Successful efforts method

The successful efforts method is used in the oil and gas industry to account for certain operating expenses. Under this approach, a company only capitalizes those costs associated with the location of new oil and gas reserves when such reserves have been found. If exploration costs are incurred and no new reserves are found, then the costs are instead charged to expense as incurred.

When exploration costs have been capitalized under this method, they are aggregated within the fixed assets section of the balance sheet. These capitalized costs are subsequently amortized as production occurs, so that expenses offset revenues as advocated under the matching principle.

The successful efforts method is a conservative approach to oil and gas accounting, since it mandates immediate charges to expense when a "dry hole" is drilled. By doing so, expense recognition is accelerated, leaving the smallest amount of expenditures recorded as assets on the balance sheet. Also, since fewer expenses are capitalized, there is less risk that a large amount of capitalized assets will be suddenly charged to expense due to the impairment of a firm's oil and gas reserves.

An alternative approach that allows for the capitalization of a larger amount of expenditures is the full cost method.