The following is a discussion of the recommended treatment of oil and gas activities as per FAS 19. (Note that this treatment is recommended, but not required.)
The costs of the special types of assets used in oil and gas producing activities are capitalized when incurred. Some examples include
Mineral interests in properties
Unproved—Properties with no proved reserves
Proved—Properties with proved reserves
Wells and related equipment and facilities
Support equipment and facilities
Uncompleted wells, equipment, and facilities
Costs associated with drilling exploratory wells or exploratory‐type stratigraphic wells are capitalized until it is determined that the well has proved reserves at which time the capitalized costs are reclassified to wells and related equipment and facilities. If, however, proved reserves are not found, the capitalized drilling costs of the well are charged to expense. When drilling is completed if it is determined that the well has reserves but those reserves cannot be classified as proved, the reporting enterprise will continue to capitalize drilling costs if (1) the reserves found are sufficient to justify completion of the well as a producing well and, (2) the reporting enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project.
These costs are amortized as reserves are produced and, along with lifting (production) costs, are classified as costs of production. Periodically, ...