Accounting Treatment of Drilling and Development Expenses Between the International Reporting Standard Ifrs 6 and the Unified Accounting System (A Comparative Study)

Authors

DOI:

https://doi.org/10.26668/businessreview/2023.v8i5.1601

Keywords:

Drilling and Development Expenditures, IFRS 6, Unified Accounting System

Abstract

Purpose: The purpose of this research is to identify the accounting treatments for drilling and development expenses in the Iraqi oil companies according to the unified accounting system, and to indicate the extent of compatibility and difference in the treatment of drilling and development expenses between the unified accounting system and the International Financial Reporting Standard IFRS 6.

 

Theoretical framework: The oil industry includes many activities and operations, starting from research and exploration operations through drilling and development operations, and ending with extracting oil from the well and delivering it to the consumer or transferring it to the refining industry. During these activities expenses are realized that should be accounted for in a way that ensures compliance with international standards for the oil industry as Iraq particularly witness a great development in the oil industry represented in dealing with foreign oil investment companies which means the need to standardize accounting treatments for the oil industry between local oil companies and foreign oil companies.

 

Design/methodology/approach: The research used comparative descriptive approach by comparing the accounting treatment of drilling and development expenses under the International Financial Reporting Standard IFRS 6 and the unified accounting system applied in Iraq represented by the Basra Oil Company and the Iraqi Drilling Company.

 

Findings:  One of the most important findings of the research is the concord of the method used by the Basra Oil Company in capitalizing drilling expenses at the expense of wells under operation with the philosophy of the total cost method approved by the standard. However, this agreement is conditional on the absence of dry wells. If the drilling operations resulted in the presence of non-productive or productive wells but in uneconomical quantities, the treatment becomes not compatible with the standard.

 

The practical and social implications: The Basra Oil Company treats all development (maintenance) expenses as operating expenses that are closed at the end of the year in the income statement, this it is not consistent with the philosophy of Standard No. 6 which states that development expenses that aim to maintain the production capacity of the well should be treated as operating expenses, but if development expenses that aim to increase the production capacity of the well must be capitalized on the cost of the well.

 

Originality/ Value: The importance of the research comes from the need to work on applying the requirements of the International Financial Reporting Standard IFRS 6 in accounting treatments for oil expenditures, including drilling and development expenses in Iraqi oil companies.

Downloads

Download data is not yet available.

References

Abdel-Wahhab, Ibrahim Taha, 2006, “Petroleum Accounting According to Global and Local Systems and International Quality Standards,” First Edition, Mansoura University, Modern Library for Publishing and Distribution, Arab Republic of Egypt.

Abdo, Hafez, 2016, “Accounting for Extractive Industries: has the IFRS 6 harmonized accounting practices by extractive industries?” Australian Accounting Review, CPA Australia, vol. 26. https://doi.org/10.1111/auar.12106.

Abu Nassar, Muhammad and Humaidat, Juma, 2013, “International Financial Accounting and Reporting Standards - Theoretical and Practical Aspects”, third edition, National Library, Amman, Jordan.

Acheampong, Atta,2013, "Comparative analysis of full cost and successful efforts accounting methods used by upstream oil and gas companies and its impact on firm’s risk. A study of selected upstream oil and gas companies in the US", Master’s Thesis .Oil and gas accounting, Faculty of management, University of Aberdeen.

Al-Ani, Safaa Ahmed, Abrheem, Muhammad Abdullah and Khudair, Reem Mohsen,2017, “The Impact of Adopting International Accounting Standards on the Accounting System of Oil Companies in Iraq,” a research presented to the International Scientific Conference, College of Administration and Economics, University of Karbala.

Al-Ghabban, Faiza Ibrahim and Mahmoud, Thaer Sabri, 2007, “Specialized Accounting Systems”, Al-Dhakira Library, Baghdad, Iraq.

Al-Ghazwi, Hussein Abdel-Jalil, 2011, “Modern Trends in Specialized Accounting,” an unpublished doctoral thesis, Faculty of Administration and Economics, The Arab Academy in Denmark.

Al-Hassan, Adel Tower Ahmed,2015, “A proposed framework for the accounting system and cost accounting problems in some oil companies - a field study of a sample of companies operating in oil in Sudan,” a published doctoral dissertation, Sudan University of Science and Technology.

