Under U.S. GAAP, research and development costs are expensed as incurred; howeve

Question

Under U.S. GAAP, research and development costs are expensed as incurred; however, in the natural resources industry, the cost of finding and developing natural resources (such as crude oil reserves) may be capitalized in the balance sheet under the full cost and successful efforts methods. Are these methods inconsistent with the general treatment of research and development costs under U.S. GAAP? What explanations can you offer for this inconsistency in accounting treatment of similar outlays under U.S. GAAP?

Explanation / Answer

Companies involved in the natural resources industry, have the option of choosing between two accounting approaches, successful efforts method or full cost method.

However, as per as per SFAS 19, oil and gas companies are required to use the successful efforts method while SEC allows companies to use the FC method also.

Hence, we can say that these methods are not inconsistent as this is industry specific accounting practices which has been approved by the regulatory authorities.

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