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PROJECT TOPIC AND MATERIAL ON ACCOUNTING FOR DEPLETION OF MINERAL RESOURCES IN NIGERIA (A CASE STUDY OF SHELL PETROLEUM DEVELOPMENT COMPANY OF NIGERIA LIMITED)
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- Name: Accounting For Depletion Of Mineral Resources In Nigeria (A Case Study Of Shell Petroleum Development Company Of Nigeria Limited)
- Type: PDF and MS Word (DOC)
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The discovery of oil in Nigeria years back is not only a blessing to the country but also a source of pride and a ray of hope of a prosperous future.
Equally important are the age long controversy over the financial practice and reporting of oil companies as it relates to which cost or expense to capitalize.
The principles guiding accounting practice and reporting have undergone a process of evolution since the 1920’s to the present stage where two basic concepts for accounting for cost are generally accepted.
The two basic concepts are the “Full Cost method” which are costs associated with acquisition, exploration, and development activities and are capitalized irrespective of whether or not the activities resulted in the discovery of reserve, and the “Successful Efforts method”. This method leads to specific reserve and are to be capitalized. Such cost include costs of acquiring mineral rights, cost of drilling successful exploratory well and also development cost. The distinguishing features of the Successful Efforts and the Full Cost methods depend on which costs are to be capitalized and the method which these cost should amortize.
From United States of America to Nigeria, mineral resources have generated heated debate among accountants. The main reason would perhaps be the very uniqueness of the challenges of the product involved in the search for drilling of, and complex steps taken to bring crude oil to the surface. These may pose some problems to the accountant.
The differences in both methods arises from the treatments given to drilling cost, that is, the cost of topographical, geological and geophysical studies (G&G) and the cost of drilling exploratory holes.
The researcher has been motivated to research on this controversial topic because of the uniqueness of oil and gas to Nigerian economy which accounts for over 80% of the nation’s revenue. Therefore, any discussion on this important sector of economy will not only be a step towards strengthening Nigeria’s economic base but will also ensure the survival of the country economically.
1.2 BACKGROUND OF THE STUDY
A long time unresolved debate has ensured among accountants over the financial accounting and reporting practices in petroleum industry. This controversy centers on the diversity of the application of the accounting of Historical Cost Convention of Successful Efforts and Full Cost methods as it relates (Sunders 1976:1) to oil prospecting. Under the same operational circumstances, both methods produce significantly different results (Lay 1977:33) because Successful Efforts and Full Cost methods use proved reserves to amortize acquisition costs. They differ however, in respect of amortization of wells and related facilities.
Full cost companies usually use proved reserves for determining the unit of production, while Successful Efforts companies use proved developed reserves. This differences arises because, full cost companies usually include future development cost in the cost subject to amortization. The difference between both methods centres on treatment of costs that are not directly traceable to the discovery of specific oil and gas reserves. Under the Successful Efforts (SE) concept, an oil company expense all cost including acquisition, exploratory and drilling cost which do not resent in discovery of reservoirs. On the other hand, the basic concept of the Full Cost method is that an oil company should capitalized and amortize to income all cost incurred in acquiring mineral rights, exploring for and developing oil and gas reservoirs even when specific projects do not result in the discovery of reservoirs.
All productive and non-productive cost of searching for oil and gas are capitalized and carried as asset. If the cost carried forward does not exceed the estimated value of the reserves at a particular location whichever methods are finally chosen will determine the treatment to be given to specific cost items.
1.3 STATEMENT OF THE PROBLEM
According to Statement of Accounting Standard 14 (SAS 14), paragraphs 102 – 103, all companies engaged in oil and gas exploration, development and production activities shall state in their financial statements, the policy for accounting for costs incurred and the manner of disposing of capitalized costs in respect of such activities. In addition, the policy on accounting for restoration and abandonment costs should be disclosed in their financial statements, even if already included in the cost of sales. (SAS 14)
A company may use either the “Full cost” method or the “Successful cost” method. The method used should be consistently applied and disclosed.
Unfortunately, there is no enough evidence to show that these methods of accounting are properly used by the concerned companies in Nigeria and where used, whether they are consistently applied and disclosed.
1.4 OBJECTIVES OF THE STUDY
This research is aimed at resolving the problems associated with accounting for depletion of mineral resources in Nigeria: A case study of Shell Petroleum Development Company, Nigeria Limited, Warri branch. Hence, this study is directed towards identifying which of the two methods (Successful Effort and Full Cost method) is practiced and why one method is favoured in preference to the other, to identify how the accountant resolve the problem of ascertaining oil and reserve in a producing well so as to enable him compute depletion charges and also make recommendations, where necessary towards enhancing the financial accounting method being practiced by Oil and Gas Companies in Nigeria.