By Bush, Jim; Johnston, Daniel
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Extra resources for International Oil Company Financial Management in Nontechical Language
The importance of DD&A is that these expenses are deducted from income for federal and state income tax purposes. The depreciable life of an asset is usually determined by legislation to emulate the useful life of that asset. Table 2-3 provides examples of typical lives of oil industry assets. 29 INTERNATIONAL OIL COMPANY FINANCIAL MANAGEMENT IN NONTECHNICAL LANGUAGE Asset Category Asset Lives Intangible Drilling Costs that must be Amortized (30% of IDCs) 5 Years Vehicles and Drilling Equipment 5 Years Production Equipment and most Field Equipment Office Equipment Processing Plants 7 Years Refining Equipment 10 Years Transmission Pipelines 15 Years Buildings 30 Years Table 2-3 Typical Asset Lives for Depreciation and Amortization Cost Depletion and Percentage Depletion Depletion for tax purposes is based on the concept of the removal and sale of a wasting or depleting asset—in this case, oil and gas.
Strategic plans define long-range operational goals and broad boundaries of operation for the business. The milestones established within the strategic plan provide direction toward accomplishing these goals. A meaningful strategic plan should build a picture of a company's current and future environment. Then it should address how the business will move from the current scenario to the new scenario. Where will new exploration occur? Which resources are required? Where will new refineries be built?
Under General Accepted Accounting Principles (GAAP), assets reported on the balance sheet consist of capitalized historical costs. Earnings are recognized as reserves are produced, rather than when they are discovered or revised. Two separate systems of accounting in the industry are based primarily on this issue as it pertains to the treatment of exploration costs. The two systems are called Full Cost Accounting (FC) and Successful Efforts Accounting (SE). While revenues are typically recognized when oil or gas is sold, the fundamental difference between the FC and SE accounting systems lies in how the corresponding costs of finding reserves match the revenues.