ASC 932
Active
ASC 932 – Extractive Activities–Oil and Gas
Establishes the dual successful efforts and full cost methods for oil and gas exploration and production accounting.
1
Conceptual Framework Linkage
A famous, genuine policy choice affecting reported earnings volatility
Oil and gas exploration inherently involves DRILLING wells that sometimes find NOTHING commercially viable ("DRY HOLES"). ASC 932 offers oil and gas companies a genuine, EXPLICIT choice between TWO fundamentally different accounting methods for exploration costs – SUCCESSFUL EFFORTS and FULL COST (Section 3) – one of the most well-known dual-method choices anywhere in US GAAP, with materially different effects on reported earnings VOLATILITY.
A distinctly SEC-shaped regulatory landscape
Given the SEC's direct oversight of oil and gas reporting (Regulation S-X Rule 4-10), this Topic is unusually SHAPED by SEC-specific mechanics – most notably the FORMULAIC "ceiling test" (Section 7) required under the full cost method, a construct without a precise IFRS parallel.
2
Scope
Oil and gas exploration, development, and production entities
ASC 932 applies to entities engaged in the exploration, development, and production of OIL and NATURAL GAS reserves.
3
THE DUAL METHOD CHOICE – Successful Efforts vs Full Cost
Both methods are permitted alternatives under US GAAP
MethodCore principle
Successful effortsOnly costs directly associated with SUCCESSFUL exploration efforts (wells that find commercially viable reserves) are CAPITALISED; costs of UNSUCCESSFUL ("dry hole") exploratory wells are EXPENSED immediately
Full costALL exploration costs – successful AND unsuccessful – within a large cost center (typically a country-wide pool) are CAPITALISED and amortised against TOTAL proved reserves in that cost center
Both methods are EXPLICITLY sanctioned as acceptable ALTERNATIVES under US GAAP – a genuine, significant accounting POLICY choice (applied consistently once elected), broadly analogous in spirit to ASC 908's major-maintenance method choice, but far more consequential given the materially different EARNINGS VOLATILITY each method produces.
4
Successful Efforts Method Mechanics
Dry holes hit the income statement immediately
Under SUCCESSFUL EFFORTS, exploratory well costs are INITIALLY capitalised pending determination of whether the well found commercially viable reserves. If the well is determined to be UNSUCCESSFUL (a dry hole), the capitalised costs are EXPENSED IMMEDIATELY. If SUCCESSFUL, the costs REMAIN capitalised and are subsequently DEPLETED using the units-of-production method as reserves are extracted. This produces a MORE VOLATILE earnings pattern, since dry hole write-offs hit the income statement directly in the period they're determined to be unsuccessful.
5
Full Cost Method Mechanics
Dry hole costs are absorbed into a large capitalised pool
Under FULL COST, ALL exploration and development costs within a defined COST CENTER (often as large as an entire country) are CAPITALISED – INCLUDING dry hole costs – and collectively DEPLETED against the cost center's TOTAL proved reserves using a units-of-production calculation. This produces a SMOOTHER earnings pattern, since individual dry hole write-offs are absorbed into the broader capitalised pool rather than hitting the income statement directly – subject, however, to the SEPARATE "ceiling test" limitation (Section 7).
6
THE KEY DIVERGENCE – Method Prevalence vs IFRS's Practice Under IFRS 6
IFRS doesn't explicitly prohibit full cost, but successful-efforts-like practice dominates internationally
IFRS does NOT mandate a specific method for oil and gas exploration cost accounting – like mining, exploration and evaluation costs fall under IFRS 6's permissive, POLICY-CONTINUATION framework (see the companion ASC 930 poster, Section 4), with subsequent development costs governed by general IAS 16/IAS 38 principles. IFRS 6 does NOT explicitly PROHIBIT a full-cost-style approach – but in PRACTICE, SUCCESSFUL-EFFORTS-LIKE accounting (capitalising only successful well costs) is far more WIDELY used internationally, since full cost's specific large-cost-center, SEC-defined mechanics (Section 7) are a distinctly US regulatory construct without the same codified counterpart or prevalence elsewhere. This is a genuine PRACTICAL divergence – not a case where IFRS explicitly bars full cost, but one where the specific, formulaic FULL COST method as US GAAP defines it (with its SEC-mandated ceiling test) simply isn't a comparably codified or prevalent choice under IFRS.
7
The Ceiling Test (Full Cost) – an SEC-Mandated Formula
A specific, formulaic impairment limitation unique to full cost
Under the FULL COST method, capitalised costs within a cost center CANNOT EXCEED a "CEILING" – computed as the PRESENT VALUE (discounted at a MANDATED 10% rate) of ESTIMATED FUTURE NET REVENUES from PROVED reserves, PLUS the cost of unproved properties (not subject to amortisation), using SEC-MANDATED PRICING (generally a TRAILING 12-MONTH average of first-day-of-month prices). If capitalised costs EXCEED this ceiling, the EXCESS is written off IMMEDIATELY as an impairment – a specific, FORMULAIC, SEC-driven mechanical test with NO precise IFRS counterpart of the same construction.
8
Impairment Under Successful Efforts
Normal long-lived asset impairment principles, not the ceiling test formula
Under SUCCESSFUL EFFORTS, capitalised oil and gas properties are tested for impairment using the GENERAL long-lived asset framework (ASC 360) – the standard undiscounted-cash-flow recoverability test, followed by fair-value-based impairment measurement if that test fails – rather than the full cost method's specific ceiling test formula.
