Date: September 20, 2016

Presented here is Exxon Corporation’s comments on RRA in its1979 10-K:

The following information departs significantly from priorreporting of historical information and attempts
to portray 1978, 1979 and future activities of Exxon in oil and gasproducing in a highly arbitrary fashion.
Therefore, Exxon believes it should warn that the remaining dataset forth in this section, for reasons
further explained here, are not to be interpreted as necessarilyrepresenting current profitability or
amounts which Exxon will receive, or costs which will be incurred,or the way oil and gas will be produced
from the respective reserves. The arbitrary 10 percent discountrate used in the determination of the
present value of estimated future net revenues represents neither acost of capital nor a borrowing rate,
and, additionally, does not necessarily reflect political risks.Actual future selling prices and related costs,
development costs, production schedules, reserves and theirclassifications, and other matters may differ
significantly from the data portrayed or assumed. The requirementto publish such information regarding
future activities is part of the SEC’s attempted development of anew method of accounting for oil and
gas producing activities called “Reserve Recognition Accounting”(RRA). RRA would depart significantly
from historical accounting practices. Exxon has taken exception tothe SEC’s proposal and has indicated
the following major concerns with the concept of RRA: Financialreporting for the oil and gas producing
segment of the oil industry would include forecasts of futureproduction rates and future investments in
an estimation of potential cash flows. Such reporting would becompletely different from the historical
cost reporting of the remainder of the oil industry and of allother industries. The difficulties and
uncertainties of estimating the volumes of oil and gas reserves andtheir production rates appear not to
have been appropriately considered, making comparability betweencompanies, and segments thereof,
very difficult at best. Quantification of reserves is far from aprecise science. A variety of methods and
techniques are used to estimate reserves and the answers obtainedare subject to wide fluctuations
because they are dependent on judgmental interpretations ofgeologic and reservoir data. The same is
true of estimates of future production schedules. While, inmanagement’s judgment, the quantities
reported herein are reasonable, there is no methodology orcertification process in place now, or likely to
be in place in the near future, which would permit independentverification of such volumes and rates.

The Regulations prescribe that future net revenues be determinedby applying December 31, 1979, prices
and costs to the projected production schedules for Exxon’s netproved oil and gas reserves as of
December 31, 1979,. The reserves exclude probable reserves as wellas reserves in the Canadian
Athabasca Oil Sands. In Exxon’s opinion, applying these arbitraryassumptions to the estimated future
production schedule for the various categories of reserves can onlylead to financial reporting which is
more likely to mislead than inform. In addition to these generalareas of concern, the following cautions
should be noted when reviewing the information: Care should beexercised when comparing the “Net
Revenues from Producing Oil and Gas in 1978 and 1979” with “FutureNet Revenues.” The 1978 and 1979
information, in accordance with the Regulations, was determined bysubtracting only Production (Lifting)
Costs from the gross revenues. Future Net Revenues, in accordancewith the Regulations, were
determined by subtracting both Development Costs and Production(Lifting) Costs from the gross
revenues. Care should also be exercised when using the net revenuedata for 1978, 1979 and the future
since all applicable costs have not been deducted from grossrevenue. The Regulations make no provision
for deducting exploration expenses, amortization of acquisitioncosts (bonus payments), depreciation of
capitalized production investments, purchase costs of royalty oiland gas, income taxes, or other payments
to governments. The “Future Net Revenues” and the present value ofsuch revenues, as computed under
the Regulations, present neither a true “future value” nor “presentvalue” for the reasons mentioned
above in addition to the effect of excluding income taxes from thecalculation. In view of Exxon’s concern
that the absence of this considerable, and in some cases major,cost from the calculation would cause the
information to be seriously misunderstood and misleading,particularly in the case of some foreign
operations, the undiscounted and present value informationpresented here is shown on both a beforetax
and after-tax basis.

Required: Evaluate the merits of Exxon’s criticism ofRRA.