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Energy Accounting In the oil and gas industry AROs usually consist of costs to remove production equipment, remove facilities at the well site, and restore
Energy Accounting
In the oil and gas industry AROs usually consist of costs to remove production equipment, remove facilities at the well site, and restore the oilfield's surface land to its' original state before the oil and gas extraction. True False The reporting entity evaluates each asset group for impairment using the two-step approach under ASC Topic 360. First, the entity evaluates the estimated fair value using its annual reserve report and other information and evaluates how its asset group's undiscounted cash flows compare to the asset group's carrying value. If the undiscounted cash flows are less than the asset group's carrying amount, the assets are likely impaired. True False For proved properties, companies use qualitative factors and recognize the loss with a valuation allowance. True False Most oil and gas companies utilize the full cost method of accounting. True False Most companies use the Cost approach, which converts future cash flows or earnings to a single present amount, typically utilizing a discounted cash flow model. True False The cost method can be difficult in practice because it involves significant assumptions about future expected performance. True False Companies are required to perform impairment testing on a periodic basis or when events or changes in circumstances occur that indicate the carrying amount may be recoverable. True False ASC 41025 states "an entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. True False Oil, natural gas and other energy reserves are not considered long-lived assets for accounting purposes. True False Most companies do not have a policy that spells out the types of occurrences that would trigger impairment consideration, such as changes in crude oil prices, the effects of inflation and technology improvements on operating expenses, the outlook for global or regional market supply-and-demand and numerous other matters. True False Accounting Standards Codification (ASC) 410-20 describes an asset retirement obligation (ARO) as unavoidable cost associated with retiring a long-lived asset that arises as a result of either the acquisition, construction, or development of an asset. True (B) False Although most companies use the market approach to determine their fair value, regulators and auditors may also look at the income approach in determining fair value of the oil and gas properties. True False In most cases, write-downs occur when oil and gas reserves cannot be extracted economically, such as on properties where drilling hasn't started or where properties were expected to be developed based on significantly lower oil prices than are currently estimated. True False Entities compare the fair value to the asset group's carrying amount. If the fair value of the asset group is more than the carrying value, companies would write down the carrying value and recognize an impairment loss on those assets. True False the key inputs required to calculate an ARO are: cost to settle the ARO-this is the amount at which the liability could be settled in a current transaction between willing parties in an active market, Date when the ARO will be settled-this is the date when the Company expects to plug and abandon the oil or gas well. True False The initial steps needed to complete an ARO calculation are: 1) Determine the current costs to settle ARO (i.e. plug and abandon the well). To arrive at this estimate Companies can obtain a quote from an oilfield service provider, look at actual costs for a similar well that was recently plugged and abandoned, or have an estimate prepared internally with the assistance of operations personal. 2) Determine the estimated settlement date or date the well will be plugged and abandoned and calculate the future value of that liability based on inflation rate at inception of ARO. 3) Discount the future value of the ARO back to the date the liability was incurred using CARFR. True False The loss is allocated to proved properties on a pro-rata basis to the group of assets so long as the loss would not increase the carrying amount of an individual asset below the fair value, if the fair value for the individual asset is known or reasonably determinable. True False There are three methods for determining the fair value of a company's asset groups: the income approach, the market approach and the cost approach. True (B) False Unproved properties must be assessed for impairment on a periodic basis, at least annually, to determine if they have been impaired. True False The initial ARO journal entry? - Debit-Capitalized Asset Retirement Costs (ARC) - Credit- Asset Retirement Obligations (ARO) True False ASC 41030 states, the appropriate rate of interest for the cash flows being measured shall be inferred from the observable rate of interest of some other liability, and to draw that inference, the characteristics of the cash flows shall be similar to those of the liability being measured. True False Step by Step Solution
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