DOWNLOAD THE COMPLETE PROJECT

2409 Users found this project useful

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The oil and gas industry is one of such industries that has specific accounting standards. This can be attributed to its peculiarity in terms of high capital requirement, earning volatility, regulation, type of business ownership, taxation, non-correlation between the amount of investment made and returns obtained (Wright and Hallun et al, 2008) and highly sensitive to risk price risk and foreign exchange risk.

Up until 2012 when the International Financial Reporting Standard (IFRS) was adopted by exploration companies in Nigeria, Nigerian companies in the upstream sector prepared their financial statement in line with the statement accounting standard 14 (accounting in the petroleum industry; upstream activities and SAS 17 (accounting in the petroleum industry) formulated by the Nigerian Accounting Standard Board.

By its adoption of IFRS, Nigeria joined over 100 countries that either use or have adopted t he accounting guidelines as stipulated by the International Accounting Standard Board (IASB). This will ensure harmony and easy comparison of financial statements. This is particularly useful in the oil and gas industry considering that it is one of the most global industries. The adoption of a common accounting framework also widens access to investment opportunities.

IFRS 6 applies to expenditure incurred by an entity in connection with the search for mineral resources. The standard divides upstream activities into two groups namely: exploration and evaluation activities and development activities. The standard under paragraph 9 discusses exploration and evaluation activities. Examples of expenditure that can be categorized as exploration and evaluation according to paragraph 9 are acquisition of right to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling cost, costs incurred in trying to evaluate the technical feasibility and commercial violability of extracting resources. These costs are capitalized and classified as tangible or intangible (IFRS 2011). Developing activities involves developing the results from extractive activities. This usually requires huge amount and paragraph 10 of (IFRS) 6 states that these expenditures should be categorized as intangible assets and treated as per the guideline provided in IAS 38 (intangible assets).

Accounting for the upstream sector is quite controversial and companies may choose from either the successful efforts method or full cost method. Successful effort is a method of accounting for petroleum exploration and development expenditures that permits capitalization of expenditures only a successful project while expenditures in unsuccessful wells are expensed. A drilling effort is classified as successful if it results in the extraction of economically recoverable oil and gas and classified as unsuccessful if it results I a dry hole.

On the other hand, the full cost method allows for the capitalization and amortization of all exploration and development expenditures i.e. both successful and unsuccessful efforts. The main difference between the two accounting methods is that only cost in proven wells are capitalized in the successful effort method while every cost is capitalized under the full cost method.

The research, therefore, seeks to investigate the nature of oil and gas accounting practice, its challenges and solutions excerpts Ejiroghene E. (2013) Accounting for oil and gas Reserve; implication for investors.

1.2 STATEMENT OF THE PROBLEM

The complex nature of the operations of the upstream oil and gas industry makes the oil and gas accounting more complex in nature. However, the International Financial Reporting Standards (IFRS) requires that oil and gas companies in the upstream sector prepare their financial statement in-line with the statement of accounting standards 14 (accounting in the petroleum industry; upstream activities) and SAS 17 (accounting in petroleum) formulated by the Nigerian Accounting Standard Board. This is as a result of the guidelines stipulated by the International Accounting Standard Board (IASB)
However, oil and gas accounting is made increasingly difficult by new challenges and risks such as horizontal drilling, price risk, foreign exchange risk etc. Research work into the various accounting standards needed in this particular industry have not been detailed and thorough.

This research seeks to investigate the practice of oil and gas accounting in Nigeria, understand its operation and determine what extent it has been standardized to help move the industry forward to international standards.

1.3 OBJECTIVES OF THE STUDY

The study seeks the following objectives:

1. To determine if oil and gas accounting is standardized in Nigeria.

2. To examine the challenges of oil and gas accounting in Nigeria and proffering solutions.

3. To evaluate the prospects of oil and gas accounting in Nigeria.

1.4 RESEARCH QUESTIONS

The following research questions were formulated:

1. Is oil and gas accounting standardized in Nigeria?

2. Are there challenges in oil and gas accounting in Nigeria?

3. Are there prospects for oil and gas accounting in Nigeria?

1.5 RESEARCH HYPOTHESIS

Hypotheses are usually gotten from research questions/problems and can be regarded as tentative solutions to research questions. Therefore, the researcher will test the following hypotheses:

H1:  Oil and gas accounting practice is standardized in Nigeria.

H2:  There are no challenges in oil and gas accounting in Nigeria.

H3:  Oil and gas accounting has huge prospects in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

1. It will help oil and gas companies know what relevant accounting standards they need to be up to standard in the Nigerian reporting environment.

2. it will help relevant agencies know what is expected from oil and gas companies in terms of accounting reporting.

3. It shall serve as reference material for accounting professionals and practitioners seeking more knowledge.

4. It shall serve as a basis for further study.

1.7 SCOPE OF THE STUDY

The study seeks to evaluate the impact of oil and gas accounting practice in Nigeria and Shell Nigeria was used as the case study for this research.

1.8 DEFINITION OF TERMS

Accounting: Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to relevant regulating agencies and tax collection entities.

Oil and Gas: Oil and natural gas are naturally occurring chemicals that are made up of just two elements -- carbon and hydrogen.

Accounting Practice: This is the system of procedures and controls that an accounting department uses to create and record business transactions. Accounting practice should ideally be extremely consistent, since there are a large number of business transactions that must be dealt with in exactly the same manner in order to produce consistently reliable financial statements.

IFRS: International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.

IASB: The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS Foundation.

SAS: SAS (Statistical Analysis System) is a software suite developed by SAS Institute for advanced analytics, multivariate analyses, business intelligence, data management, and predictive analytics. SAS was developed at North Carolina State University from 1966 until 1976, when SAS Institute was incorporated.

  DOWNLOAD THE COMPLETE PROJECT