9
Asset Retirement Obligations
Well decommissioning under the general ASC 410 framework
Legal obligations to DECOMMISSION wells and related facilities (plugging and abandonment) are recognised as asset retirement obligations under the GENERAL ASC 410 framework, applied consistently regardless of which of the two exploration cost methods (successful efforts or full cost) is elected.
10
Worked Example – Successful Efforts Dry Hole Expensing
An immediate income statement hit
Example: A dry exploratory well under successful efforts
A company using the SUCCESSFUL EFFORTS method drills an exploratory well costing $18,000,000, which is subsequently determined to be a DRY HOLE (no commercially viable reserves found).
The FULL $18,000,000 is EXPENSED IMMEDIATELY in the period the well is determined to be unsuccessful – directly reducing net income by $18,000,000 in that single period, illustrating the earnings VOLATILITY successful efforts can produce.
11
Worked Example – Full Cost Capitalization of the Same Dry Hole
Absorbed into the pool, no immediate income statement hit
Example: The same dry hole, under full cost
The SAME company, using the FULL COST method instead, drills the same $18,000,000 dry exploratory well within a cost center holding $400,000,000 of total capitalised costs and 60,000,000 barrels of total proved reserves.
The $18,000,000 dry hole cost is simply ADDED to the $400,000,000 cost center pool (now $418,000,000) – NO immediate expense is recognised. Instead, the cost is recovered gradually through UNITS-OF-PRODUCTION depletion against the cost center's total 60,000,000 barrels of proved reserves, spreading the cost over MANY future periods – SUBJECT to the ceiling test limitation (Section 7) potentially triggering a write-off if total capitalised costs exceed the computed ceiling.
12
Worked Example – a Ceiling Test Computation
Testing whether capitalised costs exceed the formulaic ceiling
Example: Applying the ceiling test to a full cost pool
A full cost company's cost center has $418,000,000 of net capitalised costs. The present value (at the mandated 10% discount rate) of estimated future net revenues from proved reserves, using trailing-12-month average SEC pricing, is calculated at $370,000,000, plus $20,000,000 of unproved property costs excluded from amortisation.
Ceiling = $370,000,000 + $20,000,000 = $390,000,000. Since capitalised costs of $418,000,000 EXCEED the $390,000,000 ceiling, the company must record an IMMEDIATE impairment write-off of $28,000,000 ($418,000,000 − $390,000,000) – a mechanical, formula-driven result distinct from the judgement-based impairment test used under successful efforts.
13
Disclosure Requirements
What ASC 932 requires
Method elected (successful efforts or full cost), applied consistentlyExtensive supplemental reserve disclosures – proved reserve quantities, standardized measure of discounted future net cash flowsCosts incurred in exploration, development, and acquisition activitiesResults of operations for oil- and gas-producing activities
14
Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Method selection (successful efforts vs full cost), a foundational and consequential accounting policy choiceDetermining whether a well is successful or a dry hole
SIGNIFICANT ESTIMATES
Proved reserve quantities, the basis for units-of-production depletion under both methodsFuture net revenues used in the full cost ceiling test computation
15
ASC 932 vs IFRS 6 / IAS 36 – Comprehensive Comparison
Comparison – ASC 932 vs IFRS 6 / IAS 36
FeatureUS GAAP (ASC 932)IFRS (IFRS 6 / IAS 36)
Method prescriptionExplicit choice: successful efforts OR full cost, both codified and sanctionedNo prescribed method – IFRS 6 permits continuing pre-existing policy; successful-efforts-like practice dominates in PRACTICE
Full cost ceiling testSpecific, SEC-mandated formula (10% discount, trailing-12-month pricing)NO equivalent formulaic construct – full cost as codified isn't a comparably prevalent IFRS practice
Impairment (successful efforts-style)ASC 360 two-step undiscounted/fair value testIAS 36 recoverable amount (higher of fair value less costs to sell and value in use)
This is one of the more STRUCTURALLY unusual comparisons in the library – the divergence isn't a differing rule applied to the same practice, but a difference in whether a specific, HIGHLY formulaic method (full cost with its SEC ceiling test) is a codified, common alternative at all.
16
Statement Mapping
Where every ASC 932 event lands
EventStatement(s) affectedNotes
Dry hole cost (successful efforts)ISExpensed immediately
Dry hole cost (full cost)BSCapitalised into the cost center pool
Ceiling test write-offBS ISImmediate impairment for excess over the computed ceiling
17
Related Topics
Cross-reference map
TopicConnection
ASC 410Supplies the general asset retirement obligation framework for well decommissioning
ASC 360Supplies the general impairment framework for successful-efforts-method properties
ASC 930Extractive Activities–Mining – a related industry Topic with parallel exploration cost capitalisation issues
18
Quick-Reference Glossary
Successful efforts method
A method capitalising only costs of successful exploration efforts, expensing dry hole costs immediately.
Full cost method
A method capitalising all exploration costs – successful and unsuccessful – within a large cost center, depleted against total proved reserves.
Ceiling test
The SEC-mandated formulaic limit on capitalised full cost pool costs, based on the present value of estimated future net revenues from proved reserves.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows