Gas contracts are usually accounted for using one of two methods:
- The normal purchases and sales exception, where costs are expensed as incurred and sales are booked as they occur, or
- Fair value accounting, where the market value of the gas contracts and associated obligations are estimated each quarter.
Under the normal purchases and sales exception, fluctuations in natural gas prices do not affect the buyer’s and/or the seller’s financial statements. Under fair value accounting, fluctuations in expected natural gas prices impact the financial statements of companies that rely on natural gas contracts. However, regardless of the accounting treatment, companies that use natural gas in their normal course of business do so to meet the needs of their production, customers, or to insure themselves against price and volume fluctuations. It is vital for these companies to enter into economically meaningful contracts and to engage in effective hedges that offer protection against price and volume fluctuations. The accounting treatment is a secondary issue.