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Guide Page 1 of 1 (Impairment) : Field A Field B Field C (In Million $)

The document describes a case study on accounting for impairment of oil and gas properties. It provides assumptions about three fields - Fields A, B, and C - that experienced downward revisions in proved oil reserve estimates. The fair values of Fields A, B, and C are provided. Field B has a net book value of $10 million but a fair value of only $5 million, indicating it is impaired. The impairment loss to recognize for Field B is $5 million. The accounting entries would be to debit impairment loss and credit accumulated depreciation in Field B for $5 million, and debit deferred tax and credit income tax for $2 million.

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29 views2 pages

Guide Page 1 of 1 (Impairment) : Field A Field B Field C (In Million $)

The document describes a case study on accounting for impairment of oil and gas properties. It provides assumptions about three fields - Fields A, B, and C - that experienced downward revisions in proved oil reserve estimates. The fair values of Fields A, B, and C are provided. Field B has a net book value of $10 million but a fair value of only $5 million, indicating it is impaired. The impairment loss to recognize for Field B is $5 million. The accounting entries would be to debit impairment loss and credit accumulated depreciation in Field B for $5 million, and debit deferred tax and credit income tax for $2 million.

Uploaded by

Nico
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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GUIDE

Page 1 of 1
(Impairment)

CASE STUDY: ACCOUNTING FOR IMPAIRMENT

Assumptions

 Proved oil and gas properties and related equipment are grouped on a field basis for
impairment purposes.
 The company has 20 proved fields.
 During the current reporting period, management made downward revisions in
proved crude oil reserve estimates of three non-operated fields (Fields A, B, and C).
The downward reserve revisions are due to significantly reduced planned
development activities as a result of recent changes in regulations pertaining to the
disposal of produced water for these offshore Louisiana properties.
 Field A, B, and C have fair values of $3, $5, and $4 million, respectively (using
expected future cash flows from reserves discounted at the market's current rate of
return).

(in million $)
Field A Field B Field C
Capitalized cost of proved properties 5 20 10
Accumulated DD&A (2) (8) (3)
Decommissioning liability 0 (2) (1)
Deferred revenue for volume production
payment on Field C 0 0 (3)
Net book value 3 10 3

Is any of the fields (A, B or C) impaired? Justify your answers.

If there is an impairment, calculate the impairment loss to be recognised.

Prepare the resulting accounting entries.

Field B – 5 mil
Dr Cr
Impairment loss Accumulated depreciation in field B - 5 mil (10 mil NBV– 5 mil FV)

Dr Cr
Different taxes Income taxes - 2 mil

NBV = 16 (sum NBV Field)


FV = 12 (sum FV Field)
<4> diferenta NBV si FV
HANDOUT
Page 2 of 2
(Exploration & Evaluation)

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