This excerpt taken from the CHK 8-K filed Jul 9, 2008.
Accounting Treatment ConclusionVolumetric Production Payment
Based on the buyers assumption of significant production and reserve risks and substantially all price risk, Chesapeake concluded that the production payment should be accounted for as a volumetric production payment. Under Regulation S-X Rule 4-10(c)(6)(i), sales of oil and gas properties . . . shall be accounted for as adjustments of capitalized costs with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves . . . attributable to the cost center. Since the VPP constituted less than 2% of Chesapeakes total proved reserves, a significant alteration of the relationship between capitalized costs and proved reserves did not take place (the impact of the sale on our 2007 fourth quarter DD&A rate was approximately 1.9%).
We also considered the provisions of Regulation S-X Rule 4-10(c)(6)(ii), which indicates that purchases of oil and gas reserves in place ordinarily shall be accounted for as additional capitalized costs with the applicable cost center; however, significant purchases of production payments or properties with lives substantially shorter than the composite life of the cost center shall be accounted for separately. While this provision is focused on the purchase of reserves, we believe it confirms that the full-cost rules consider production payments the transfer of a mineral interest as contemplated by Regulation S-X Rule 4-10(c)(6)(i) above.