Two potential methods of accounting for the cost of oil drilling are full cost and successful efforts. CASE 2-2 Under the fill-cost method, a drilling company capitalizes costs both for successful wells and dry Industry Accounting holes. This means it classifies all costs as assets on its balance sheet. A company charges these costs against revenues as it extracts and sells the oil. Under the successful efforts method, a company Histerical Case expenses the costs of dry holes as they are incurred, resulting in immediate charges against earn ings. Costs of only successful wells are capitalized. Many small and midsized drilling companies use the full-cost method and, as a result, millions of dollars of drilling costs appear as assets on their balance sheets. and Analhsis: The SEC imposes a limit to full-cost accounting. Costs capitalized under this method cannot exceed a ceiling defined as the present value of company reserves. Capitalized costs above the ceiling are expensed. Oil companies, primarily smaller ones, have been successful in prevailing on the SEC to keep the full-cost accounting method as an alternative even though the accounting profession took a position in favor of the successful-efforts method. Because the imposition of the ceiling rule occurred during a time of relatively high oil prices, the companies accepted it, conf dent that it would have no practical effect on them. With a subsequent decline in oil prices, many companies found that drilling costs carried as assets on their balance sheets exceeded the sharply lower ceilings. This meant they were faced with write- offs. Oil companies, concerned about the effect that big write-offs would have on their ability to con- duct business, began a fierce lobbying effort to change SEC accounting rules so as to avoid sizable