Finance

Question a:

A conclusion that an analysis might derive from the evolution of accounting in the oil and gas industry is that:

First, from line 18 to 23 of the case, we can notice that the S.E.C undergoes from oil companies o lobbyist such as political personalities to stretch on change accounting rules. These results from the fact that some oil companies are threatened by write-offs that would lower their earnings as well as their equity capital. So to avoid that, they pressure the S.E.C to change accounting rules in favor to them

A second point is that they seem that most of small and midsize companies preferred the full-cost Method because on their balance sheet they had millions of dollars appearing as assets. These companies have chosen the full-cost-method only when oil prices where high, so it would not have an effect on them, but the problem is when oil prices declines, they would not be in favor of this method, because in the case the ceiling which imposed by the S.E.C is exceeded.

Finally, we can say that the evolution of accounting in the oil and gas industry depends on prices on the market. When prices are high, companies prefer the full-cost method; when prices are low, it is different.

Question b

Over the years, the proposed change in Tenneco’s accounting method would have changes in its favor significantly. This is because Tenneco took advantage of the S.E.C accounting rule to apply it in its favor, since it is not illegal to switch method, by switching from the full-cost method to successful method. Tenneco found a way to match its write-offs with prior years ’revenue so that it would cancel each other and not show up on the next financial report.