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HMRC internal manual

Oil Taxation Manual

Oil Industry accounting: the successful efforts accounting method

This is defined in SORP as:

  • “A method of accounting for oil and gas exploration and development activities whereby exploration expenditure which is either general in nature or relates to unsuccessful drilling operations is written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves are capitalised, and are depreciated over the lives of these reserves. The success or failure of each exploration effort is judged on a well-by-well basis as each potentially hydrocarbon-bearing structure is identified and tested.”

All pre-licence, licence acquisition, exploration and appraisal costs should initially be capitalised (including those costs which may fall to be written off in the same accounting period) in well, field or general exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and development phases should then be written off unless commercial reserves are established or the determination process is incomplete.

Costs incurred prior to license acquisition and costs of other exploration activities not specifically directed to an identified structure should be written off in the period.

Exploration and appraisal costs should be accumulated on a well-by-well basis pending evaluation. Costs should be written off as abortive on completion of a well unless drilling indicates the existence of hydrocarbon reserves and there is a reasonable prospect that these reserves are commercial. After appraisal, if commercial reserves are found then the net capitalised costs incurred in discovering the field should be transferred into a single field cost centre. SORP at paragraph 56 provides rules limiting the length of time the determination process may last.


Paragraph 82 describes when an impairment test should be carried out. This is when events or changes in circumstances indicate that the net book amount of expenditure within each cost centre, less any provisions for decommissioning costs and deferred production or revenue-related taxes, may not be recoverable from the anticipated future net revenue from oil and gas reserves attributable to the company’s interest in that field. Since, under successful efforts accounting, the field is the recorded asset for Companies Act purposes, the test should generally be carried out on a field-by-field basis.

The SORP provides rules for calculations of possible impairments.


Successful effort companies must disclose:

  • exploration and appraisal expenditure, pending evaluation, as “intangible assets - exploration expenditure”, and
  • when commercial reserves are established, the reclassification from “intangible assets - exploration expenditure” to “tangible assets” of such directly related expenditure.