OIL AND GAS ACCOUNTING: PRACTICE, CHALLENGES AND SOLUTIONS IN NIGERIA (A CASE STUDY OF SHELL NIGERIA PLC)
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OIL AND GAS ACCOUNTING: PRACTICE,
CHALLENGES AND SOLUTIONS IN NIGERIA (A CASE STUDY OF SHELL NIGERIA PLC)
1.0 INTRODUCTION
Accounting
regulatory bodies usually formulate industry specific standards when an
industry has peculiar characteristic of accounting for banks and non-bank
financial institutions. The oil and gas industry is one of such industries that
have specific accounting standards. This can be attributed to its peculiarity
in terms of high capital requirement,
earning volatility, regulation, type of business ownership, taxation,
non-correlation between the amount of investment made and returns obtained
(Wright and Hallun et al, 2008) and high
sensitive to risk price risk and
foreign exchange risk.
Up and 2012
when the International Financial Reporting Standard (IFRS) was adopted by
exploration companies in Nigeria, Nigerian companies in the upstream sector prepared
their financial statement in line with the statement accounting standard 14
(accounting in the petroleum industry; upstream activities and SAS 17
(accounting in the petroleum industry) formulated by the Nigerian Accounting
Standard Board.
By its adoption
of IFRS, Nigeria joined over 100 countries who either use or have adopted t he
accounting guidelines as stipulated by the International Accounting Standard
Board (IASB). This will ensure harmony and easy comparison of financial
statements. This is particularly useful in the oil and gas industry considering
that it is one of the most global industries. The adoption of a common
accounting framework also widens access to investment opportunities.
IFRS 6
applies to expenditure incurred by an entity in connection with the search for
mineral resources. The standard divides upstream activities into two groups
namely: exploration and evaluation activities and development activities. The
standard under paragraph 9 discusses exploration and evaluation activities.
Examples of expenditure that can be categorized as exploration and evaluation
according to paragraph 9 are acquisition of right to explore, topographical,
geological, geochemical and geophysical studies, exploratory drilling,
trenching, sampling cost, costs incurred in trying to evaluate the technical
feasibility and commercial violability of extracting resources. These cost are
capitalized and classified as tangible or intangible (IFRS 2011). Developing
activities involves developing the results from extractive activities. This
usually requires huge amount and paragraph 10 of (IFRS) 6 states that these
expenditures should be categorized as intangible assets and treated as per the
guideline provided in IAS 38 (intangible assets).
Accounting
for the upstream sector is quite controversial and companies may choose from
either the successful efforts method or full cost method.
Successful
effort is a method of accounting for petroleum exploration and development
expenditures that permits capitalization of expenditures only a successful
projects while expenditures in unsuccessful wells are expensed. A drilling
effort is classified as successful if it results in the extraction of
economically recoverable oil and gas and classified as unsuccessful if it
results I a dry hole.
On the other
hand, the full cost method allows for the capitalization and amortization of
all exploration and development expenditures i.e. both successful and
unsuccessful efforts.
The main
difference between the two accounting method is that only cost in proven wells
are capitalized in the successful effort method while every cost is capitalized
under the full cost method.
The
research, therefore, seeks to investigate the nature of oil and gas accounting
practice, its challenges and solutions excerpts Ejiroghene E. (2013) Accounting
for oil and gas Reserve; implication for investors.
BACKGROUND
OF THE STUDY
The oil and
gas industry is one of such industries that have specific accounting standards.
This is as a result of its peculiarity in-terms of high capital requirement,
earnings violability, regulation, type of business ownership, taxation,
non-correlation between the account of investment made and returns obtained
(Wright and Gullen et al, 2008) and high sensitivity to risk like price risk
and foreign exchange risk etc. Therefore, when the international Financial
Reporting Standards (IFRS) was adopted by exploration companies in Nigeria, it
became imperatives for oil and gas companies in the sector to prepare financial
statements in line with the statement of accounting standards.
Upstream oil
and gas organizations must meticulously record, track, distribute and report
sales of oil and gas and other products. Accurate and timely oil and gas
revenues accounting require tracking complex contracts and owner lease
agreements. It must also reflect joint venture and capital expenditure accounts
among others.
The nature
of the complexity of the oil and gas operations makes the nature of its accounting
reporting even more complex by new challenges such as horizontal drilling etc.
The
research, therefore, intends to explore the nature of oil and gas accounting in
Nigeria, challenges and solutions.
1.2 STATEMENT OF THE PROBLEM
The complex
nature of the operations of the upstream oil and gas industry makes the oil and
gas accounting more complex in nature. However, the International Financial
Reporting Standards (IFRS) requires that oil and gas companies in the upstream
sector prepare their financial statement in-line with the statement of
accounting standards 14 (accounting in the petroleum industry; upstream
activities) and SAS 17 (accounting in petroleum) formulated by the Nigerian
Accounting Standard Board.
This is as a
result of the guidelines stipulated by the International Accounting Standard
Board (IASB
However, oil
and gas accounting is made increasingly difficult by new challenges and risks
such as horizontal drilling, price risk, foreign exchange risk etc.
Therefore,
this research seeks to investigate oil and gas accounting in Nigeria, practice,
challenges and solution.
1.3 RESEARCH QUESTIONS
1. What is the nature of oil and gas
accounting?
2. What constitute the challenges of oil
and gas accounting?
3. What possible solution are necessary in
oil and gas accounting?
4. What is the nature of oil and gas
accounting in Nigeria?
1.4 OBJECTIVE OF THE STUDY
1. To determine the nature of oil and gas
accounting
2. TO determine the discharges and
solutions in oil and gas accounting
3. To determine the nature of oil and gas
accounting in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
1. It shall provide a detail analysis of
the nature of oil and gas accounting as a framework for further studies.
2. It shall provide a framework to
evaluate the challenges in oil and gas accounting and proper solution.
3. It shall serve a reference part of
information for accounting professionals etc.
4. It shall elucidate the nature of oil
and gas practice in Nigeria.
1.6
STATEMENT OF HYPOTHESIS
1. H0 oil and gas accounting practice is not
standardized in Nigeria
H1 oil and gas accounting practice is
standardized in Nigeria
2. H0 Challenges in oil and gas accounting in
Nigeria is high
H1 Challenges in oil and gas accounting in
Nigeria is low
3. H0 The prospect of oil and gas accounting
in Nigeria is low
H1 The prospect of oil and gas accounting
in Nigeria is high
1.7 SCOPE OF THE STUDY
The scope of the study
is centered on the oil and gas accounting practice in Nigeria, its challenges
and solutions IN Shell Nigeria Plc
1.8 DEFINITION OF TERMS
IFRS: International Financial Reporting
Standard
SAS: Statement of Accounting Standard
IASB: International Accounting Standard
Board.
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