Choice of Accounting Methods and Reported Earnings by Oil and Gas Producing Firms in Nigeria : A Critical Evaluation of Full Cost versus Succesful Effort Methods

Abstract

The debate over choice of Accounting methods in the oil and gas sector in the face of alternatives between Full Cost and Successful Effort method dates back to the mid 2oth century and is unlikely to abate soon. Full cost method capitalizes all costs while Successful Efforts method capitalizes only cost that discovers reserves and expenses 'dry hole' costs. The debate is further fueled by the inability of regulators to choose one method over the other leaving the decision to the whims and caprices of the firm who may choose one method over the other to mask their real intentions. This paper examines the pros and cons of the two methods. Investors must be weary and realize that any of the methods adopted represents a historical perspective that is not reflective of the economic reality especially reserves under successful Effort method. Investors must note that using Full cost method approximates the book values of the reserves close to the economic value while at the same time it suffers from the disadvantage that it can be used to mask unprofitable investments. In summary, the raging arguments reveal the possibility of manipulation of earnings by oil firms depending on intentions through choice of accounting method. In Nigeria, Multinational firms tend to adopt accounting method in line with the method chosen by the parent company to ensure uniformity and ease of comparison of results while indigenous firms adopt the methods that best suit their operations

Full Cost Vs Successful Efforts Accounting: A Systematic Review

“…Exploration costs, which has been highlighted as being significant in this study, refers to costs related to the collection and analysis of geophysical and seismic data required for determining the viability of a targeted area, for the purpose of deciding if such an area should be developed (Umobong, 2015). Exploration costs could be classified as either (i) intangible: cost incurred to ready a target area for installation of drilling equipment; or (ii) tangible: costs directly incurred on installing and operating equipment to be used for drilling.…”

“…There is a need to account for oil and gas reserves to enable participants in the industry to maximize the benefits derivable from such a natural endowment. Strangely, however, in spite of the metamorphosis experienced in the oil and gas industry over the years, the world over, standard-setting for oil and gas has been an area of controversy since time immemorial (Umobong, 2015;Abushaiba & Eldanfo, 2014). The American Institute of Certified Public Accountants (AICPA) has defined accounting as the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.…”