ANALYSTS FORECAST AND THE CHOICE OF THE METHOD OF ACCOUNTING OF OIL EXPLORATION EXPENDITURE
DOI:
https://doi.org/10.4270/ruc.2023125Keywords:
Analyst Forecast, Accounting Choices, Oil, GasAbstract
The two accepted methods of appropriating oil exploration expenditures (full capitalization and successful efforts) have been controversial for many years, but there is little empirical evidence about their predictive capabilities. This can be an important aspect for a possible choice or not of one of the methods by the accounting standard-setter. In this context, the objective of this work was to investigate whether the choice of accounting method for appropriating oil exploration expenses affected the forecasting capacity of analysts, as a means of evaluating the predictive capacity of the methods. Regressions were carried out using the panel data technique in two models: one with the analysts' earnings per share forecast error as the dependent variable; and another the dispersion of these forecasts. Both variables are used as metrics for forecast quality. As a variable of interest, a dummy was considered for the choice of one of the permitted methods for appropriating oil exploration expenses, obtained by reading the explanatory notes of the companies analyzed. Two samples were considered, one for each model. For the profit forecast error model, 49 oil companies were analyzed between 2003 and 2020, totaling 708 observations. For the forecast dispersion model, 29 oil companies were analyzed in the same period, totaling 522 observations. The results found indicate that the adoption of the Successful Efforts Method (SE) negatively impacts the predictive quality of accounting information and, consequently, reduces its predictive capacity, given the usual uncertainties in well exploration. The text contributes to the reflection of financial accounting standard setters regarding a possible decision to allow a single method of accounting for operations, thus abandoning the operational and geopolitical characteristics of the industry. Therefore, analysts' forecasting difficulties resemble those of petroleum engineers in the field.
Downloads
References
Abarbanell, J., & Lehavy, R. (2003). An explanation for why prior stock returns and analysts’ earnings forecast revisions predict earnings management and forecast errors. Ann Arbor, 1001, 48109.
Araujo, M. V. F. U., Tardin, N., & Antônio, R. M. (2024). Influência da agressividade tributária na previsão dos analistas financeiros. RAM. Revista de Administração Mackenzie, 25, eRAMF240072.
Ashbaugh, H., & Pincus, M. (2001). Domestic accounting standards, international accounting standards, and the predictability of earnings. Journal of accounting research, 39(3), 417-434.
Bandyopadhyay, S. P. (1994). Market reaction to earnings announcements of successful efforts and full cost firms in the oil and gas industry. Accounting Review, 657-674.
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of accounting research, 46(3), 467-498.
Batistella, A. J., Dal Magro, C. B., Mazzioni, S., & Paulo, E. (2021). Relevância da informação contábil e cultura nacional. Revista de Contabilidade e Organizações, 15, e169533-e169533.
Berry, K. T., & Wright, C. J. (2001). The value relevance of oil and gas disclosures: an assessment of the market's perception of firms' effort and ability to discover reserves. Journal of Business Finance & Accounting, 28(5‐6), 741-769.
Bhat, G., Hope, O. K., & Kang, T. (2006). Does corporate governance transparency affect the accuracy of analyst forecasts? Accounting & Finance, 46(5), 715-732.
Bierstaker, J. L., Brazel, J., Caster, P., & Reed, B. J. (2010). American Institute of Certified Public Accountants’(AICPA) Professional Ethics Executive Committee’s (PEEC) Omnibus Proposal of Professional Ethics Division Interpretations and Rulings. Current Issues in Auditing, 4(1), C10-C11.
Brady, J.; Jennings, D. R, & Shappard, R. (2021). Petroleum Accounting: principles, procedures and issue, PDI, 8a Edition.
Brock, H. R.; Carnes, M. Z.; & Justice, R. (2007). Petroleum accounting: principles, procedures & issues. 6º Ed. Denton, Texas: PricewaterhouseCoopers/Professional Development Institute.
Bryant, L. (2003). Relative value relevance of the successful efforts and full cost accounting methods in the oil and gas industry. Review of accounting studies, 8(1), 5-28.
Byard, D., Li, Y., & Weintrop, J. (2006). Corporate governance and the quality of financial analysts’ information. Journal of Accounting and Public policy, 25(5), 609-625.
