1 Use ethical reasoning to evaluate the actions of Shell
1. Use ethical reasoning to evaluate the actions of Shell management in this case with respect to accounting for and disclosing information about proved reserves.
2. In chapter 7 we discussed aggressive accounting and earnings management techniques. Apply your knowledge from that chapter to the facts of the Shell case with respect to its proved reserves. Be sure to address specific actions taken that illustrate aggressive accounting and earnings management.
3. Given the facts of the case, describe the failures in corporate governance, including internal controls and the relationship between the Group auditor and management and explain how they contributed toward the financial reporting problems with proved reserves at Shell.
4. The following note to the financial statements of Shell for the fiscal year end December 31, 2008, appeared in its 20-F filing with the SEC.
Other than properties with no proved reserves (where the basis for carrying costs in the Consolidated Balance Sheet is explained under “Exploration costs”), the carrying amounts of major property, plant and equipment are reviewed for possible impairment annually, while all assets are reviewed whenever events or changes in circumstances indicate that the carrying amounts for those assets may not be recoverable. If assets are determined to be impaired, the carrying amounts of those assets are written down to their recoverable amount, which is the higher of fair value less costs to sell and value in use, the latter being determined as the amount of estimated risk-adjusted discounted future cash flows. For this purpose, assets are grouped into cash-generating units based on separately identifiable and largely independent cash inflows. Assets classified as held for sale are recognized at the lower of the carrying amount and fair value less cost to sell. No further provision for depreciation is charged on such assets.
Estimates of future cash flows used in the evaluation for impairment of assets related to hydrocarbon production are made using risk assessments on field and reservoir performance and include expectations about proved reserves and unproved volumes, which are then risk-weighted utilizing the results from projections of geological, production, recovery and economic factors.
Impairments, except those related to goodwill, are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed. Impairment charges and reversals are reported within depreciation, depletion and amortization.
Compare the standards followed by Shell that conform to IFRS with those generally accepted in the U.S. Explain any differences and how such differences might impact the financial statements.

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