SEC Adopts New Reserve Definition

03/01/2009

The Securities and Exchange Commission (SEC) recently made its first major modification to reserve reporting requirements since 1982. The SEC’s new rules rely in part on the definitions contained in the Petroleum Resource Management System as adopted by the Society of Petroleum Engineers (SPE) and other organizations in March 2007. The new rules will allow exploration and production companies to provide additional, relevant information on their asset base and management’s decision making process.  

Why Changes Are Needed
Existing SEC rules generally prohibit companies from disclosing reserves other than “proved reserves” in their SEC filings. Proved reserves is defined in the SEC’s accounting literature, and is used primarily to determine depletion expenses and the appropriate amount of certain capitalized costs. Like many accounting terms, proved reserves is a conservative measurement. While conservatism is appropriate in accounting, by limiting a company to disclosing only proved reserves, the SEC made it difficult for management to explain why it was investing their company’s funds in a particular project, and why potential investors should invest in their company.

Excerpted from Law Reports Banking and Finance, Vol. 2 No. 3, March 2009 © Bloomberg Finance L.P. 2009. Originally published by Bloomberg Finance LP. Reprinted by permission. The full article appears in the PDF below.

For more information contact Bill Nelson or Chris Kulander.

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