IFRS IAS 36!!! The big bad COP of the accounting world drives into town on North American Natural Gas Reserves.

North American Natural Gas reserves will be under serious pressure this closing fiscal year.  For those firms with all-in FD&A costs in excess of $18/boe or $3/mmbtu the need to apply IAS 36 strictly is a certainty.

The purpose of the impairment review, which applies to all intangible and tangible oil and gas assets, indefinite life assets and goodwill, is to ascertain that the carrying value of the assets does not exceed their recoverable amount. Under IAS 36, “recoverable amount” is defined as the higher of fair value less costs to sell (FVLCTS) and value in use (VIU). If either recoverable amount exceeds the asset’s carrying value, no impairment exists and no write-down is necessary.

FVLCTS is generally recognized as a valuation based on the potential sale of an asset, i.e., the amount that would be obtained from the sale of the asset in an arm’s length transaction betweenknowledgeable willing parties less disposal costs.
VIU is defined in terms of discounted cash flow, i.e., the present value of the future cash flows to the entity generated through utilization of an asset throughout its life plus proceeds from eventual disposition. Selection of an appropriate discount rate under IAS 36 definitions is an important consideration in completing a VIU impairment test. VIU is an entity-specific value that permits consideration of synergies; however, IAS 36 is restrictive in the cash flows and other inputs that may be used in the valuation.

Principles

There are two standards that address impairment within the upstream oil and gas industry:

• IFRS 6 “Exploration for and Evaluation of Mineral Resources”, which is applicable only in respect of exploration and evaluation (E&E) assets — see Section 1, and

• IAS 36, which is applicable to intangible and tangible oil and gas assets (except E&E assets), intangible assets with an indefinite life and goodwill.