Accounting for Intangible Drilling and Development Costs of Oil and Gas Wells
BY PRESLEY S. FORD, JR. PARTNER, TULSA OFFICE
Prepared for the National Association of Cost Accountants, Tulsa Chapter — December, 1955
The drilling of oil and gas wells gives rise to an interesting series
of accounting problems for which petroleum accountants have been called upon to devise solutions. A discussion of these problems should be of interest to cost accountants generally. Large numbers of persons
have invested in securities of oil companies or in oil and gas ventures.
An understanding of the alternative methods of accounting for intangible drilling and development costs is essential to the understanding
of financial statements issued by oil companies as well as to the understanding of the methods by which taxable income from oil and gas properties is determined.
THE NATURE OF DEVELOPMENT COSTS
Intangible drilling and development costs, which are more commonly
referred to as development costs, represent expenditures made to sink a hole in the earth's crust to reach a reservoir of oil or gas. Development costs are to be distinguished from leasehold costs, which represent bonuses and other costs incurred to obtain the right to exploit
the oil and gas reserves, and from the cost of well and lease equipment
installed on the property for the purpose of producing oil or gas. Development costs are also to be distinguished from the purchase price of reserves on which the development has already occurred, which is generally classified as leasehold cost.
A more technical definition of the term "development costs" is to be found in the Federal income tax Regulations. (1) Under these Regulations and the Internal Revenue Code^), each taxpayer is granted an election with respect to such costs. A taxpayer may elect to capitalize
development costs or to deduct them from taxable income in the