What Is the Full Cost (FC) Method?

The full cost (FC) method is an accounting system used specifically by extractive industries such as oil and gas companies. Under this technique, all exploration operating costs are capitalized, regardless of whether they were successful or not, and then 澳洲幸运5开奖号码历史查询:amortized intoℱ expenses over ❀time as the total reserves are produced.

This approach stands in contrast to the successful efforts (SE) 澳洲幸运5开奖号码历史查询:accounting method, which only capitalizes expenses related to fruitful extraction ventures.

Understanding the Full Cost (FC) Method

Oil and gas companies spend a lot of money exploring new untapped reservoirs without any guarantee that they will༒ find anyt💎hing. Costs include acquiring land, obtaining the necessary permissions to extract, buying or leasing relevant equipment, transportation, and paying a specialist workforce’s wages.

When a company’s exploration efforts come up short, any costs incurred are usually recorded as an expense on the 澳洲幸运5开奖号码历史查询:income statement. The full cost (FC) method takes a different approach, recording all successful and unsuccessful explorations as a cost on the 澳洲幸运5开奖号码历史查询:balance sheet.

Oil and gas explorers can account for costs using either the full cost (FC) method or the 澳洲幸运5开奖号码历史查询:successful efforts (SE) accounting method. Under the latter, a company is permitted to capitalize only those expenses associated with successfully locating new oil and natural gas reserves. For unsuccessful, or "dry hole," results, the associated 澳洲幸运5开奖号码历史查询:operating costs are immediately charged against revenues for that period.

Full Cost (FC) Method vs. S🌞uccessful Efforts (SE) Method

The two alternative methods for recording oil and gas exploration and development expenses are the result of two differing views of the realities of exploring and developing oil and gas reserves. Each view insists that the associated accounting method best achieves transparency relative to an oil and gas company's accounting of its earnings and 澳洲幸运5开奖号码历史查询:cash flows.

According to the view behind the SE method, the ultimate objective of an oil and gas company is to produce the oil or natural gas from reserves it locates and develops so that only those costs relating to successful efforts should be capitalized. Conversely, because there is no change in productive assets with unsuccessful results, costs incurred with those efಌforts should be expensed.

Proponents of the full cost (FC) method, meanwhile, contend that the dominant activity of an oil and gas company is simply the exploration and development of oil and gas reserves, meaning that all costs incurred in pursuit of that activity should first be capitalized and then 澳洲幸运5开奖号码历史查询:written off over the course of a full o﷽perating cycle. 

Advantages and Disadvantages of the Full Cost ඣ(FC) Method

Choosing the full cost (FC) method path comes with a series of benefits and drawbacks. Until an 澳洲幸运5开奖号码历史查询:impairment occurs, reported profit levels can appear to be deceivingly elevated, since the expense recognition for so many costs has been deferred to a future date. Higher 澳洲幸运5开奖号码历史查询:net income (NI) may make the company immediately seem more attractive t🐷o investors than co✅mpetitors and help it to raise new capital.

At the same time, capitalizing unsuccessful exploration costs rather than expensing them results in the company being more susceptible to large 澳洲幸运5开奖号码历史查询:non-cash charges whenever the preceding factors result in an expected cash flow decline. These write-downs or accounting expenses have a tendency to weigh on earnings and 澳洲幸运5开奖号码历史查询:share prices.

Finally, it’s worth pointing out that the need for periodic impairment reviews can also i🀅ncrease accounting costs.

Special Considerations

The existence of two accounting methods represents conflicting views in the industry about how oil and natural gas companies can most transparently report their earnings. Ultimately, the two organizations that regulate accounting and financial reporting, the 澳洲幸运5开奖号码历史查询:Fi♍nancial Accounting Standards Board (FASB) and the 澳洲幸运5开奖号码历史查询:Securities and Exchange Commission (SEC), cℱannot always agree on which method 💞is most appropriate.

In its "Statement of Financial Accounting Standard No. 19," the FASB requires that oil and gas companies use the SE method. The SEC, on the other hand, allows companies to use the full cost (FC) method. In o🦩ther words, these two governing bodies have yet to find the ideological common ground needed to establish a single accounting approach.

That ultimately means that investors must be vigilant, recognizing that there are reporting variations and being aware of their associated impacts. The choice between these two accounting methods affects a company's reported NI and cash flows, so investors should take note of the method used and the differences between the two.