ASC 986-20: Journal Entries for Oil & Gas Reserves Recognition

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Accounting Standards Codification (ASC) Topic 986-20, Extractive Activities - Oil and Gas - Reserve Recognition Accounting, provides guidance on the accounting treatment for reserve recognition accounting (RRA) in the oil and gas industry under Generally Accepted Accounting Principles (GAAP). RRA is a method used to recognize oil and gas reserves in the financial statements, which plays a critical role in evaluating the financial position and performance of oil and gas entities. This article will explore the key aspects of reserve recognition under ASC 986-20 and provide examples of journal entries to help you better understand the accounting treatment.
 

 

ASC 986-20 Overview

ASC 986-20 provides guidance on the recognition and measurement of oil and gas reserves in the financial statements of entities involved in extractive activities. The standard outlines criteria for recognizing reserves, which include:

 

1. Proved reserves: Reserves that are reasonably certain to be recoverable under existing economic and operating conditions.
 

2. Probable reserves: Reserves that are less certain to be recoverable but have a reasonable probability of being economically producible.
 

3. Possible reserves: Reserves with a low degree of certainty for economic recovery and are considered more speculative.
 

Under RRA, entities should recognize proved reserves, while probable and possible reserves can be disclosed in the notes to the financial statements.

 

Journal Entries for Recognition of Reserves

To illustrate the accounting treatment for recognizing oil and gas reserves, let's consider an example. Company A operates in the oil and gas industry and has identified 1 million barrels of proved reserves, 500,000 barrels of probable reserves, and 200,000 barrels of possible reserves.

 

Here are the journal entries for Company A to record the recognition of reserves
 

1. Record the recognition of proved reserves:

Debit: Oil and Gas Properties $X
Credit: Reserve Recognition Liability $X

In this case, Company A recognizes the value of the 1 million barrels of proved reserves as an asset and a corresponding liability on its balance sheet. The value of the reserves is determined by estimating the future cash flows from the reserves, discounted at an appropriate rate.

 

2. Disclosure of probable and possible reserves:

Company A should disclose the information related to its probable reserves (500,000 barrels) and possible reserves (200,000 barrels) in the notes to the financial statements. These disclosures provide important information to investors and other stakeholders about the entity's future potential for revenue generation from extractive activities.

 

ASC 986-20 provides guidance on the recognition and measurement of oil and gas reserves in the financial statements of entities involved in extractive activities. By understanding the accounting treatment and journal entries for recognizing reserves, entities can maintain accurate financial records and comply with GAAP. Proper recognition of reserves is essential for demonstrating the financial position and performance of oil and gas entities, providing transparency and comparability for investors and other stakeholders. Adherence to the provisions of ASC 986-20 ensures that financial statements accurately reflect the financial impact of extractive activities and the related reserve recognition accounting.