Accounting for oil and gas upstream activities: a study in discretionary reporting behaviour in Libya

Numerous studies have dealt with full cost (FC) and successful efforts (SE) methods based on their impact on financial statements (e.g. Johnson, 1972; Yee, 2006; Murdoch and Krause, 2008), and market reaction to FC and SE methods (e.g. Mohrman, 1993; Aboody, 1996) with the focus on generally accepted accounting principles as applied by international accounting standards. This study provides a further perspective from an emerging economy (Libya) who do not apply these global standards, gaining insight into an alternative reporting framework, and an understanding of the choices being made by agency entities reporting to their principal (the Libyan Government). While it can be argued that the building of long-term relationships might encourage the agent to act in the interests of the principal rather than responding to contractual obligations (Broadbent et al, 1996) the results of this study indicate that the majority of agents (IOCs) do not act in the interests of the NOCorp (principal). The majority of IOCs expense their upstream costs where discretion allows rather than capitalize them resulting in earlier recompense from the principal thus enhancing corporate value. The results confirm the findings of Mahmud and Russell (1998) regarding expensing such costs although unlike the previous study there are several cases where companies adopt a capitalizing practice.