Ceretta, P. S., Vieira, K. M., da Fonseca, J. L., & de Lima Trindade, L. (2009). Determinantes da estrutura de capital: uma análise de dados em painel de empresas pertencentes ao Ibovespa no período de 1995 a 2007. REGE Revista de Gestão, 16(4), 29-43.
Chen, J., Jin, F., Ouyang, G., Ouyang, J., & Wen, F. (2019). Oil price shocks, economic policy uncertainty and industrial economic growth in China. PloS one, 14(5).
Clements, A.; Shield, C., & Thiele, S. (2019). Which oil shocks really matter in equity markets? Energy Economics, Volume 81, 134-141,
Consentino, F. P., Maragno, L. M. D., & Santos, O. M. D. (2024). O Impacto das Informações por Segmento na Acurácia de Previsão dos Analistas. Pensar Contábil, 25(88).
Cortese, C. L., Irvine, H. J., & Kaidonis, M. A. (2009). Extractive industries accounting and economic consequences: Past, present and future. In Accounting Forum (Vol. 33, No. 1, pp. 27-37). No longer published by Elsevier.
Cortese, C., & Irvine, H. (2010). Investigating international accounting standard setting: The black box of IFRS 6. Research in Accounting Regulation, 22(2), 87-95.
Cotter, J., Tarca, A., & Wee, M. (2012). IFRS adoption and analysts’ earnings forecasts: Australian evidence. Accounting & Finance, 52(2), 395-419.
Dalmácio, F. Z., Lopes, A. B., Rezende, A. J., & Sarlo Neto, A. (2013). Uma análise da relação entre governança corporativa e acurácia das previsões dos analistas do mercado brasileiro. RAM. Revista de Administração Mackenzie, 14, 104-139.
Dalmácio, F. Z., Lopes, A. B., Rezende, A. J., & Sarlo Neto, A. (2013). Uma análise da relação entre governança corporativa e acurácia das previsões dos analistas do mercado brasileiro. RAM. Revista de Administração Mackenzie, 14, 104-139.
Deakin III, E. B. (1979). An analysis of differences between non-major oil firms using successful efforts and full cost methods. Accounting Review, 722-734.
Delloitte (2016). Oil and Gas Accounting, Financial Reporting, and Tax Update.
Dhaliwal, D. S. (1980). The effect of the firm's capital structure on the choice of accounting methods. Accounting Review, 78-84.
Dhaliwal, D. S., Heninger, W. G., & Hughes II, K. E. (1999). The investment opportunity set and capitalization versus expensing methods of accounting choice. Accounting & Finance, 39(2), 151-175.
Domingues, J. C. A., & Nakao, S. H. (2017). Previsão dos analistas e adoção dos padrões IFRS em petrolíferas mundiais. Revista Universo Contábil, 13(2), 6-24.
Duarte, P. C., Lamounier, W. M., & Takamatsu, R. T. (2007). Modelos econométricos para dados em painel: aspectos teóricos e exemplos de aplicação à pesquisa em contabilidade e finanças. In Congresso USP de controladoria e contabilidade (Vol. 4, pp. 1-15).
Emiliano, P. C. (2013). Critérios de informação: como eles se comportam em diferentes modelos. Tese de Doutorado em Estatística e Experimentação Agropecuária. Universidade Federal de Lavras, Minas Gerais, Brasil.
Ferguson, A., Kean, S., & Pündrich, G. (2021). Factors affecting the value-relevance of capitalized exploration and evaluation expenditures under IFRS 6. Journal of Accounting, Auditing & Finance, 36(4), 802-825.
Financial Accounting Standards Board (1979). Suspension of Certain Accounting Requirements for Oil and Gas Producing Companies. SFAS Nº 25.
Financial Accounting Standards Board (1997). Financial Accounting and Reporting by Oil and Gas Producing Companies. SFAS Nº 19.
Financial Accounting Standards Board (2009). Accounting Codification 932 – Extractive Activities – Oil and Gas. ASC 932.
Godoy, C. R. (2004). Evidenciação contábil e as avaliações pelo fluxo de caixa descontado e pela teoria de opções: um estudo aplicado à indústria petrolífera mundial. 2004. 284 f. Tese (Doutorado em Controladoria e Contabilidade) – Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade. São Paulo.