Al-Jaarat, Khaled Jamal,2008, “International Financial Reporting Standards IFRS & IAS 2007”, first edition, Ithraa for Publishing and Distribution, Amman, Jordan.

Al-Nawas, Rafid Obaid and Al-Mahaini, Muhammad Khaled, 2018, “Accounting and auditing in oil and gas companies according to international standards,” first edition, MPG International, London.

Al-Rawi, Abd al-Khaleq Mutlaq, 2011, “Oil and Gas Accounting,” first edition, Dar Al-Yazuri Scientific for Publishing and Distribution, Amman, Jordan.

Al-Tamimi, Firas Qassem Majeed,2014, “The Impact of Oil Licensing Contract Costs on the Financial Statements of the South Oil Company in Light of International Standards for the Oil Industry,” Unpublished Master’s Thesis, College of Administration and Economics, University of Basra.

Cai, Francis & Wang, Hannah, 2010, “The Effect of IFRS Adoption On Global Market Integration”, International Business & Economics Research Journal, Vol. 9, No. 10. https://doi.org/10.19030/iber.v9i10.636.

El-Toby, Bushra Hassan Mohamed, Dakheel Kareem ,Akeel& Abd, Waad Hadi , 2022," THE possibility of applying international accounting standards in the public sector (IPSAS) in the Iraqi government accounting system : exploratory research for the opinions of accountants at the university of AL-Muthanna" , International Journal of professional BusinessReview,Vol.7No.2,Doi:https://doi.org/10.26668/businessreview/2022.v7i2.0461.

Erhomosele, Osareme& Rahim, Lukman Jimoh, 2021, "Full Cost Vs Successful Efforts Accounting: A Systematic Review", International Journal of Academic Research in Accounting Finance and Management Sciences Vol. 11, No. 3. DOI: 10.6007/IJARAFMS/v11-i3/10548.

Hameedi, karrar saleem,union,ali hilal,talab,hassnain & almagtome, akeel hamza,(2022), "IFRS adoption, cost of equity and firm value: evidence from Iraq”, International Journal of professional Business Review, Vol. 7 No. 3, Doi: https://doi.org/10.26668/businessreview/2022.v7i3.0602

Ibraheem, Mahmoud and Al-Qutini, Khaled, 2005, “Oil Accounting”, Directorate of University Books and Publications, Aleppo, Syria.

Jamil, Sinan Zuhair Muhammad, 2007,“The Accountancy Processing of Under Construction Projects – Excavations and Survey Expenses 1283 in Petrol Units With The Application on Northern Oil Company,” a research submitted to the Rafidain Development Journal, College of Administration and Economics, University of Mosul, Volume 29, Number 86. DOI: 10.33899/tanra.2007.161701.

Khalawi, Sattar Jaber & Muhaisen, Hoda Owaid,2019, “Effect of cost recovery in service contracts for oil licensing tours,” a research submitted to the Journal of Al-Kut University College, College of Administration and Economics, Wasit University, Volume 1, Number 31. ISSN: 1999 -558x.

Mayanja, Lugemwa Michael,"2018, Earnings quality of the successful efforts and full cost accounting methods in the oil and gas industry", Thesis submitted for the degree Doctor of Philosophy in Accountancy at the North-West University.

Mushjl, Hani Hameed& Ageely, Ammar Raheem ,"2019,The Extent of possibility to which IFRS 6 is applicable in Iraqi crude oil production companies", Al Kut Journal of Economics Administrative Sciences, College of Administration & Economics ,Wasit University, VOL. 11, NO. 34. ISSN: 1999-558X .

The Office of Financial Supervision, 2011, Unified Accounting System, second edition, Baghdad.

Yahya, Taghreed Najeeb, 2011, “Evaluation of Accounting Treatments for the Expenditures of the Oil Industry Stages - Applied Research in the North Oil Company,” unpublished Ph.D. thesis, Higher Institute for Accounting and Financial Studies, University of Baghdad.

Downloads

Published

2023-05-05

How to Cite

AL-Hilaly, Z. J. S. (2023). Accounting Treatment of Drilling and Development Expenses Between the International Reporting Standard Ifrs 6 and the Unified Accounting System (A Comparative Study). International Journal of Professional Business Review, 8(5), e01601. https://doi.org/10.26668/businessreview/2023.v8i5.1601