Canadian Institute of Chartered Accountants

Canadian Institute of Chartered Accountants

December 07, 2010 13:31 ET

IFRSs: What Oil & Gas Executives Need to Know

By Gordon Beal, CA

TORONTO, ONTARIO--(Marketwire - Dec. 7, 2010) -

Editors Note: A photo for this article will be available via Marketwire on the picture wire of The Canadian Press.

The changeover to International Financial Reporting Standards (IFRSs) is likely to change the way the financial performance of publicly listed oil and gas companies is reported. Senior executives must be prepared to help investors understand whether differences they see in the financial statements reflect real changes in the business, or simply reflect the new accounting framework. 

The move to IFRSs will not change the economics of the business, but the new accounting standards may lead to differences in the reported cash flow from operations, earnings, and asset values.

"One of the biggest changes for the industry is the different accounting treatment of costs associated with oil and gas exploration and development activities," explains Matt Bootle, FCA, a Partner in Ernst & Young's Professional Practice group in Calgary. "The majority of public exploration and production companies currently use what is referred to as the full-cost method of accounting for exploration and development costs. They will be required to change how these costs are treated when IFRSs are adopted."

"Generally speaking, oil and gas companies are currently permitted to capitalize all seismic, exploration and development costs as a single amount on the balance sheet," said Gordon Heard, CA, Principal Advisor of The Finance Group. "These costs are then expensed over time based on production levels. Under IFRSs, all costs incurred before exploration rights are acquired are generally expensed immediately. Further, costs associated with unsuccessful drilling efforts may also be charged directly to expense, reducing reporting cash flow from operations."

In addition, IFRSs will also change the way exchanges of properties and interests, and acquisition of businesses, are reflected in financial statements.

These differences, along with the fact that impairment charges are generally expected to be more frequent under IFRSs, are likely to affect discussions about a company's financial performance – discussions that are particularly critical as the investment community gains a level of IFRS literacy.

The adoption of IFRSs is mandatory in 2011 for public companies with a December year-end and in the 2012 fiscal year for non-calendar year-ends. More information about communicating with investors and other aspects of the changeover to the new accounting standards are available through a special website (www.cica.ca/IFRS).

Note: Gordon Beal, CA, Principal, Canadian Institute of Chartered Accountants, has played a leadership role in the CA profession's program of support for the changeover to IFRSs.

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Contact Information

  • Canadian Institute of Chartered Accountants
    Tobin Lambie
    Manager, Media
    416-204-3228
    tobin.lambie@cica.ca