Testing

US GAAP-based ‘successful efforts’ method

Unlike IFRS SMEs, U.S. GAAP provides detailed guidance on accounting and reporting by oil and gas producing entities, includuing guidance on pre-exploration and development activities. U.S. GAAP does not contain any guidance for other extractive industries.

Unlike IFRS SMEs, oil and gas producing entities have a choice of applying either the successful efforts method or the full cost method to all oil and gas expenditures. Under the successful efforts method, costs of geological and geophysical activities, costs of carrying and retaining undeveloped properties, and costs associated with exploratory dry holes, net of any salvage value, are charged to expense. Under the full cost method, all costs (internal and external) directly identified with the acquisition of property, exploration, and development activities generally qualify for capitalization.

Unlike IFRS SMEs, capitalized acquisition costs and capitalized exploration and development costs must be amortized by the unit-of-production method.

Like IFRS SMEs, entities following the successful efforts method of accounting apply the general impairment standard. However, the methodology used to calculate an impairment loss differs from IFRS SMEs (see Section 27).

Entities using the full cost method perform a limitation calculation on capitalized costs each reporting period (“ceiling test”), unlike IFRS SMEs. An impairment loss is recognized if the carrying amount of a cost center is not recoverable and exceeds the limitation on capitalized costs (the “ceiling”). Also unlike IFRS SMEs, the test for recoverability under the full cost method is applied at the “geographic” level, which generally covers an entire country.

Unlike IFRS SMEs, impairment losses are not reversed.