Watch for oil companies to register asset increases on their balance sheets. The SEC has announced a new rule that will allow companies to book unproven, but expected, oil reserves on their books, as assets. Previously, oil companies could only declare oil assets that they’d actually proven. As WSJ notes, oil companies had complained that the old accounting rules didn’t take into account new technology that might indicate the presence and volume of oil without having actually proven it:
Here’s how the old rule was worded:
The definition of proved reserves states that reservoirs are considered proved if “economic producibility is supported by either actual production or conclusive formation test.” May oil and gas reserves be considered proved if economic producibility is supported only by core analyses and/or electric or other log interpretations?
The exact rule change has yet to be announced, but the intent is there:
“In the more than a quarter century since the SEC last reviewed its rules in this area, there have been significant changes in technology that have increasingly limited the usefulness of current disclosures to the market and investors,” said SEC Chairman Christopher Cox. “These updates to the SEC rules will help ensure more meaningful and comprehensive disclosure of information that, even though it does not appear on a company’s balance sheet, is of significance to investors in making informed investment decisions.”
The other change is that companies will now be allowed to value reserves at trailing-twelve month prices, rather than end-of-year prices. That should smooth things out, and the idea is to make year-on-year comparisons easier.
We’re not yet sure how big the impact of this will be — we’ll be on the lookout for reports — but it goes to show the problem with objective accounting rules by political bodies. If accounting for something as tangible as oil reserves can’t be done effectively, then it’s no surprise financial accounting is so vexing.