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placed in service in 1981 and 1982 under the Accelerated Cost
Recovery System (ACRS) of section 168.
Exxon’s Financial Reporting Relating to
Estimated Prudhoe Bay DRR Costs
In 1977, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 19,
“Financial Accounting and Reporting by Oil and Gas Producing
Companies” (FAS 19),4 which required oil and gas companies, for
financial income statement reporting purposes, to take estimated
future DRR costs into account in determining amortization and
depreciation rates. For financial accounting purposes, oil and
gas companies have estimated such costs in a variety of ways.
Where estimates of DRR costs exceed estimated salvage value, oil
and gas companies, including Exxon, have reported and claimed,
for financial income statement reporting purposes, depreciation
4 Paragraph 37 of FAS 19 provides with regard to fixed DRR
obligations the following income statement accounting for DRR:
Estimated dismantlement, restoration, and abandonment costs
and estimated residual salvage values shall be taken into
account in determining amortization and depreciation rates.
FAS 19 does not address the balance sheet accounting for
DRR. In a February 1996 Exposure Draft entitled “Accounting for
Certain Liabilities Related to Closure or Removal of Long-Lived
Assets”, which would include onshore and offshore oil and gas
production facilities, the FASB recommended that oil and gas
companies, for financial reporting purposes, fully accrue
estimated future DRR costs that represent fixed obligations in
the year the obligations first arise, capitalize such costs into
the bases of the related assets, and recover the costs through
depreciation deductions over the productive lives of the assets.
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