Oil and gas accounting is unlike most other industry accounting procedures. Oil and gas has a history of volatile swings in price, value and demand. Oil is the primary driving industry in the states of Oklahoma and Texas. Colleges and Universities throughout the area offer specific oil & gas accounting courses. Oil and gas accounting has two primary accounting approaches. These two approaches are: the successful efforts (SE) method and the full cost (FC) method.
The method (SE) effectively permits an exploration and production company to capitalize only the costs associated with locating new reserves. All costs associated with a failed find, or dry hole, are charged against the revenue results for that period. This method allows the company to properly accounting for the exploration portion of its activities since the production is the vital element of the overall project. Only intangible assets are charged to the income statement while tangible assets are capitalized and listed on the balance sheet as a long-term asset.
The full cost (FC) method allows a company to capitalize all expenses associated with the discovery portion of the operation. All expenses, whether from a wet or dry hole, can be capitalized. The proponents of this method argue that the exploration is just as important and the more dominate activity in the production of oil and gas. Therefore, it should be capitalized regardless of the drilling outcome. All tangible and intangible drilling costs are capitalized and added to the balance sheet as a long-term asset.
There are currently a lack of a common consensus from regulating authorities. The SEC allows a company to use the FC method while the FASB wants companies to choose the SE method. More companies have chosen to use the SE method over the FC method. This is the more conservative approach to accounting for oil and gas.