By Michael Rapoport, Bradley Olson and Chester Dawson 

Exxon Mobil Corp. is under scrutiny for a question that's fraught for any business: When should a company decide its assets literally aren't worth it?

New York Attorney General Eric Schneiderman is investigating why the oil giant hasn't written down the value of its assets even as others have done so due to plummeting crude prices. It is an issue that is particularly knotty in the energy industry, where the rules about valuing and writing down assets are complex. And a lot depends on what a company expects for the future: Will oil prices rebound, or stay mired below $50 a barrel?

The answer can make a big difference for investors -- if a company decides its assets have lost value and should be written down, it hurts earnings and book value, or a company's net worth. And the leeway allowed in making that decision means there is always a motivation for a company to be overly optimistic about the future to avoid an earnings hit today.

"There's definitely a temptation all the time," said Dan Amiram, an associate professor of business accounting at Columbia University's business school. Companies "will use discretion in accounting to push the envelope" away from taking write-downs.

But some in the oil industry said Exxon has a good reputation for avoiding aggressive accounting practices. And they think it may be justified in not writing down its assets. "They love stability, they are one of the most compliant companies in the business," said John Hofmeister, a former president of Royal Dutch Shell PLC's U.S. business.

In a statement Friday, Exxon said its results were in accordance with accounting and reporting rules. It declined to comment on The Wall Street Journal's report of Mr. Schneiderman's investigation. A spokesman for Mr. Schneiderman declined to comment.

And debate about write-downs isn't limited to the energy industry. In the aftermath of the financial crisis, banks faced scrutiny over decisions to avoid write-downs of some risky, hard-to-trade securities. In other industries, some companies won't write down the value of "goodwill," the intangible asset typically generated when one company buys another, even as peers have done so.

Adding complexity to the question of when a write-down should occur in the energy industry: the way oil and gas reserves are recorded as assets to begin with depends in part on whether they can be extracted, and whether it is cost-effective to do so.

The oil-price crash has led some companies to take big write-downs.

Chevron Corp., for instance, recorded write-downs and other noncash charges totaling $2.6 billion in the second quarter, reflecting "lower oil prices and our ongoing adjustment to a lower oil price world," the company said. Shell took $3.7 billion in write-downs in 2015 to reflect a weaker long-term outlook for energy prices, plus another $4.6 billion for scrapping Alaska drilling and Canada oil-sands projects.

Exxon maintains the value of reserves tied to decades-long projects shouldn't be affected by price fluctuations it views as temporary. The company did acknowledge in its latest annual report that future write-downs are possible if long-term price increases don't materialize.

And Exxon is careful, testing a potential investment under every price scenario before committing to it, so that even a prolonged price slump won't derail the project, said Derek Ryder, a retired reservoir engineer specializing in reserves accounting who spent most of his career as an executive at Exxon subsidiary Imperial Oil.

The company is particularly reluctant to write down an asset because that removes its value permanently, he noted. "Impairment is a one-way trap door. Once they're gone, they're gone," said Mr. Ryder, who says he wrote a manual in the 1990s that standardized Exxon's reserves-booking policy. That was at the behest of Rex Tillerson, then head of corporate planning and now Exxon's chief executive.

Sometimes companies differ on how to value assets even on the same project. At a Nigerian oil-drilling project in which both Exxon and French oil giant Total SA are partners, Total took a write-down in February, while Exxon didn't. Oil and gas accounting specialists said the two companies may not have valued the assets the same way, and noted U.S. accounting rules Exxon follows differ in some respects from international standards followed by Total.

The leeway companies have around write downs may also make it hard for regulators to prove any wrongdoing on Exxon's part, Mr. Amiram said. "It will be very difficult in this case unless there's a smoking gun," he added.

Write to Michael Rapoport at Michael.Rapoport@wsj.com, Bradley Olson at Bradley.Olson@wsj.com and Chester Dawson at chester.dawson@wsj.com

 

(END) Dow Jones Newswires

September 16, 2016 18:36 ET (22:36 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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