What is ‘Depreciation, Depletion and Amortization – DD&A’
Depreciation, depletion and amortization (DD&A) are noncash expenses occupied in accrual accounting, often associated with the acquisition, exploration and happening of new oil and natural gas reserves. Depreciation is a means of allocating the cost of a material asset all over its useful life, and depletion is used to allocate the cost of extracting straightforward resources from the earth and is the actual physical depletion of a resource by a corporation. Amortization is the deduction of capital expenses over a specified time term, typically the life of an asset.
Depreciation and amortization are common to almost every energy, while depletion is usually used only by energy and natural-resource cartels.
BREAKING DOWN ‘Depreciation, Depletion and Amortization – DD&A’
Accrual accounting considers companies to recognize capital expenses in periods that reflect the use of the tied up capital asset. If a large piece of machinery or property requires a broad cash outlay, it can be expensed over its usable life rather than in the singular period during which the cash outlay occurred. This provides a various accurate depiction of the profitability of the business, and the discrepancy is reconciled in the cash rush statement.
Depreciation and Amortization
Depreciation applies to expenses incurred for the edge of assets with useful lives greater than one year. Depreciation habitually causes a reduction on the property, plant and equipment line of a balance veneer, though other capital assets could be affected. A percentage of the edge price is deducted over the course of the asset’s useful life. Amortization is vastly similar to depreciation in theory, but it applies to intangible assets such as patents, trademarks and certifies rather than physical property and equipment. Capital leases are also amortized.
Depletion
Depletion expense is commonly against by miners, loggers, oil and gas drillers, and other companies engaged in natural-resource separation. Enterprises with an economic interest in mineral property or standing beams may recognize depletion expenses against those assets as they are hardened. Depletion can be calculated on a cost or percentage basis, and businesses generally be obliged use whichever provides the larger deduction for tax purposes.
DD&A
DD&A is a common operating expense filler for energy companies, and it combines all these noncash accrual expenses as a singular income statement line item. Analysts and investors in the energy sector should be particularly aware of this expense and how it relates to cash flow and capital expenditure. Consider Chevron Corporation’s 2015 10-K, in which the company reported $21 billion in DD&A expense, up from $16.8 billion in the latest year. The rise was attributed to greater impairments of oil and gas fields.