Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
2. The Steering Committee favours adoption of a cost-based method more
consistent with the traditional successful efforts concept than with other
concepts such as full costing. [Note that full costing involves broader
capitalisation of exploration and related costs.]
3. All members of the Steering Committee favour disclosure of reserve
quantities. The project committee is divided regarding disclosure of reserve
values.
4. Disclose proved and probable reserves separately, and within proved
disclose proved developed and proved undeveloped reserves separately.
Some of the other areas of accounting of interest are discussed below.
• Decommissioning costs
In a similar vein to utilities, one of the key challenges for companies in these
industries is to deal with future ‘dismantling’ costs. Over and above the
points raised in the discussion of utilities, above, the situation is often
complicated for oil companies by the substantial tax credits that can be
created through abandonment. In the UK, for example, fields that have been
paying Petroleum Revenue Tax will be eligible for tax relief at a rate of
almost 70 per cent for the costs to the companies of abandonment.
• Joint ventures
IAS 31 benchmarks proportional consolidation as the preferred treatment for
jointly controlled entities. This would require line by line consolidation of a
share of the JV’s assets, liabilities, revenues, expenses and cashflows. The
use of the equity method (so called ‘single line’ consolidation) is also
ermitted under IAS 31.
• Oil reserve disclosure requirements
Unlike the US, there are no oil reserve disclosure requirements under IFRS.
However, in adopting a more comprehensive standard for extractive
industries the IASB has stated its support for reserve disclosure.
• Capitalising costs
Decisions about capitalisation tend to be based on general principles.
However, the IASB wishes to introduce some more specificity into this
process for companies operating in extractive industries. Exhibit 6.3
illustrates their current thinking.
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