RegulationAccounting Standards£100m write-off for Cairn Energy

£100m write-off for Cairn Energy

New accounting method for exploration could see oil group write off about £100m from its profits

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
its profits.

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
£100m.’

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.

Related Articles

Demystifying GDPR for accountants

Accounting Standards Demystifying GDPR for accountants

2w 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

5m 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