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IMPACT OF
OIL AND GAS ACCOUNTING ON ACCOUNTING PRACTICE IN NIGERIA: (A STUDY OF SHELL
NIGERIA PLC)
ABSTRACT
This study
examines the impact of oil and gas accounting and reporting on the organisation
and to the Nigerian accounting practice using Shell Development Petroleum
Company as a case study. The study was conducted using the Chi-square. The
elements were selected by means of random and stratified sampling technique.
Data were gathered from primary and secondary sources. Data collected were
presented using tables and analyzed using the Chi-square analysis. It was found
from the study that Oil and gas accounting practice in Nigeria is standardized
in line with International Financial Reporting Standard; the challenges facing
oil and gas accounting in Nigeria is low while the prospect of oil and gas
accounting is high
The study
recommended that the International Financial Reporting Standard be adopted by
countries that are yet to standardized their oil and gas accounting
information. It also recommended that oil and gas accounting software be
developed in line with the IFRS requirements and standards to ease the
complexities involved in the nature of oil and gas accounting.
CHAPTER ONE
INTRODUCTION
1.0 INTRODUCTION
Accounting
regulatory bodies usually formulate industry specific standards when an
industry has peculiar characteristic of accounting for banks and non-bank
financial institutions.
The oil and
gas industry is one of such industries that has specific accounting standards.
This can be attributed to its peculiarity interms of high capital requirement, earning volatility, regulation,
type of business ownership, taxation, non-correlation between the amount of
investment made and returns obtained (Wright and Hallun et al, 2008) and high sensitive to risk - price risk and
foreign exchange risk.
Before 2012
when the International Financial Reporting Standard (IFRS) was adopted by
exploration companies in Nigeria, Nigerian companies in the upstream sector
prepared their financial statements in line with the statement accounting
standard 14 (accounting in the petroleum industry; upstream activities) and SAS
17 (accounting in the petroleum industry) formulated by the Nigerian Accounting
Standard Board.
With its adoption
of IFRS, Nigeria joined over 100 countries that either use or have adopted the
accounting guidelines as stipulated by the International Accounting Standard
Board (IASB). This will ensure harmony and easy comparison of financial
statements. This is particularly useful in the oil and gas industry considering
that it is one of the most global industries. The adoption of a common
accounting framework also widens access to investment opportunities.
1.1 BACKGROUND OF THE STUDY
The oil and
gas industry is one of such industries that has specific accounting standards.
This is as a result of its peculiarity in terms of high capital requirement,
earnings violability, regulation, type of business ownership, taxation,
non-correlation between the account of investment made and returns obtained
(Wright and Gullen et al, 2008) and high sensitivity to risk like price risk
and foreign exchange risk etc.
Therefore,
when the international Financial Reporting Standards (IFRS) was adopted by
exploration companies in Nigeria, it became imperative for oil and gas
companies in the sector to prepare financial statements in line with the statement
of accounting standards.
Upstream oil
and gas organizations must meticulously record, track, distribute and report
sales of oil and gas and other products. Accurate and timely oil and gas
revenues accounting require tracking complex contracts and owner lease
agreements. It must also reflect joint venture and capital expenditure accounts
among others.
The nature
of the complexity of the oil and gas operations makes the nature of its
accounting reporting even more complex by new challenges such as horizontal
drilling etc.
The
research, therefore, intends to explore the nature of oil and gas accounting in
Nigeria, challenges and solutions.
1.2 STATEMENT OF THE PROBLEM
The complex
nature of the operations of the upstream oil and gas industry makes the oil and
gas accounting more complex in nature. However, the International Financial
Reporting Standards (IFRS) requires that oil and gas companies in the upstream
sector prepare their financial statement in-line with the statement of
accounting standards 14 (accounting in the petroleum industry; upstream
activities) andSAS 17 (accounting in petroleum) formulated by the Nigerian
Accounting Standard Board. This is as a result of the guidelines stipulated by
the International Accounting Standard Board (IASB)
However, oil
and gas accounting is made increasingly difficult by new challenges and risks
such as horizontal drilling, price risk, foreign exchange risk etc. Research
work into the various accounting standards needed in this particular industry
have not been detailed and thorough.
This
research seeks to investigate the practice of oil and gas accounting in
Nigeria, understand its operation and determine what extent it has been
standardized to help move the industry forward to international standards
1.3 OBJECTIVES OF THE STUDY
The study
seeks the following objectives:
1. To determine if oil and gas accounting
is standardized in Nigeria
2. To examine the challenges of oil and
gas accounting in Nigeria and proffering solutions
3. To evaluate the prospects of oil and
gas accounting in Nigeria.
1.4 RESEARCH QUESTIONS
The
following research questions were formulated:
1. Is oil and gas accounting standardized
in Nigeria?
2. Are there challenges in oil and gas
accounting in Nigeria?
3. Are there prospects for oil and gas
accounting in Nigeria?
1.5 RESEARCH HYPOTHESIS
Hypotheses
are usually gotten from research questions/problems and can be regarded as
tentative solutions to research questions. Therefore, the researcher will test
the following hypotheses
H1 Oil and gas accounting practice is
standardized in Nigeria
H2 There are no challenges in oil and gas
accounting in Nigeria
H3 Oil and gas accounting has huge
prospects in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
1. It will help oil and gas companies
know what relevant accounting standards they need to be up to standard in the
Nigerian reporting environment.
2. it will help relevant agencies know
what is expected from oil and gas companies in terms of accounting reporting
3. It shall serve as reference material
for accounting professionals and practitioners seeking more knowledge.
4. It shall serve as a basis for further
study.
1.7 SCOPE OF THE STUDY
The study
seeks to evaluate the impact of oil and gas accounting practice in Nigeria and
Shell Nigeria was used as the case study for this research
1.8 DEFINITION OF TERMS
Accounting:
Accounting is the systematic and comprehensive recording of financial
transactions pertaining to a business, and it also refers to the process of
summarizing, analyzing and reporting these transactions to relevant regulating
agencies and tax collection entities.
Oil and Gas:
Oil and natural gas are naturally occurring chemicals that are made up of just
two elements -- carbon and hydrogen.
Accounting
Practice: This is the system of procedures and controls that an accounting
department uses to create and record business transactions. Accounting practice
should ideally be extremely consistent, since there are a large number of
business transactions that must be dealt with in exactly the same manner in
order to produce consistently reliable financial statements.
IFRS:
International Financial Reporting Standards (IFRS) are a set of accounting
standards developed by the International Accounting Standards Board (IASB) that
is becoming the global standard for the preparation of public company financial
statements.
IASB: The
International Accounting Standards Board (IASB) is an independent,
private-sector body that develops and approves International Financial
Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS
Foundation.
SAS: SAS
(Statistical Analysis System) is a software suite developed by SAS Institute
for advanced analytics, multivariate analyses, business intelligence, data
management, and predictive analytics. SAS was developed at North Carolina State
University from 1966 until 1976, when SAS Institute was incorporated.
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