Assessing and Accounting for Impairment
In oil and gas sector, exploration and production companies may participate in the impairment of their successful-effort method or also call the full-cost method. This paper will talk about assessing and accounting for Impairment, The timing of impairment testing and indicators, and also the measurement of impairment loss. An essential difference amongst the two approaches comes in through the way they are handling expenses associated with the successful and unsuccessful exploration project. The technique used will differently account for the impairment of the assets. LaTourrette &Tom, (2003), using the successful-efforts method, expenses connected to the successful identification of new Oil and Gas assets can be exploited while expenses related to unsuccessful exploration exertions would be immediately accounted for. Alternatively, the full-cost method allows Exploration and Production companies to utilize almost all expenses interrelated to the exploration and locality of different Oil and Gas assets nonetheless of whether the determinations were successful or not (Wright, 2017).
Factors that the Exploration and Production Company should consider. In the course of assessing and Accounting for Impairment of oil and gaz controlled by successful- efforts methods and full-cost method. The timing of impairment testing and indicators, measurement of an impairment loss, the level at which impairment is assessed, and recognition of an impairment loss (Wright, 2017).
Using the successful-efforts method, an Exploration and Production company assess the timing of impairment testing and indicators. Mostly, this factor consists of determining when circumstances specify that the carrying value of the company’s Oil and Gas assets might not be recovered back. Under the full-cost method, a full-cost upper limit assessment should be executed on verified assets every recording dated. Further, unproved assets should occasionally be calculated for annexation in the whole cost (Nichols, 2011).
In the measurement of impairment loss, when the company who appeal for the successful-efforts method will test an asset group for impairment by manipulating the two-step procedure. Firstly, the company will execute a currency flow test on recoverability by making a comparison of the asset which is not discounted with the existing asset price. LaTourrette ;Tom, (2003), the current value of the asset which is not recovered, if it surpasses the amount of the cash flow which is not discounted that are predictable to appear from the use and eventual disposition of the asset group. The full-cost accounting method obliges to a write-down of the whole-cost asset when disposable unamortized cost less concerned overdue revenue excises surpass; the discounted cash flows from verified assets the revenue excise causes associated to the variance amongst the book source and excise source of the assets involved (Nichols, 2011).
To be able to determine the level at which an impairment should be assessed, the successful-efforts method of the company that applies should be consider whether the property is ascertained or untested. Ascertained assets should be assembled at the last level by which there are recognizable cash flows that are not dependent on the cash flows of other groups of assets. Wright (2017), untested assets should be assessed on an asset-by-asset basis or, if procurement costs are not substantial, by a suitable configuration. Companies which uses the full-cost method mostly create cost cores on a country-by-country basis and assess and account impairment at the cost-core level.
An impairment loss for a proved Oil and Gas asset group will decrease only the carrying value of the group’s long-term assets. The impairment loss ought to be allotted to the long-term assets of the group using the virtual carrying quantities of the assets.Assets tend to lose values overtime due to lifespan.That concept is referred to as depreciation and relates to impairment, which is also a loss of value of assets due to different factors. So, the loss assigned to an individual long-term asset of the group nil not to lessen the asset’s bringing principles to less than its sensible amount if the cost can be determined short of unpardonable rate and exertion. Nichols, (2011), the untested assets, if the outcome of the assessment and accounting designate impairment, a loss should be recognized by providing a valuation allowance. Covered by the successful-efforts method, companies are interdicted from reversing markdown. When identifying an impairment loss, companies that join the full-cost process should be reduce at the carrying value of the full-cost asset pool and script the excess on top of the ceiling as a charge to expense in continuing operations. The full-cost method prohibit companies from reversing markdown comparing to the successful-efforts method, (Wright, 2017).
To sum it up, at the end of every reporting period the assets has the impairments. Therefore, it is necessary to test the goodwill for the impairment yearly, and the assets should be reflected for impairment in the total cost, the company can either use the successful-efforts method or full-cost method to assess and account for the impairment of the assets. It is essential to account for impairment since it portrays the decrease in value of an asset in the Oil and Gas Company (Wright, 2017).
Assessing and Accounting for Impairment