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.
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.
Peter Terry joins the North West advisory team
The average cost of fraud increased 35.4% to £3.9m in 2016, compared to 2015 data
Tallat Mahmood appointed to corporate finance team of Top 20 firm
Andrew Tyrie airs views on the Finance Bill, 'Making Tax Policy Better' report, and Brexit