ASC 932: Full Cost Method in Extractive Activities - Oil and Gas Journal Entries

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Oil and gas exploration, development, and production activities represent a significant portion of the global economy. The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 932, "Extractive Activities - Oil and Gas," provides guidelines for accounting for these activities. One of the two primary methods for accounting for oil and gas exploration and development costs is the Full Cost Method. This article will explore the key aspects of the Full Cost Method under ASC 932 and provide examples of journal entries to illustrate the accounting process for oil and gas activities.

 

Full Cost Method Overview

The Full Cost Method is an accounting approach that allows companies to capitalize all costs associated with oil and gas exploration, development, and production within a cost center. These costs include lease acquisition, geological and geophysical costs, drilling, and overhead directly related to the activities. Under this method, costs are accumulated and amortized over the life of the related reserves as they are produced.
 

Key Elements of the Full Cost Method

 

1. Cost center: A geographical area where all costs associated with oil and gas activities are accumulated. The cost center can be as broad as a country or as narrow as a group of leases or wells.
    

2. Capitalization: The process of recording costs as assets rather than expenses. Under the Full Cost Method, all exploration and development costs are capitalized within the cost center.
    

3. Depletion: The systematic allocation of capitalized costs to expense over the life of the reserves as they are produced, using a unit-of-production method.

 

Journal Entries for Oil and Gas Activities under the Full Cost Method

To illustrate the accounting process for oil and gas activities using the Full Cost Method, let's consider a hypothetical company, XYZ Oil & Gas Inc., that incurred the following costs during the year:

 

1. Lease acquisition costs: $500,000

2. Geological and geophysical costs: $300,000

3. Drilling costs: $1,200,000

4. Overhead directly related to activities: $100,000

5. Production of 10,000 barrels of oil equivalent (BOE) during the year

 

Here's how the journal entries for these oil and gas activities would look:

 

Record lease acquisition costs:

Dr. Oil and Gas Properties (Lease) $500,000

1. Cr. Cash $500,000
 

Record geological and geophysical costs:

Dr. Oil and Gas Properties (G&G) $300,000

2. Cr. Cash $300,000
 

Record drilling costs:

Dr. Oil and Gas Properties (Drilling) $1,200,000

3. Cr. Cash $1,200,000
 

Record overhead directly related to activities:

Dr. Oil and Gas Properties (Overhead) $100,000

4. Cr. Various Overhead Accounts $100,000
 

Calculate depletion per BOE:

Total capitalized costs: $500,000 + $300,000 + $1,200,000 + $100,000 = $2,100,000

5. Depletion per BOE: $2,100,000 / 10,000 BOE = $210
 

Record depletion expense for the year:

Dr. Depletion Expense $2,100,000

6. Cr. Accumulated Depletion $2,100,000

 

The Full Cost Method under ASC 932 provides a standardized framework for accounting for oil and gas exploration, development, and production activities. By capitalizing all costs within a cost center and allocating these costs through depletion over the life of the reserves, companies can accurately reflect their investments in oil and gas activities on their financial statements. Understanding the journal entries involved in the Full Cost Method is crucial for businesses in the oil and gas industry to maintain accurate financial records and comply with accounting standards. This method ensures consistency and transparency in financial reporting, allowing investors to better assess the financial performance of companies in this sector.