Capital Market Analysis of Reserve Recognition Accounting

Abstract

This paper conducts a capital market analysis of the oil and gas accounting method, Reserve Recognition (RRA). The Securities and Exchange Commission (SEC) first proposed RRA in Accounting Series Release No. 253 (ASR 253), issued in August 1978. In ASR 253, the Commission noted that development of an accounting method based on a valuation of proved oil and gas reserves would provide significant useful information.' To this end, the Commission required oil and gas firms to disclose RRA data as a supplementary item to their financial statements. Unlike traditional oil and gas accounting methods (i.e., Full Cost [FC] or Successful Efforts [SE]), RRA values the firm's reserves directly and measures income as the change in reserve values, where reserve value is defined by the RRA accounting rules.2 In principle, the RRA income statement forms an articulation between successive economic balance sheets for the firm; that is, the RRA income statement details the sources of change in the RRA reserve values.3