Petroleum Accounting and Financial Management Journal

Summer 1987 Vol. 6 № 2
Current Developments in Oil and Gas Taxation 1
Richard Mark

This section of the Journal summarizes the most important recent tax developments affecting oil and gas companies.

Current Developments in Oil and Gas Taxation. Mark, Richard, Summer 1987, pp. 1‑4.

Current Developments in Financial Accounting 5
James D. Hall

Recent developments affecting financial accounting and reporting for the petroleum industry are reviewed in this section.

Current Developments in Financial Accounting. Hall, James D., Summer 1987, pp. 5‑8.

The Accounting Forum 9

This section contains responses based on questions raised by our readers. The responses in this issue reflect a composite of opinions given to each question by several oil and gas accounting professionals.

The Accounting Forum. Summer 1987, pp. 9‑12.

Searching for Dollars—Revenue Analysis (Audit) 13
Al E. McClellan

Mr. McClellan points out the need for non operators to audit joint interest revenues in addition to carrying out the traditional audit of costs. He then discusses the initiation and conduct of the audit, time limitations on audits, participation and roles of the parties, access to production facilities and records, action on exceptions, and sharing of audit costs.

Searching for Dollars—Revenue Analysis (Audit). McClellan, Al E., Summer 1987, pp. 13‑22.

FASB Income Tax Accounting Exposure Draft: Its Impact on Oil and Gas Companies 23
James W. De Loach, Jr. and James M. Downs

The FASB has issued an exposure draft of a Statement of Financial Accounting Standards that would significantly change the current requirements for accounting for deferred income taxes. Mr. De Loach and Mr. Downs review the exposure draft, directing specific attention to changes in the accounting rules that affect oil and gas companies. Among the topics discussed are: comprehensive allocation for all book/tax differences, balance sheet classification of deferred obligations or charges, accounting for effects of tax rate changes, restrictions on recognition of tax assets, income statement treatment for NOL carryforward benefits, tax deferrals for business combinations, impact of the AMT and tax preference depletion.

FASB Income Tax Accounting Exposure Draft: Its Impact on Oil and Gas Companies. De Loach, Jr., James W. and Downs, James M., Summer 1987, pp. 23‑30.

Retained Contingent Interests in Producing Properties 31
Richard G. File

Dr. File discusses the tax treatment to be given the sale of oil and gas properties where the seller retains a "contingent interest" under which the holder of that interest is paid a portion of production proceeds when field prices exceed the specified base price during the fixed term of the interest. This type contract is being used with increasing frequency because of the uncertainty and volatility of oil and gas prices. The nature of retained interests and their impact on the taxation of the sale and subsequent payments for production are examined. Additionally, the paper considers alternative forms of the trans- action to determine the tax consequences of each.

Retained Contingent Interests in Producing Properties. File, Richard G., Summer 1987, pp. 31‑40.

Full Cost Accounting in a New Cost Center 41
Alan Porter

From the date that the SEC published accounting rules to be followed by publicly-held companies using the full cost method, an interesting question has existed over the period of time that application of a ceiling test to capitalized costs incurred in a "new full cost center" may be deferred. In this article, Dr. Porter analyzes this problem, using as a basis for his discussion an assumed set of facts over a five-year period.

Full Cost Accounting in a New Cost Center. Porter, Alan, Summer 1987, pp. 41‑48.

Determination of Economic Interest in Coal Transactions 49
William R. Pasewark and D. Larry Crumbley

Professors Pasewark and Crumbley review the general concept of the economic interest in taxation of natural resources, comparing the published IRS interpretations with those found in judicial decisions. They examine and classify variables identified by the IRS to be used in making decisions about the existence of economic interest in coal properties identifying those variables that have been held to be most significant.

Determination of Economic Interest in Coal Transactions. Pasewark, William R. and Crumbley, D. Larry, Summer 1987, pp. 49‑68.

The Impact of the 1986 Tax Reform Act on Cost Recovery of Oil and Gas Producing Assets 69
Arthur D. Cassill

In this article Dr. Cassill presents a detailed analysis of depreciation rules under the 1986 IRC as they apply to assets used in oil and gas production. He thoroughly examines the revised ACRS system, including such topics as property that is eligible for ACRS, cost-recovery periods, cost-recovery methods, conventions, transitional rules and asset dispositions. He also discusses optional depreciation methods.

The Impact of the 1986 Tax Reform Act on Cost Recovery of Oil and Gas Producing Assets. Cassill, Arthur D., Summer 1987, pp. 69‑92.

A Methodology for Explaining Mergers and Acquisitions 93
Ahmad Etebari and S. Nanda

The wave of mergers of oil and gas producing companies in recent years has given rise to a lively debate over whether such mergers arise because of general undervaluation of oil and gas companies or result because assets of specific companies are, as argued by T. Boone Pickens, undervalued because of poor management. Etebari and Nanda propose a simple methodology for helping to determine if a specific merger is motivated by company-specific factors or/and general industry-wide causes. They apply this methodology to the takeovers of Conoco by DuPont and the acquisition of Marathon Oil Company by U. S. Steel.

A Methodology for Explaining Mergers and Acquisitions. Etebari, Ahmad; Nanda, S., Summer 1987, pp. 93‑104.

Oil and Gas Disclosures and Intermeshed Reconciliation: An Empirical Study 105
Jiunn C. Huang

Presumably supplemental disclosures required of oil and gas producing companies are intended, at least in part to provide information that will permit users to adjust for the lack of uniformity resulting from the use of both the full cost and successful efforts methods of accounting and to enhance comparability among companies. In this article Professor Huang examines supplemental disclosures by successful efforts companies and develops expense prediction models to arrive at estimates of what full cost firms' incomes would have been under the successful efforts method. Huang concludes the disclosure requirements are sufficient to allow an indirect transformation, through regression analysis, from one accounting method to another.

Oil and Gas Disclosures and Intermeshed Reconciliation: An Empirical Study. Huang, Jiunn C., Summer 1987, pp. 105‑122.

Financial Facts and Their Effect on Beta in the Oil and Gas Industry 123
P. R. Chandy and Simon Kwan

The authors examine the determinants of risk in securities of oil and gas companies. Based on a sample of 168 companies in the industry, the authors analyze the relationship between security risk and twenty independent variables. The study confirms previous studies that conclude: - Size is significantly related to risk; - Dividends are significantly negatively related to risk; - Financial leverage is directly related to risk; - Liquidity has a significant negative relation to risk; - Net profit margin is significantly negatively related to risk.

Financial Facts and Their Effect on Beta in the Oil and Gas Industry. Chandy, P. R. and Kwan, Simon, Summer 1987, pp. 123‑133.