Chief Financial Officer
Company
Address
Re: Company
File No.: xxx-xxxxx
Dear Chief Financial Officer,
As a producer of oil and gas, you are subject to the disclosure requirements of FASB Statement No. 69, Disclosures about Oil and Gas Producing Activities (FAS 69). We have recently become aware of questions that have arisen with
respect to the required disclosures of FAS 69 upon the adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations (FAS 143). After consideration by our staff, including discussions with the FASB staff, and to maintain comparability among oil and gas companies in preparing the FAS 69 disclosures for their 2003 annual report, we offer the following observations about the required disclosures that you should consider in preparing your Form 10-K/KSB.
Among other things, FAS 143 requires the recognition of a liability for a legal obligation associated with the retirement of a long-lived assets that results from the acquisition, construction, development, and (or) the normal operation of a long-lived asset. The initial recognition of a liability for an asset retirement obligation increases the carrying amount of the related long-lived asset by the same amount as the liability. In periods subsequent to initial measurement, period-to-period changes in the liability are recognized for the passage of time (accretion) and revisions to the original estimate of the liability. Additionally, the capitalized asset retirement cost is subsequently allocated to expense using a systematic and rational method over its useful life.
The questions raised concern how recognition of a liability for an asset retirement obligation and the related depreciation of the asset and accretion of the liability under FAS 143 impact the required disclosures under paragraphs through 34 of FAS 69. We note that FAS 143 did not amend FAS 69.
FAS 69 - paragraphs 18-20, Disclosures of Capitalized Costs Relating to Oil and Gas Producing Activities (Capitalized Costs)
We believe the reported carrying value of oil and gas properties should include the related asset retirement costs and accumulated depreciation, depletion and amortization should include the accumulated allocation of the asset retirement costs since the beginning of the respective property's productive life.
The Basis of Conclusions to FAS 143 discusses the Board's conclusion regarding the capitalization of asset retirement costs by stating "a requirement for capitalization of an asset retirement cost along with a requirement for the systematic and rational allocation of it to expense achieves the objectives of (a) obtaining a measure of cost that more closely reflects the entity's total investment in the assets and (b) permitting the allocation of the cost, or portions thereof, to expense in the periods in which the related asset is expected to provide benefits." Excluding net capitalized asset retirement costs from the capitalized costs disclosure would essentially result in a presentation of capitalized costs that is not reflective of the entity's total investment in the asset, which is contrary to one of the objectives of FAS 143.
FAS 69 - paragraphs 21-23, Disclosures of Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities (Costs Incurred)
We believe an entity should include asset retirement costs in its Costs Incurred disclosures in the year that the liability is incurred, rather than on a cash basis.
Paragraph 21 requires an entity to disclose Costs Incurred during the year whether those costs are capitalized or charged to expense. We believe FAS 69 clearly indicates that the disclosure was intended to be on an accrual, rather than a cash, basis. Additionally, FAS 143 requires an entity to recognize the asset retirement costs and liability in the period in which it incurs the legal obligation - through the acquisition or development of an asset or through normal operation of the asset. The cost of an asset retirement obligation is not incurred when the asset is retired and the obligation is settled. Accordingly, an entity should disclose the costs associated with an asset retirement obligation in the period in which that obligation is incurred. That is, the Costs Incurred disclosures in a given period should include asset retirement costs capitalized during the year and any gains or losses recognized upon settlement of asset retirement obligations during the period.