Oil and gas accounting is different than in many fields. Accountants use two different methods, which you should use depends on the agencies your business reports to. You’ll need to understand your company's operating expenses and how different agencies view oil and gas accounting.
Understanding the importance of accounting holds to your stakeholders can also help explain why these different methods exist. The more you know about the accounting methods available for gas and oil, the more accurate your records will be, helping you gain future clients and investors.
Successful-efforts Accounting
Successful-efforts accounting involves capitalizing on expenses resulting in successful drills or digs. Under this model, unsuccessful drills are charged against your revenue for that period. Many companies and organizations prefer this model because it gives you the ability to use these expenses to offset future income.Full-cost Accounting
Full-cost accounting capitalizes on all expenses, no matter if the dig was successful or not. If you’ve had an especially unlucky dig streak, this method can give you a short-term advantage because it’ll show lower taxable income.Operating Expenses
The two methods exist because different companies and organizations have different beliefs on how best and most transparently to report operating expenses in the oil and gas industry. Operating expenses include any costs your business has related to your day-to-day operations. There are a plethora of expenses related to oil and gas, including:- Rent- Many companies rent their equipment, land, and office spaces. Depending on your location, company size, and other factors, you may also need to pay additional rental fees.
- Equipment- Gas and oil companies require many heavy types of machinery that are often costly. You’ll need oil field equipment, oil treatment plants, engines, compressors, turbines, generators, drilling rigs, and more.
- Inventory- Your field workers need a steady flow of materials to keep digs going. You’ll need to keep rods, pipes, chemical drums, pipes, and casings in inventory.
- Payroll- Payroll is essential to any business. Without employees, your company can’t operate and find digs to profit off of. Many companies will find that payroll is one of their largest expenses.
- Insurance includes workers’ compensation, general liability, automobile, property, and environmental, depending on where your business operates.
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is one of the main bodies responsible for regulating markets and investments. For gas and oil, they provide standardization guidelines to accomplish this. The SEC requires the full-cost method, as they believe that oil and gas companies’ primary purpose is to explore new oil and gas, no matter if the drill or dig is successful.The SEC uses full-cost accounting because they want oil and gas companies to capitalize on all of their operating expenses. As such, the majority of companies will need to report using full-cost since SEC oversees nearly all gas and oil companies in the U.S.
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) provides accounting and transparency guidelines for various fields, including gas and oil. The FASB is a private, independent organization that isn’t mandatory to be part of. However, many gas and oil companies choose to join it for transparency and to participate in membership benefits.FASB requires successful-efforts reporting. They believe gas and oil companies’ purpose is to have successful digs, not simply explore new oil rigs and holes. Using this view, FASB thinks you should only capitalize on operating costs for successful digs.
Current and Potential Investors
Most of your investors and potential investors will want to know you can produce both reports successfully. Managing both methodologies closely will offer potential investors a better picture of your company’s financial situation.Accounting and consulting for oil and gas will help you ensure you’re using the method(s) required by the agencies you’re part of. Working with a consultant will also show potential investors that you have clean and accurate accounting reports, regardless of the method used.
Accounting Methods for Gas and Oil
Navigating accounting for gas and oil companies can be challenging, with costly consequences for mistakes. Improper accounting can result in hefty fines, violations, and a loss of trust from investors and clients.The process is even trickier if your company must report using both full-cost and successful-efforts accounting. To help ensure your books are accurate, consider investing in a gas and oil accountant to make sure you’re reporting using the correct method for the appropriate agency.
