Accounting for Extractive Industries: Has IFRS 6 Harmonised Accounting Practices by Extractive Industries?

Abstract

Accounting for extractive industries has historically been practiced by one of a number of methods: successful efforts, full costing, area of interest, appropriation and reserve recognition accounting. The choice of method adopted leads to different accounting figures. The difference in the treatment of the costs leads to different accounting figures being reported in the financial statements of extractive companies. This means that the ‘tell it like it is’ criteria of accounting functions differently, so that stakeholders find like‐with‐like comparisons for decision‐making purposes difficult. These difficulties have culminated in the release of IFRS 6 Exploration for and Evaluation of Mineral Resources, to help harmonise accounting practice. This paper, through content analysis of annual reports of 122 upstream oil and gas companies from around the world, investigates the role of IFRS 6 in harmonising extractive industries’ accounting practices. Our analysis identifies seven types of company, which differ in their compliance with IFRS 6. Hence, we conclude that IFRS 6 has had some success in harmonising accounting treatments of exploration and evaluation expense but that this success is limited and more needs to be done to achieve wider harmonisation for the extractive industries.

Accounting for the Extractive Industries: Controversies and a Need for Harmonisation

“…Regardless of which side of the debate one takes, the choice of accounting method has implications for how the financial statements are portrayed and it therefore affects the decisions of investors (Abdo, 2016;Misund, 2017). Three implications can be noted here.…”

Extractive Industries Reporting: A Review of Accounting Challenges and the Research Literature

“…One area of diversity concerns the extent to which costs in the early phases of extractive activities should be capitalized. An international comparative study in this area is Abdo (), who compares the accounting treatment of E&E costs in 118 oil and gas companies listed on six stock exchanges around the world (FTSE 350, Hang Sen, Toronto TSX, Fortune, ISEQ, and AIM). On the basis of content analysis of annual reports for these companies, he reports that 47% of firms state they use the SE method, 28% the FC method, 9% the areas of interest method, and 16% do not specify a particular method.…”

Agency Theory, Accounting Based Performance Evaluation Systems and IFRS: A Brief Relational Overview

“…Because of its unique temperament, Islamic financial institutions will hamper the progress of IFRS (Mulyany, 2018). Abdo (2016) reported because of the growth and globalization of capital markets, comparing financial statements has become a problem. Historically, it has been challenging to analyze financial statements.…”