Question

What should be the accounting treatment of Fracking costs (Fracture Stimulation jobs) in the books/financial statements. Should this cost be capitalized or expensed out. One could argue that this depends on material addition to production etc, but in my opinion this is all relative. Is there any leverage available to treat it accordingly.  Appreciate quick guidance please.

We have invested/incurred a significant amount on fracking / hydraulic fracturing. However these were all for reasearch and evaluation purposes. All these fracking jobs failed and did not add to the reserves of the company. What are the alternative treatments available in this regard - are these situations where we can classify these costs as operating expenditures rather than capital expenditures.

Answer 1

If the fracking / hydraulic fracturing were unsuccessful, you have no many options other than charging into expenses. You may initially recognize as an asset but then again at the end of the period you will have to test it for impairment because at the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). And because the jobs failed you will have to impair the total amount recognized.