One significant but often overlooked part of GAAP-compliant financial statements are the footnotes and disclosures that accompany the numbers. It’s easy to ignore these when you are in a rush to “see how the year went” and “see how much we made.” However, the footnotes provide additional information and color and allow a reader to obtain a better picture of the financial condition of a company. Remember, management and ownership may not be the only readers of the financial statements. Bankers and potential investors may be carefully reviewing these statements as well.
Financial statements of oil and gas producers have several footnotes that are unique to the industry. Some of these footnotes are related to items we’ve discussed previously. For example, any company with an asset retirement obligation related to their wells will generally have a footnote describing how the obligation is calculated and also showing a table with beginning balances, changes during the year, and the ending balance that ties to the balance sheet. This allows a reader to see more detail as to why the obligation increased or decreased during the year. Was it due to more wells brought online? Did the Company plug a large number of wells during the year? Was there a change in how the amount was calculated? The footnote will provide the reader with that information.
A second footnote commonly seen is related to hedging transactions and derivatives. This footnote will usually provide more detail about the Company’s hedging arrangements; for example, when do the agreements run through? What volume is the Company hedging? Is it based on NYMEX or WTI or Henry Hub? A reader will obtain a greater understanding of the accounting treatment of these transactions and how they are calculated from the footnote.
A third footnote might be related to reserves held by the Company. This is a required footnote for publicly held companies, but many private companies elect to include this information as well. For example, a table might show changes in reserves, similar to the asset retirement obligation described above. Why did reserves increase substantially this year? Or conversely, why the significant decrease? A footnote can explain the changes and show a reader that the change was due to prices going up or down. Or it might be because the Company bought or sold reserves during the year. Are the reserve totals using escalated prices? What discount rate is the Company using to determine total reserves. These and other questions can be answered and expanded upon within a footnote.
As we’ve mentioned above, the Company may not be the only reader of a financial statement. Bankers and investors read them as well. That’s why it’s essential to have strong and supportable numbers in your financial statements, and footnotes that are compliant with GAAP and allow for analysis and discussion. This is crucial for any company, whether you’re drilling your first well, or getting back into the game, or taking the next step to grow your Company.
This wraps up our series on GAAP for the oil and gas industry, To read other blog posts on this topic, search under the Category “Oil & Gas.” You can also subscribe to our newsletter or contact us at 330-453-7633 for more information about your oil and gas accounting needs.
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Hall, Kistler & Company has been helping producers in the oil and gas industry since we opened our doors in 1941. We know what it takes to produce proper GAAP financial statements for oil and gas companies and can provide guidance along the way. Let us help when you are coming off of the sidelines and BACK INTO THE GAME.