Ceiling test

The ceiling test is a method used to keep the capitalized cost of a business from exceeding its underlying value. It is used by an oil and gas producer that employs the full cost method to account for its costs. Under the ceiling test, the net amount of costs in a cost center cannot exceed the sum of the items noted in the following calculation:

+ The present value of estimated future net revenues, minus any estimated future expenditures to develop and produce proved reserves, using a discount rate of 10%
+ The cost of any properties not being amortized
+ The lower of cost or the estimated fair value of unproved properties that are included in the amortized costs
- Any income tax effects associated with differences between the book and tax basis of the excluded properties and the unproven properties being amortized

If a cost center ceiling is exceeded, the excess amount is charged to expense. If the cost center ceiling later increases, the amount written off cannot be reinstated.

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Oil and Gas Accounting