Cairn Energy, the FTSE100 oil group, is bracing itself for a new accounting
treatment that will hammer its income statement and could affect its ability to
report a profit in its accounts.
In its last set of results, the Edinburgh-based group reported interim
pre-tax profits of £31.2m, but analysts have predicted the change to a new
accounting method for exploration could see the group write off about £100m from
In a trading update, Cairn said it would have to change its accounting for
exploration from full cost accounting to the successful efforts method in order
to comply with IFRIC guidance.
Accountancy Age broke the news last year that a number of oil
companies would be forced to make write-offs because of the change, but it has
emerged that Cairn will be particularly hard hit.
Full cost accounting allows companies to hold expenditure on exploration as
an intangible asset. If the spend is on a dry well, then the well is grouped
with successful wells and depreciated. Under successful efforts, however, all
spending on dry fields has to be expensed through the income statement.
‘Cairn does hold a lot of these intangible exploration assets on its balance
sheet. A fair amount of these are successful but some are unsuccessful, so there
is going to be an element of write-off,’ said Tony Alves, oil and gas analyst at
KBC Peel Hunt.
‘When Cairn reported interim results for 2005, £247m of its £470m assets were
intangibles, so it is quite a chunky number. I expect write-offs of at least
Cairn, which will release a restatement incorporating the new method in
February, ahead of reporting final results in March, admitted there would be a
‘potentially significant impact on the income statement and balance sheet’, but
added that the change would have no impact on its cash flow or strategy.
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