December 2015 question 3

Hi,

I have some questions that would want to ask you.

1. In the Information below (Q3/Dec 2015), can you help explain why the cost of $5m is capitalized, on what basis and what IAS? Isn’t this should be considered as Reseasrch activities to find new gas and should be expensed? The year end date is 31 August 2015

“From October 2014, Gasnature had undertaken exploratory drilling to find gas and up to 31 August 2015 costs of $5 million had been incurred. At 31 August 2015, the results to date indicated that it was probable that there were sufficient economic benefits to carry on drilling and there were no indicators of impairment. During September 2015, additional drilling costs of $2 million were incurred and there was significant evidence that no commercial deposits existed and the drilling was abandoned.”

2. In the information below, can you help explain why the irrecoverable gas is considered as PPE? I understand that gas is non-tangible and should not be PPE?

“Gasnature is a publicly traded entity involved in the production and trading of natural gas and oil. Gasnature jointly owns an underground storage facility with another entity, Gogas. Both parties extract gas from offshore gas fields, which they own and operate independently from each other. Gasnature owns 55% of the underground facility and Gogas owns 45%. They have agreed to share services and costs accordingly, with decisions regarding the storage facility requiring unanimous agreement of the parties. The underground facility is pressurised so that the gas is pushed out when extracted. When the gas pressure is reduced to a certain level, the remaining gas is irrecoverable and remains in the underground storage facility until it is decommissioned. Local legislation requires the decommissioning of the storage facility at the end of its useful life. Gasnature wishes to know how to treat the agreement with Gogas including any obligation or possible obligation arising on the underground storage facility and the accounting for the irrecoverable gas”

Thanks