Accounting for the Extractive Industries: Controversies and a Need for Harmonisation

Abstract

The oil and gas industry is international in nature and being operated, in most, by multinational companies. However, accounting for the activities of the oil and gas industry is being practiced by using different methods. These methods produce incomparable results which makes it hard for users of thes companies' accounts to make investments decissions. In this paper, we demonstrate the differences in accounting practices by oil and gas industry via an extensive literature review. Historically, there has been a number of attempts by accounting bodies to harmonise accounting practices by extractive industries, howeever these attempts have not been successful. We highlight the historical controversies sourounding accounting for the oil and gas industry and we make a call on the International Accounting Standard Board to produce a comprehensive accounting standard for the extractive industries in general, and the oil and gas industry in particular. Such a standard would unify accounting practices by oil and gas companies and act as a common language that companies use when preparing their accounts.

Accounting practices and regulations for extractive industries: a framework for harmonisation

“…Cortese and Irvine (2010) argue that the invisible influence of EI in the process of developing IFRS 6 has captured the regulatory process and led to different accounting methods being permitted under IFRS 6, therefore, leaving the standard with little practical impact on harmonising accounting practices by EI (Abdo, 2016). Changing the statue of IFRS 6 from interim to permanent does not reduce diversity and accounting practices (Abdo and Owusu, 2023), therefore, a harmonisation framework is required to enhance the comparability of accounts produced by EI.…”

“…On each end of the spectrum are the full cost (FC) and successful efforts (SE) methods (Pacter, 2001), with others being reserve recognition accounting (RRA), the area of interest (AOI), the expense all (costs written off) method, and the appropriation method (Micallef, 2001;Alfredson et al, 2009). i Extractive investment goes via several stages, these are prospecting, acquisition, exploration, evaluation, development, production, and decommissioning (Abdo, 2018). If evaluation of a project confirms commercial viability of discovered resources, extractive companies develop the mine in readiness for production.…”

“…Extractive investment goes via several stages; these are prospecting, acquisition, exploration, evaluation, development, production and decommissioning (Abdo, 2018). If the evaluation of a project confirms thecommercial viability of discovered resources, extractive companies develop the mine in readiness for production.…”

“…Should evaluation confirm this viability, the initially capitalised costs are recognised as assets; otherwise, they are expensed (Flory and Grossman, 1978; Amernic, 1979; Bryant, 2003; Cortese et al , 2010; Abdo, 2016). FC method users capitalise pre-development expenditure whether the discovery is economically viable or not (Gerhardy, 1999; Abdo, 2018), however, capitalisation of expenditure in any cost centre is limited to the value of mineral reserves available in that cost centre (FASB, 1977; Lilien and Pastena, 1981). The AOI method is a method developed by the Australian Accounting Standard Board (AASB) for their extractive industries in AAS7 (previously DS 12/308) and AASB 1,022 (Gerhardy, 1999).…”

“…The third and final wave started post-2000 and paid particular attention to the efforts of the IASB to standardize accounting practices by issuing IFRS 6 – Accounting for extractive industries . The focus of the literature during this period was on evaluating and criticising IFRS 6 (Nichols, 2007; Cortese and Irvine, 2010; Noël et al , 2010; Abdo, 2016), developing a comprehensive accounting standard for the EI (Brock, 2001; Nichols, 2007), the efforts of the IASB to engineer a comprehensive accounting standard for the EI based on a discussion paper (DP) that was published in 2010 (for example, Wright et al , 2010; Russell and Jenkins, 2010; Nichols, 2012; dos Santos and dos Santos, 2014), questioning the validity of EI accounting related standards (Cortese et al , 2022; Nobes and Stadler, 2021) and criticising the IASB decision to change status of IFRS 6 from temporary to permanent (Abdo and Owusu, 2023).…”