The accounting methods of successful efforts and full cost: a study under the perspective of value relevance

Abstract

This paper aimed at analyzing the value relevance of all information developed upon the accounting methods applicable to oil companies, namely successful efforts and full cost, which differ from each other regarding the definition of which expenditures from the exploratory phase of an exploration and production project may be treated, or not, as assets. As a result from this analysis, there is this endeavor to identify which accounting method yields more relevant information for the capital market, based on the information summarized by the net profit, equity, and by the standardized discounted cash flow from the oil reserves. For such, empirical tests were conducted through the use of multiple regressions, where data from 41 companies over the period between 2005 and 2008 were used, amounting to 164 observations. The results achieved suggest that the accounting method of full cost yields higher value relevance when compared to the empirical results yielded by the accounting method of successful efforts, thus indicating that the capitalization of the total expenses from the exploration phase better summarizes the economic events inherent to the oil companies. The results are relevant for the accounting regulation process to the extent that it is under discussion in the international regulatory agency a proposal which deals exactly with the accounting rules applicable to extractive activities (IFRS 6). Furthermore, all the evidence empirically found supports the ongoing debate and the one which is to come.