The Quebec government’s decision to extend the moratorium on natural gas hydraulic fracturing (commonly referred to as “fracking”) has certainly raised some eyebrows within Canada and internationally. Fracking has been used to access natural gas reserves that were previously thought to be inaccessible or at least not economically feasible to access. The science is pretty simple: pump water at great pressure into rock with cracks and natural gas and viola, the water pressure opens the cracks up letting the natural gas be captured. I’m not convinced that this does not carry substantial health risks but I will admit that the research is not conclusive.
As a result of some mixed results, the Quebec government introduced a temporary moratorium on all natural gas fracking in the province. In the middle of September, there was some indication that the government was considering a permanent ban. While this has clear political repercussions, and potentially some health benefits, it also has some substantial accounting implications. There are a number of companies that had started natural gas fracking operations or exploration within Quebec prior to the moratorium, most notably Talisman Energy and Lone Pine Resources.
Talisman just reported their third quarter results and included a substantial impairment charge related to their Quebec fracking operations. An impairment charge is a non-cash write down of an asset. Over the past two or three years, Talisman had purchased exploration rights (an asset), done some successful drilling and exploration (an asset), and started to building capital infrastructure to support fracking (an asset). Now that Quebec is considering a permanent ban, those assets are virtually worthless. Under generally accepted accounting principles (IAS 36, IAS 16), that decline in value is referred to as an “impairment”. The asset must be written down to its value-in-use (pretty much zero if you can’t pull natural gas out of the ground) or its recoverable amount if you can sell it (pretty much zero since no one will buy those assets with a government strongly considering a permanent ban). The asset write down creates an expense for the same amount – a non-cash expense but an expense nonetheless. This expense is typically large and commonly results in a loss for the period. Check out Talisman’s third-quarter financial statements, particularly the income statement (page 2) and note 9 (page 9) for more information on this impairment. For another example of an impairment charge see the post about Microsoft.
This is another great example of how accounting is a pretty good reflection of real life or at least economic reality.
Note: this blog was originally posted on my site hosted by Pearson Education(http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)