RegulationAccounting StandardsTrouble in the pipeline for oil companies

Trouble in the pipeline for oil companies

IFRS hits oil company profits at a time when prices are soaring past $70 per barrel

Oil companies cashing in on soaring oil prices and strong demand from
emerging markets could face an unexpected brake on profits because of a new
accounting standard for oil exploration.

It is expected that by next year IFRS will require companies to expense
failed prospecting attempts immediately in the P&L, known as successful
efforts accounting, instead of amortising dry fields that have always been
capitalised. The change will hurt any company that drills for oil
unsuccessfully, and lead to sizable reductions in reported profits.

The potential impact of the new accounting standard emerged last week when
FTSE250 company Premier Oil voluntarily restated its 2004 accounts under IFRS
and downgraded post-tax profits from $43.8m (£24.3m) to $22.1m.

‘The new accounting provides more transparency for oil exploration as the
performance of assets is reported directly in profit and loss,’ said Tony
Durrant, FD of Premier Oil. ‘Premier has taken a proactive decision in
anticipation of likely future changes in accounting standards for our industry.’

Other mid-cap oil and gas businesses, those likely to be most affected, have
yet to adopt the pending standard and analysts predict further profit reductions
when they do.

‘The move from full cost accounting to successful efforts is the steer we
have been given and there is going to be an impact on income statements and
write-downs,’ said Al Stanton, oil analyst at Bridgewell Securities.

Related Articles

Demystifying GDPR for accountants

Accounting Standards Demystifying GDPR for accountants

1w Ellen Temperton, Lewis Silkin
EY fined £1.8m over Tech Data audit

Accounting Standards EY fined £1.8m over Tech Data audit

2m Emma Smith, Managing Editor
The great professional services shake-up

Accounting Standards The great professional services shake-up

3m Fergus Payne, Lewis Silkin
What do clients actually want from an accountant?

Accounting Standards What do clients actually want from an accountant?

4m Emma Smith, Managing Editor
Accountants shouldn’t neglect hybrid mismatch anti-avoidance rules

Accounting Standards Accountants shouldn’t neglect hybrid mismatch anti-avoidance rules

4m Alison Conley
Membership of the accountancy profession on the rise

Accounting Standards Membership of the accountancy profession on the rise

5m Alia Shoaib, Reporter
The real price of mates' rates in the provision of professional services

Accounting Standards The real price of mates' rates in the provision of professional services

5m DAC Beachcroft
IASB overhauls insurance accounting with issuance of IFRS 17

Accounting Standards IASB overhauls insurance accounting with issuance of IFRS 17

7m Alia Shoaib, Reporter