OG Limited (OG) is in the oil and gas business. It spends quite a bit of money each year exploring for new wells. Currently, it has several wells that are in the production phases. The company's shares trade on the London Stock Exchange. OG is looking to expand its exploration into China and therefore would like to issue more shares next year to fund the exploration. The company's top management is compensated partly with stock options.
One of the company's wells recently exploded, pouring a significant amount of oil into a nearby waterway. It took one month to cap the well, and during that time the company incurred significant costs in capping the well including costs related to many failed attempts. OG has announced that it will clean up the spilled oil and estimates that it will cost between $5 and $ 10 million to do so. It has also announced that it will act in a responsible manner when dealing with any losses and complaints that the local farmers may have in connection with the spill.
OG is now being sued in a class action suit brought about by the farmers. They are suing for $100 million in compensation for their land, which is now unusable due to the oil. The company’s lawyers feel they can settle for 10% of that amount.
The company capitalizes all costs incurred in connection with searching for new oil and gas wells, even when the exploration does not result in a well that has oil in it. They argue that they must incur those costs in order to find a producing well. In many countries where OG explores and operates, there are no legal requirements to restore the land to its original state once the exploration is complete or a well is depleted. The company does, however, state that it considers this an important activity and will make every effort to restore the site.
When excavating one site, OG came across a significant amount of gold. OG is now mining and selling the gold. Currently, it is trying to decide how to account for the gold inventory and is considering valuing the gold at market price once it has been refined, even though it is not yet sold.
Instructions
Assume the role of the company's auditors and analyze the financial reporting issues.