According to this article Cairn Energy plc has had to change its accounting policies in order to comply with IFRIC (International Financial Reporting Interpretations Committee)
requirements. Apparently ‘analysts’ (who and how many?) believe that this could reduce the company’s profits by around £100m.
1 What is the effect on the profit and loss account if dry wells are grouped with ‘successfuleffort’
wells and then the combined amount is depreciated?
2 How far do you agree with the principle of ‘successful efforts’ accounting that all spending on dry well costs should be ‘expensed through the income statement’?
3 Is Cairn correct in arguing that the changed accounting method would have no impact on the company’s cash flow?
4 Discounting the jargon, what basic accounting dilemma is this article highlighting?