Thanks
Depreciation of "future cost" in oil & gas assets.
this is a bit specialised oil and gas industry accounting where unit of production method is being used for depreciation. eventhough I have been in the industry for a while, in this new place , it is first that i have heard of depreciating cost which we have not capitalised nor incurred. The argument given was that because the numerator use is the remaining 2P reserves (proved and probable reserves) , thus the remaining future cost of the oil & gas facilities is matching with the remaining reserves. It seems to me that this is contradicting to fundamental accounting that we take in future cost as "depreciable amount" which we have not even capitalised. I feel there is a conflict between "substance over form" principle and "matching" principle. Has anyone encountered this before ? Is this type of accounting (i.e. depreciation of future cost) acceptable under IAS or IFRS ?
Note 1 - For question above we can use the example of 2 wells which started producing oil out of say 15 wells being planned. Thus following the future cost rules, (even though we only capitalised 2 wells cost, the depreciable amount would be the whole 15 wells multiply by the production of the 2 wells for the year divide by the remaining 2P reserves at the start of the year for all 15 wells? Will the concept be different then if it is a platform facility where you can attach any reserves to ?
Note 2- The company is not bound by SEC rules and not listed in US thus US GAAP is not applicable.
Thanks