Date: September 20, 2016

Presented here is Exxon Corporations comments on RRA in its 1979 10-K:

The following information departs significantly from prior reporting of historical information and attempts to portray 1978, 1979 and future activities of Exxon in oil and gas producing in a highly arbitrary fashion. Therefore, Exxon believes it should warn that the remaining data set forth in this section, for reasons further explained here, are not to be interpreted as necessarily representing current profitability or amounts which Exxon will receive, or costs which will be incurred, or the way oil and gas will be produced from the respective reserves. The arbitrary 10 percent discount rate used in the determination of the present value of estimated future net revenues represents neither a cost of capital nor a borrowing rate, and, additionally, does not necessarily reflect political risks. Actual future selling prices and related costs, development costs, production schedules, reserves and their classifications, and other matters may differ significantly from the data portrayed or assumed. The requirement to publish such information regarding future activities is part of the SECs attempted development of a new method of accounting for oil and gas producing activities called Reserve Recognition Accounting (RRA). RRA would depart significantly from historical accounting practices. Exxon has taken exception to the SECs proposal and has indicated the following major concerns with the concept of RRA: Financial reporting for the oil and gas producing segment of the oil industry would include forecasts of future production rates and future investments in an estimation of potential cash flows. Such reporting would be completely different from the historical cost reporting of the remainder of the oil industry and of all other industries. The difficulties and uncertainties of estimating the volumes of oil and gas reserves and their production rates appear not to have been appropriately considered, making comparability between companies, and segments thereof, very difficult at best. Quantification of reserves is far from a precise science. A variety of methods and techniques are used to estimate reserves and the answers obtained are subject to wide fluctuations because they are dependent on judgmental interpretations of geologic and reservoir data. The same is true of estimates of future production schedules. While, in managements judgment, the quantities reported herein are reasonable, there is no methodology or certification process in place now, or likely to be in place in the near future, which would permit independent verification of such volumes and rates.

The Regulations prescribe that future net revenues be determined by applying December 31, 1979, prices and costs to the projected production schedules for Exxons net proved oil and gas reserves as of December 31, 1979,. The reserves exclude probable reserves as well as reserves in the Canadian Athabasca Oil Sands. In Exxons opinion, applying these arbitrary assumptions to the estimated future production schedule for the various categories of reserves can only lead to financial reporting which is more likely to mislead than inform. In addition to these general areas of concern, the following cautions should be noted when reviewing the information: Care should be exercised when comparing the Net Revenues from Producing Oil and Gas in 1978 and 1979 with Future Net Revenues. The 1978 and 1979 information, in accordance with the Regulations, was determined by subtracting only Production (Lifting) Costs from the gross revenues. Future Net Revenues, in accordance with the Regulations, were determined by subtracting both Development Costs and Production (Lifting) Costs from the gross revenues. Care should also be exercised when using the net revenue data for 1978, 1979 and the future since all applicable costs have not been deducted from gross revenue. The Regulations make no provision for deducting exploration expenses, amortization of acquisition costs (bonus payments), depreciation of capitalized production investments, purchase costs of royalty oil and gas, income taxes, or other payments to governments. The Future Net Revenues and the present value of such revenues, as computed under the Regulations, present neither a true future value nor present value for the reasons mentioned above in addition to the effect of excluding income taxes from the calculation. In view of Exxons concern that the absence of this considerable, and in some cases major, cost from the calculation would cause the information to be seriously misunderstood and misleading, particularly in the case of some foreign operations, the undiscounted and present value information presented here is shown on both a beforetax and after-tax basis.

Required: Evaluate the merits of Exxons criticism of RRA.