Exhibit 7 depicts the typical exploration and production operating cycle, beginning with exploration activities, through realization of cash from customers, and beyond, to the payment of royalties from cash collections that are often due to landowners and/or host governments.

Under both IFRS and US GAAP, companies in the oil and gas industry recognize revenue after the product has been shipped. In addition, under both sets of standards, companies may capitalize some acquisition, exploration, and development costs, but extraction costs are expensed as they are incurred. Thus, extraction costs are expensed during the period between discovery and the time of sale.

1. Why is the revenue recognition accounting standard in the oil and gas industry characterized as conservative?
2. Why is the expense recognition accounting standard in the oil and gas industry characterized as conservative?

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EXHIBIT 7 The Extractive Industries Production Cycle Pay Royalties to Landowner Collect Funds from Customer Bill Customer Ship Products Exploration Discovery Extraction Receive Order from Customer