Godoy, C. R.; & Domingues, J. C. A. (2011). Contabilidade para Atividade de Exploração e Produção de Petróleo e Gás: Desafios da Contabilidade Brasileira na Nova Fronteira Petrolífera Mundial. Anais do XI Congresso USP de Controladoria e Contabilidade. São Paulo – SP.
Gray, S. J., Hellman, N., & Ivanova, M. N. (2019). Extractive industries reporting: a review of accounting challenges and the research literature. Abacus, 55(1), 42-91.
Harris, T. S., & Ohlson, J. A. (1987). Accounting disclosures and the market's valuation of oil and gas properties. Accounting Review, 651-670.
Hasan, M. M., Asad, S., & Wong, J. B. (2022). Oil price uncertainty and corporate debt maturity structure. Finance Research Letters, 46, 102278.
Healy, P. N., & Palepu, K. G. (2001). Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature. Journal of Accounting & Economic, 31, 405-440.
Holthausen, R. W., & Leftwich, R. W. (1983). The economic consequences of accounting choice implications of costly contracting and monitoring. Journal of accounting and economics, 5, 77-117.
Ijiri, Y. (1979). Oil and Gas Accounting–Turbulence in Financial Reporting. Financial Executive, 47(8), 18-26.
Jiao, T., Koning, M., Mertens, G., & Roosenboom, P. (2012). Mandatory IFRS adoption and its impact on analysts' forecasts. International review of financial analysis, 21, 56-63.
Johnston, D. C., & Johnston, D. (2006). Introduction to oil company financial analysis. PennWell Books.
Klingstedt, J. P. (1970). Effects of full costing in the petroleum industry. Financial Analysts Journal, 26(5), 79-86.
Lang, M. H., & Lundholm, R. J. (1996). Corporate disclosure policy and analyst behavior. Accounting review, 467-492.
Martinez, A. L. (2004). Analisando os analistas: estudo empírico das projeções de lucros e das recomendações dos analistas de mercado de capitais para as empresas brasileiras de capital aberto. Tese de Doutorado em Administração de Empresas. Fundação Getúlio Vargas, São Paulo/SP, Brasil.
Peixoto, E. P. A, & Martins, O. S. (2021). Value relevance da contabilidade e das previsões dos analistas: o ambiente de informação do país emergente é importante? Revista Contemporânea de Contabilidade, 18(49), 162-177.
Phan, D. H. B., Tran, V. T., & Nguyen, D. T. (2019). Crude oil price uncertainty and corporate investment: New global evidence. Energy Economics, 77, 54-65.
Power, S. B., Cleary, P., & Donnelly, R. (2017). Accounting in the London Stock Exchange's extractive industry: The effect of policy diversity on the value relevance of exploration-related disclosures. The British Accounting Review, 49(6), 545-559.
Richardson, S. A., Teoh, S. H., & Wysocki, P. D. (1999). Tracking analysts' forecasts over the annual earnings horizon: Are analysts' forecasts optimistic or pessimistic?. Available at SSRN 168191.
Salendrez, H. E., & Tang, A. C. (2016). Accounting practices for exploration for and evaluation expenditures in Philippine mining industry. Asia Pacific Business and Economics Perspectives, 4(2), 40-48.
Sunder, S. (1976). Properties of accounting numbers under full costing and successful efforts costing in the petroleum industry. The Accounting Review, 51(1), 1-18.
Venturini, L. D. B., Bianchi, M., Machado, V. N., & Paulo, E. (2022). Conteúdo informacional dos principais assuntos de auditoria e a previsão dos analistas financeiros. Revista Contabilidade & Finanças, 33, 281-299.
Wright, C. J. (2017). Fundamentals of Oil and Gas Accounting. PennWell, 6o Edition.
Downloads
Published
How to Cite
Issue
Section
License
The copyright for papers published in this journal belong to the author, with rights of first publication for the journal. As the papers appears in this publicly accessed journal, the papers are for free use, receiving their credit, in educational and non-commercial uses. The journal will allow the use of the papers published for non-commercial purposes, including the right to send the paper to publicly accessed databases.
