Trends in Reporting in the Gas and Oil Industry

Date of Submission


Document Type


Degree Name

Master of Science in Accounting




Robert McDonald


Oil industries--Accounting, Gas industry--Accounting

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1987 no. 5


For the past three decades, two distinct methods - "successful efforts", and "full cost" have been employed in accounting for the exploration, development, and production of crude oil and natural gas. Consequently, companies performing identical activities and experiencing similar economic gains have nevertheless been using different principles of asset recognition and earnings measurement.

In 1977 the FASB attempted to resolve the reporting disparity with its issuance of Statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". The statement endorsed "successful efforts" as the prescribed accounting method to be used in financial statements. However, this pronouncement was greatly criticized by all oil companies who felt threatened by its effect. The stated reasons for rejection of Statement No. 19 included: the full cost procedure would tend to curtail competition; it would be detrimental to the nation’s domestic resource development; and would jeopardize the ability of small companies to raise capital.

Subsequently, on August 31. 1978 the SEC intervened in the controversy and rejected both methods of accounting. In its Accounting Series Release #253 the SEC took a drastically different tack from the FASB’s endorsed method requiring "Reserve Recognition Accounting", which aimed to assign future values to both proven and unproven reserves. From the outset the decision was challenged by the accounting profession and the oil industry on the grounds that it was inherently deficient in its ability to predict the future value of current reserves, and therefore did little to improve financial reporting. Faced by the overwhelming negative reaction, the SEC abandoned the reporting project in February, 1981.

Now the ball was back in FASB's court, and in November, 1981, the FASB picked up on the theme of the deficient SEC release and issued Statement No. 69, "Disclosures about Oil and Gas Producing Activities". The statement provided a standardized method to measure future cash inflows based on the particular characteristics of reserves. Furthermore, it required discounted and undiscounted cash flow information so that the information seeker could make his own evaluation of risk. This greatly improved the quality of disclosures.

Despite this major step of enhancing comparability in financial statements, the FASB has done little, so some experts feel, to resolve the issue of full cost versus successful efforts accounting. Thus, explicit comparability between financial statements is still debatable. Moreover, even on a more fundamental basis, Statement No. 69 has been criticized by others for failure to improve reliability and usefulness.

This research project attempts to give a good representation of events leading up to the FASB's and SEC's current compromise regarding accounting solutions in the gas and oil industry. In addition, it will provide a complete study of the method of accounting in this field, focusing on successful versus full cost accounting. Finally, it will provide insights into (in the eyes of the writer) how disclosure can be improved vis-a-vis Statement No. 69 and reserve recognition accounting. Moreover, since comparability is still an issue it will take a look at a compromise solution to full cost-successful efforts methods of accounting. Thus, practitioners and students can use this paper as a compendium for accounting practices in the industry, and a guide to promising alternatives to current accounting practices.