BusinessCorporate FinanceOil exploration turns from asset into cost

Oil exploration turns from asset into cost

New accounting standard for oil, gas and mining exploration could hit oil and mining companies' balance sheets

Oil and mining companies could suffer a blow to their balance sheets and see expenses increased because of a new accounting standard for oil, gas and mining exploration.

Link: Shell/AstraZeneca release Q1 IFRS numbers

The world’s top 10 oil groups alone spend approximately $8bn (£4.2bn) annually on exploration, but have always been able to capitalise this expenditure on their balance sheets.

With the introduction of IFRS6, however, a percentage of this spend will have to be expensed – hitting the assets held on balance sheets and increasing company costs.

The new standard, which becomes mandatory from 2006, will prevent resources companies from capitalising their exploration expenses for pre-licence prospecting. These costs will now be charged by companies to their profit and loss account.

But PKF partner Stuart Barnsdall said the slightly stricter accounting treatment for exploration under IFRS would not have a major impact on the figures of oil and mining groups.

‘Companies are not going to commit substantial expenditure to exploration without a licence,’ Barnsdall said.

A spokesman for Royal Dutch/Shell, which reported its Q1 figures today, also downplayed the impacts of the new standard.

‘The purpose of IFRS6 is to enable most companies to continue with their existing accounting practice for exploration and evaluation activities,’ the spokesman said.

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