Replacement Cost Accounting Of Petroleum Reserves Some Engineering Considerations
Authors: Batt Robert 
Published: December 2007

Abstract
The Securities and Exchange Commission has issued Accounting Series Release No. 190 which requires disclosure of replacement cost information related to the productive capacity of the firm. Determining the productive capacity of the firm. Determining the replacement cost of petroleum reserves is a problem that will be facing accountants at the end of 1977. They will call upon petroleum engineers to assist them in the preparation of the required material, which may require substantial effort by the engineering staffs of the larger companies.
Recommended approaches to this disclosure establish certain constraints that permit a workable interpretation of ASR 190 for petroleum reserves. line assets to be replaced will be limited to proven petroleum reserves. The replacement value will be determined by the discounted future cash flow of the properties.

Introduction
The Securities and Exchange Commission (SEC) has issued Accounting Series Release No. 190 (ASR 190) which requires disclosure of replacement cost information related to the productive capacity of the firm. This disclosure is to take the form of footnotes or an additional section to the firm's financial statements. Disclosure requirements apply to all firms whose total inventories and gross property, plant and equipment are more than $100 million and represent more than 10% of total assets. Approximately 50 petroleum firms will be affected by this requirement.
Due to the unique nature of petroleum reserves, the SEC granted a one year delay in implementing the disclosure requirement in this area. For these assets, the rule will be effective with financial statements released after December 25, 1977.
Although the disclosure requirements are an accounting problem, engineering realities must be considered. Implementation of the SEC requirements will result in demands on petroleum engineers to assist in the preparation of this data. It is important that preparation of this data. It is important that engineers know what is intended by this disclosure and the limits that the accountants have placed on the calculation of the disclosure statement. The interdisciplinary nature of this task makes it imperative that both the accountants and engineers involved recognize the limits of each discipline.

THE ACCOUNTING PROBLEM
The accountants for large corporations have been given the requirement that supplemental disclosure of specific replacement amounts be included in the financial statements filed with the SEC. For all assets other than mineral assets, this requirement was implemented with 1976 financial statements, i.e. those filed during 1977. The purpose of this requirement, as stated in ASR 190 was:
"These proposals were designed to enable investors to obtain more relevant information about the current economics of a business enterprise in an inflationary economy than that provided solely by financial statements provided solely by financial statements prepared solely on the basis of historical cost…" prepared solely on the basis of historical cost…" This disclosure requirement is mainly in response to the high inflation rate of recent years and was not directed at the petroleum industry.
This requirement presents special problems when applied to petroleum reserves. Traditional historical cost approaches to the reporting of petroleum reserves on corporate balance sheets do not necessarily have a strong relationship to "value". Historical costs are strongly influenced by "success", a phenomenon that is not generally present with other types of assets. The relationship between expenditures and reserves discovered is not very precise. In the accountant's view, productive assets as they apply to mineral asset, productive assets as they apply to mineral asset, represent the historical costs of discovering and developing the reserves. The actual reserves themselves are not considered in this framework.