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expenses for estimated future DRR costs (including those relating
to the Prudhoe Bay oil field) over the entire life of an oil
field using the units-of-production method.
Oil and gas companies, including Exxon, typically review and
revise their estimates and depreciation rates relating to
estimated future DRR costs throughout the life of a field. Their
financial income statements incorporate and reflect changes in
DRR cost estimates relating to changes in technology, inflation,
labor, equipment, and material rates. When new facilities are
installed, oil and gas companies reflect additional estimated DRR
costs relating to the new facilities in their financial income
statements as additional depreciation expenses.
FAS 19 does not state that estimated future DRR costs should
be reflected as a fixed capital liability on a company’s
financial balance sheets.
During the years in issue, consistent with FAS 19, Bulletin
61 of Exxon’s financial accounting manual, “Accounting for Cost
of Plant Removal and Site Restoration” relating to the accrual of
DRR costs, provided as follows:
Annual accruals [for future DRR] are to be
provided only if both of the following conditions
are met:
1) The work must be required as the result of
local laws or regulations, or as part of a
contractual agreement.
2) The nature of the work is such that it is
possible to estimate its cost. Thus, the law or
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