FASB ASC 932 – Extractive Activities – Oil and Gas

The Financial Accounting Standards Board (FASB) released Accounting Standards Codification 932 (ASC 932) to address topics related to oil and gas extraction activities. Companies involved in these activities have several unique areas to account for including estimating the amount of resources remaining, the value of the extracted oil/gas, production costs, and more. 

As there are large costs associated with the finding of these resources as well as installing the machinery to extract them, this can be a significant area as well.

ASC 932-330-55 Energy Derivatives and Contracts

One specific item which relates to the oil and gas industries are the derivatives and contracts that are purchased.  Companies will often utilize these in order to remove volatility involved with pricing of energy.  Ultimately, the standard has come to the conclusion that these contracts which are held for sale should not be recorded in the financials at fair value, and neither should the physical inventory of energy be carried at fair value.

Special Capitalization Rules for ASC 932

As the oil and gas industries have unique underlying business activity than other industries, there are special rules which follow the capitalization of industry specific transactions.  For example:

  1. Interests in properties used for commodity extraction, including those with no proven commodity
  2. Wells and the equipment which are a part of these facilities
  3. Equipment and facilities which are utilized in connection with support of the extraction process
  4. Wells, equipment, and facilities which are in the progress of being constructed
The basic way of looking at this is that first, costs are capitalized while building these facilities until it has been proven that there are, or are not, commodities in the wells.  Upon finding commodity, the classification is then considered to be proven on the balance sheet.  At this point, it is reclassed in the financials from an unproven to a proven asset.  When there has been deemed no commodity in the ground, the costs associated with the activity must be expended.  The capitalized wells will then be amortized over the useful period determined by the company.
Supporting equipment that can be used for other purposes, beyond the specific project it is being used on, is simply capitalized and then depreciated over the useful life of the asset.  The reason for the differing treatment of these, is simply that the support equipment has the opportunity to continue to be used and is not deemed to be useless after the project has been classified in this manner.  Should the supporting equipment become damaged beyond repair or salvage, then it would be expended.

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