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[Federal Register Volume 69, Number 191 (Monday, October 4, 2004)]
[Rules and Regulations]
[Pages 59130-59131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-22186]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 106]

Staff Accounting Bulletin No. 106

AGENCY: Securities and Exchange Commission.

ACTION: Publication of staff accounting bulletin.

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SUMMARY: The interpretations in this staff accounting bulletin express 
the staff's views regarding the application of FASB Statement No. 143, 
Accounting for Asset Retirement Obligations, by oil and gas producing 
companies following the full cost accounting method.

DATES: Effective September 28, 2004.

FOR FURTHER INFORMATION CONTACT: Cathy J. Cole or John W. Albert, 
Office of the Chief Accountant (202) 942-4400 or Leslie A. Overton, 
Division of Corporation Finance (202) 942-2960, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-1103.

SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission, nor are they 
published as bearing the Commission's official approval. They represent 
interpretations and practices followed by the Division of Corporation 
Finance and the Office of the Chief Accountant in administering the 
disclosure requirements of the Federal securities laws.

    Dated: September 28, 2004.
Margaret H. McFarland,
Deputy Secretary.

PART 211--[AMENDED]

0
Accordingly, part 211 of title 17 of the Code of Federal Regulations is 
amended by adding Staff Accounting Bulletin No. 106 to the table found 
in subpart B.

    Note: The text of SAB 106 will not appear in the Code of Federal 
Regulations.

Staff Accounting Bulletin No. 106

    The staff hereby adds Section 4 to Topic 12-D of the staff 
accounting bulletin series. Topic 12-D.4 provides guidance regarding 
the interaction of Statement of Financial Accounting Standards No. 143, 
Accounting for Asset Retirement Obligations, with the full cost 
accounting rules in Article 4-10 of Regulation S-X.

Topic 12: Oil and Gas Producing Activities

* * * * *

D. Application of Full Cost Method of Accounting

* * * * *
4. Interaction of Statement 143 \1\ and the Full Cost Rules
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    \1\ Statement of Financial Accounting Standards No. 143 
(Statement 143), Accounting for Asset Retirement Obligations, is 
effective for financial statements issued for fiscal years beginning 
after June 15, 2002.
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a. Impact of Statement 143 on the Full Cost Ceiling Test
    Facts: A company following the full cost method of accounting under 
Rule 4-10(c) of Regulation S-X must periodically calculate a limitation 
on capitalized costs, i.e., the full cost ceiling. Prior to adopting 
Statement 143, in calculating the full cost ceiling a company reduced 
the expected future revenues from proved oil and gas reserves by the 
estimated future expenditures to be incurred in developing and 
producing such reserves discounted using a factor specified in the 
rule. While expected future cash flows related to the asset retirement 
obligation (ARO) were included in the calculation of the ceiling test, 
no associated asset was recorded. Under Statement 143, a company must 
recognize a liability for an asset retirement obligation at fair value 
in the period in which the obligation is incurred, if a reasonable 
estimate of fair value can be made. The company also must initially 
capitalize the associated asset retirement costs by increasing long-
lived oil and gas assets by the same amount as the liability. Any asset 
retirement costs capitalized pursuant to Statement 143 are subject to 
the full cost ceiling limitation under Rule 4-10(c)(4) of Regulation S-
X. If after adoption of Statement 143, a company were to continue 
calculating the full cost ceiling by reducing expected future net 
revenues by the cash flows required to settle the ARO, then the effect 
would be to ``double-count'' such costs in the ceiling test. The assets 
that must be recovered would be increased while the future net revenues 
available to recover the assets continue to be reduced by the amount of 
the ARO settlement cash flows.
    Question 1: After adopting Statement 143, how should a company 
compute the full cost ceiling to avoid double-counting the expected 
future cash outflows associated with asset retirement costs?
    Interpretive Response: After adoption of Statement 143, the future 
cash outflows associated with settling AROs that have been accrued on 
the balance sheet should be excluded from the computation of the 
present value of estimated future net revenues for purposes of the full 
cost ceiling calculation.2 3
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    \2\ If an obligation for expected asset retirement costs has not 
been accrued under Statement 143 for certain asset retirement costs 
required to be included in the full cost ceiling calculation under 
Rule 4-10(c)(4), such costs should continue to be included in the 
full cost ceiling calculation.
    \3\ This approach is consistent with the guidance in paragraph 
12 of Statement 143 on testing for impairment under Statement of 
Financial Accounting Standards No. 144, Accounting for the 
Impairment or Disposal of Long-Lived Assets. Under that guidance, 
the asset tested should include capitalized asset retirement costs. 
The estimated cash flows related to the associated ARO that has been 
recognized in the financial statements are to be excluded from both 
the undiscounted cash flows used to test for recoverability and the 
discounted cash flows used to measure the asset's fair value.
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    Question 2: What disclosures should the company provide on the 
interaction of Statement 143 and the full cost rules?
    Interpretive Response: In order to inform financial statement users 
on the interaction of Statement 143 and the full cost rules, a company 
following such rules is expected to provide appropriate disclosures in 
the financial statement footnotes and Management's Discussion and 
Analysis explaining in detail how

