Looks like there may be retrospective accounting exemption under the IFRS conversion. Thoughts? “Unlike Canadian GAPP, IFRS allows companies to reverse impairments and put assets back on the books if the situation warrants.” I shuddered at this when I read it in CFA and I am shuddering again…
What’s wrong with doing whatever it takes to make the balance sheet better reflect economic reality?
The increased risk of manipulation
I don’t really think this is a big issue. The reserve report is what it is… manipulated or not, up and down, etc. It’s put together and audited by geologists,etc. As an investor I don’t worry about the balance sheet as the accountants write it? So why does it matter if it is adjusted up to reflect a higher reserve report? Investors have to do it anyway? I guess I’m saying who is still looking at the balance sheet anyway!?
KJH Wrote: ------------------------------------------------------- > I guess I’m saying who is > still looking at the balance sheet anyway!? What CA was getting at was the possibility to manipulate earnings but you’re right that most will adjust for gains on writeups.
Nope, reserves aren’t audited by geologists; reserves are audited by reservoir/exploitation engineers. I can manipulate the numbers whichever way my manager wants, so don’t always trust PV-10 
Typically, your third-party evaluator–you’re required to verify reserves by a third-party company for the SEC–will be more pessimistic than the company engineer, but they only evaluate at year-end (quarterly reserves are part of unaudited financial statements, of course) so you have to be careful. I just don’t like it, KJH; earnings could be much more volatile as companies will deem wells to be economic because a spike in commodity price. Of course, I am just speculating on what will happen. By the way, whatever happened to $70 oil? I guess I don’t like the idea of writing up assets to fair value in general with the conversion to IFRS. I liked the asset play approach very much, and it will be sad to see real estate revalued from 1968 depreciated book values :). Isn’t revaluing historical cost on the balance sheet one of the most important methods in value investing? It’s these asset plays are going to get a lot tougher to find as less “work” will be required to correct balance sheets - that is, if you follow the Whitman approach.
With o&g it’s an irrelevant issue. No one in the oilpatch cares about earnings anyway. Writing up reserves won’t effect cashflow. Reserve reports are blessed by reserve auditors and accountants, and I guarantee you there are a few geologists looking at probable reserves. There’s more to a reserve report than PV-10. As far as reits and any other asset type investment it would be a GODSEND to the efficiency of the markets. Like I said, anything that makes the balance sheets reflect better reflect economic value is welcomed! Just think for a second of how it will give management a major kick in the ass. So many companies have assets written down to nill that are worth so much more than they’re earning in the corporate structure. Management’s best interest is to make you think they’re cheap so they have high roa, which makes them look like good stewards of the assets and gets them high bonuses. Think about TARGET sitting on all that real estate? The stock market is full of companies like that…earning a tiny tiny return on their true asset values. It won’t happen but it would be nice if it did.
KJH, are you on gmail?
For O&G the reserve report information in US GAAP is included in additional disclosures under SFAS which are not audited but reviewed by auditors for consistency with other financial information. In fact, for public listed company the reserve report should be audited by indepent petroleum engineers such as DeGolyer and MacNaughton or Miller and Lents and etc. Because it is a part of audit test to ensure that business is going concern and there is a requirement of ISA “Use of work of specialists” for cases where auditor can not investigate issue by itself it should ask for work of specialists such as petroleum engineers. For reserve report the auditor should itself review the assumptions made for report for consistency: reasonabless of prices, fixed and marginal costs, discounts rates and etc. By the way the reserve report is a many pages document with several categories: proved developed, undeveloped, possible and so on. So the valuation of field is dependant on many things. Regarding IFRS there is a move to US GAAP in term of disclosures and use of information from reserve reports. The move to fair value is a some sort of IFRS committee purpose. And it was always been allowed to increase fair value of assets under IFRS under certain conditions.