In January 2010, the SEC staff issued a small entity compliance guide on oil and gas reporting to assist smaller companies in implementing the new reporting requirements under the SEC final rule, Modernization of Oil and Gas Reporting.  The final rule modernizes and updates the oil and gas disclosure requirements to align them with current practices and changes in technology.  The guide summarizes and explains rules adopted by the SEC, but is not a substitute for a rule itself.  Only a rule itself can provide complete and definitive information regarding its requirements.  The final rule is effective for registration statements filed on or after January 1, 2010, and for annual reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009.

The small entity compliance guide on oil and gas reporting includes an overview of the following information from the SEC final rule.

Changes to Oil and Gas Definitions in Rule 4-10 of Regulations S-X

The guide describes revisions to the following oil and gas definitions resulting from the final rule:

• Average price
• First-of-the month pricing
• Reliable technologies
• Nontraditional resources
• Eliminate “certainty” test
• Supporting definitions

Consolidation of Disclosure Requirement in Subpart 1200

The guide describes how the final rule resulted in the creation of Subpart 1200, Disclosure by Registrants Engaged in Oil and Gas Producing Activities, in Regulation S-K. This new subpart consolidates the industry-specific disclosure requirements for oil and gas companies found in Item 102 of Regulation S-K and Industry Guide 2. The new subpart contains the following disclosure items:

• Item 1201. General instructions to oil and gas industry-specific disclosures
• Item 1202. Disclosure of reserves
• Item 1203. Proved undeveloped reserves (PUDs)
• Item 1204. Oil and gas production, production prices and production costs
• Item 1205. Drilling and other exploratory and development activities
• Item 1206. Present activities
• Item 1207. Delivery commitments
• Item 1208. Oil and gas properties, wells, operations, and acreage

Other Significant Issues

The guide also describes the following issues related to oil and gas reporting addressed in the final rule:

• MD&A Guidance – The adopting release also includes interpretative guidance regarding the types of issues an oil and gas company should consider when preparing its MD&A, including disclosure regarding material changes due to technology, prices and concession conditions.
• Ceiling Test Limitation for Capitalized Costs under Full Cost Method – The amendments change the Commission’s full cost method of accounting to use a 12-month average price for reserves quantity disclosures and for accounting purposes.
• Accounting Treatment and no Retroactive Revision – The adopting release includes accounting guidance stating that any change to accounting figures that result from the amendments should be treated as a change in the method of applying an accounting principle that is inseparable from a change in accounting estimate, which would not require retroactive revision.

The SEC’s small entity compliance guide on oil and gas reporting can be found at http://www.sec.gov/info/smallbus/secg/oilgasreporting-secg.htm.

From John Lehman
GBH CPAs, PC
www.gbhcpas.com