By Himanshu V. Kishnadwala, Chartered Accountant
New Page 1ESSAR OIL LTD. — (31-3-2007)
6. Oil and gas exploration and development costs
The Company follows the ‘Full Cost Method’ of accounting for
its oil and gas exploration and development activities, whereby all costs
associated with acquisition, exploration and development of oil and gas
reserves, are capitalised under capital work-in-progress, irrespective of
success or failure of specific parts of the overall exploration activity within
or outside a cost centre (known as ‘cost pool’). Exploration and survey costs
incurred are held outside cost pools until the existence or otherwise of
commercial reserves are determined. These costs remain undepleted pending
determination, subject to there being no evidence of impairment. Costs are
released to its cost pool upon determination or otherwise of reserves. When any
field in a cost pool is ready to commence commercial production, the accumulated
costs in that cost pool are transferred from capital work-in-progress to the
gross block of assets under producing properties. Subsequent exploration
expenditure in that cost pool will be added to gross block of assets, either on
commencement of commercial production from a field discovery or failure. In case
a block is surrendered, the accumulated exploration expenditure pertaining to
such block is transferred to the gross block of assets. Expenditure carried
within each cost pool (including future development cost) will be depleted on a
unit-of-production basis with reference to quantities, with depletion computed
on the basis of the ratio that oil and gas production bears to the balance
proved and probable reserves at commencement of the year. The financial
statements of the Company reflect its share of assets, liabilities, income and
expenditure of the joint-venture operations, which are accounted on the basis of
available information on line-to-line basis, with similar items in the Company’s
financial statements to the extent of the participating interest of the Company
as per the various joint-venture agreement(s).
Revenue recognition :
Revenue on sale of goods is recognised when the property in
the goods is transferred to buyer for a price, or when all significant risks and
rewards of ownership have been transferred to the buyer and no effective control
is retained by the Company in respect of the goods transferred to a degree
usually associated with ownership and no significant uncertainty exists
regarding the amount of consideration that will be derived from the sale of
goods.
Revenue on transactions of rendering services is recognised,
either under the completed service contract method or under the proportionate
completion method, as appropriate. Performance is regarded as achieved when no
significant uncertainty exists regarding the amount of consideration that will
be derived from rendering the services.
