Full-Cost Method


DEFINITION of 'Full-Cost Method'

An accounting system used by companies that incur exploration costs for oil and natural gas that does not differentiate between operating expenses associated with successful and unsuccessful exploration projects. Regardless of the outcome, successful and unsuccessful operation expenses are capitalized. By contrast, the successful efforts accounting method only capitalizes expenses related to successful ventures.

BREAKING DOWN 'Full-Cost Method'

The two methods represent conflicting views in the industry about how oil and natural gas companies can most transparently report their earnings, and the two organizations that regulate accounting and financial reporting, the Financial Accounting Standards Board and the Securities and Exchange Commission, cannot always agree on which method is most appropriate.

The choice between these two accounting methods affects the company's reported net income and cash flows, so investors in such companies should be aware of the method used and the differences between the two.

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