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Unformatted text preview: operative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Impact of IFRS: Oil and Gas 5 1 Exploration and evaluation (E&E) assets IFRS does not define either successful efforts or modified full cost accounting, despite these being the two most common accounting approaches applied by IFRS companies
The costs involved in E&E and development activities are considerable, and often there are years between the start of exploration and the commencement of production. Even with today's advanced technology, exploration is a risky and complex activity. These factors create specific challenges in accounting for E&E expenditure. There was no IFRS that specifically addressed E&E activities until IFRS 6 became effective in 2006. IFRS 6 was intended to be a temporary standard while the IASB undertook an in-depth project on extractive activities. With that in mind, the standard was written with a view to allowing companies to carry over to IFRS their previous GAAP practices to a large extent. Traditionally under national GAAPs, oil and gas companies have accounted for E&E costs using one of two broadly defined methods: the successful efforts method or the full cost method. However, as there is no single accepted definition of either method under IFRS, the application of these approaches can vary. Applying this test, it would be rare for expenditure other than licence acquisition costs to be capitalised prior to the determination of commercial reserves. IFRS 6 relaxes this approach for E&E assets, allowing capitalisation of E&E costs by expenditure class if the company elects that accounting policy. Classification
Classification of expenditure forms the basis of presentation and subsequent measurement of assets E&E assets are a separate class of asset that is measured initially at cost. E&E assets ar...
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