On January 6, 2010, the FASB issued ASU 2010-03 which aligns the current oil and gas reserve estimation and disclosure requirements of ASC 932 with those in the SEC Final Rule Modernization of Oil and Gas Reporting. ASC 932 contains the guidance previously located in FASB statements 19 and 69, FIN 33 and 35 and FSP FAS 19-1. This new rule is effective for entities with annual reporting periods ending on or after December 31, 2009. Early adoption is not permitted.

In addition to definition changes, key revisions to ASC 932 include:

• Revising the definition of oil and gas producing activities to include nontraditional resources in reserves. This includes oil sands, shale, coalbeds, etc.



• Amending the definition of proved oil and gas reserves to change the pricing used in estimating reserves. Previously the end of the period price was used. Now the requirement calls for entities to use the simple average of the prices posted on the first day of each month in the entity’s fiscal year to estimate reserves.



• Providing guidance on "geographic area" with respect to disclosure of information about significant reserves. The result of this change concluded that an entity should consider qualitative information to determine if a reserve is significant, and quantitatively if an area contains 15% or more of the entity’s proved reserves. Therefore, proved reserve disclosures would be shown both in the aggregate and separately by geographic areas if they meet either of these thresholds.



• Expanding the disclosures required for equity method investments. Previously there was not a requirement to consider equity method investments when determining significant oil and gas producing activity. Now these must be considered and disclosed.

These new rules must be applied prospectively as a change in accounting principle that is inseparable from a change in accounting estimate. Comparative disclosures in periods before adoption are not required. The following must be disclosed under the new rule:

• In the first annual period (including interim periods within that annual period), the effect of applying ASU 2010-03 on income from continuing operations and net income, if significant and practical to estimate.



• The effect of including nontraditional resources in each of the amounts and quantities disclosed based on the new rules.



• Separate qualitative and quantitative disclosures about the estimated effect (or portion of the effect) of initially applying ASU 2010-03 on each of the amounts and quantities disclosed in accordance with ASC 932, if significant and practical to estimate.

If the effect is not significant or not practical to estimate, an entity must state that fact and explain why.

For the full text of this new rule, click here.

For more information, contact Tracy Pharis, Audit Partner & Energy Practice Area Leader, Denver at tpharis@heincpa.com or 303.298.9600.

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