[[Page 59131]]

the adoption of Statement 143 impacts its accounting for oil and gas 
operations. This disclosure is expected to address each area of 
accounting that is impacted or expected to be impacted and should 
specifically address each way that the company's application of full 
cost accounting has changed as a result of adoption of Statement 143. 
These disclosures and discussions should include, but are not limited 
to, how the company's calculation of the ceiling test and depreciation, 
depletion, and amortization are affected by the adoption of Statement 
143.
b. Impact of Statement 143 on the Calculation of Depreciation, 
Depletion, and Amortization
    Facts: Regarding the base for depreciation, depletion, and 
amortization (DD&A) of proved reserves, Rule 4-10(c)(3)(i) of 
Regulations S-X states that ``[c]osts to be amortized shall include (A) 
all capitalized costs, less accumulated amortization, other than the 
cost of properties described in paragraph (ii) below; \4\ (B) the 
estimated future expenditures (based on current costs) to be incurred 
in developing proved reserves; and (C) estimated dismantlement and 
abandonment costs, net of estimated salvage values.'' Statement 143 
requires that upon initial recognition of an ARO, the associated asset 
retirement costs be included in the capitalized costs of the company. 
Therefore, subsequent to the adoption of Statement 143, the estimated 
dismantlement and abandonment costs described in (C) above may be 
included in the capitalized costs described in (A) above, at least to 
the extent that an ARO has been incurred as a result of acquisition, 
exploration and development activities to date. Future development 
activities on proved reserves may result in additional asset retirement 
obligations when such activities are performed and the associated asset 
retirement costs will be capitalized at that time.
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    \4\ The reference to ``cost of properties described in paragraph 
(ii) below'' relates to the costs of investments in unproved 
properties and major development projects, as defined.
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    Question: Following the adoption of Statement 143, should the costs 
to be amortized under Rule 4-10(c)(3) of Regulation S-X include an 
amount for estimated dismantlement and abandonment costs, net of 
estimated salvage values, that are expected to result from future 
development activities?
    Interpretive Response: Yes. To the extent that estimated 
dismantlement and abandonment costs, net of estimated salvage values, 
have not been included as capitalized costs in the base for computing 
DD&A because they have not yet been capitalized as asset retirement 
costs under Statement 143, compliance with Rule 4-10(c)(3) of 
Regulation S-X continues to require that they be included in the base 
for computing DD&A. Companies should estimate the amount of 
dismantlement and abandonment costs that will be incurred as a result 
of future development activities on proved reserves and include those 
amounts in the costs to be amortized.
c. Transition
    Question: When will registrants be expected to comply with the 
accounting and disclosures described in this bulletin?
    Interpretive Response: All registrants are expected to apply the 
accounting and disclosures described in this bulletin prospectively as 
of the beginning of the first fiscal quarter beginning after the 
publication of this bulletin in the Federal Register. If a registrant 
files financial statements with the Commission before applying the 
guidance in this bulletin, disclosures similar to those described in 
Staff Accounting Bulletin Topic 11-M should be provided.

[FR Doc. 04-22186 Filed 10-1-04; 8:45 am]
BILLING CODE 8010-01-P
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