FASB update
The Financial Accounting Standards Board (FASB) issued several Accounting Standard Updates (ASUs) in 2019, including several that address narrow amendments to previously issued guidance related to accounting for leases and credit losses. The key 2019 ASUs are discussed in depth in the Accounting and Financial Reporting Developments for Public and Private Companies Newsletters.
Private companies are currently focused on implementation of ASC 606, Revenue from Contracts with Customers, which is effective year end 2019 for calendar-year companies. The potential impact to oil and gas companies is discussed in “Private oil and gas companies: It’s your turn to apply revenue recognition,” included in this quarterly publication.
Below, we cover key ASUs that may impact oil and gas companies, along with the effective dates, for calendar-year companies. Please note, this content is not meant to be all-inclusive, and the dates below are calendar year.
Improving the presentation of net periodic pension cost and net periodic post-retirement benefit cost (ASU 2017-07)
Requires an employer to report the service cost component of net periodic pension/post-retirement cost in the same line item as other compensation costs. All other components of net periodic pension/post-retirement cost are required to be presented outside of income from operations.
- Public company effective date: 2018
- Private company effective date: 2019
Definition of a business (ASU 2017-01)
Clarifies guidance for determining whether an acquisition or disposition meets the definition of a business requiring accounting under business combination guidance. Impacts oil and gas companies acquiring combination of assets, such as proved developed producing, proved undeveloped, and unproved properties, gathering assets, and other equipment.
- Public company effective date: 2018
- Private company effective date: 2019
(Many oil and gas companies early adopted the guidance.)
Cash flow presentation (ASU 2016-18 and ASU 2016-15)
Provides guidance to combine restricted and unrestricted cash balances and addresses eight other transactions on the cash flow statement.
- Public company effective date: 2018
- Private company effective date: 2019
Intra-entity transfers of assets other than inventory (ASU 2016-16)
Provides that income tax consequences of intra-entity transfer of an asset other than inventory be recognized when the transfer occurs.
- Public company effective date: 2018
- Private company effective date: 2019
Recognition and measurement of certain financial instruments (ASU 2016-01)
Removes fair value disclosure requirements for financial instruments not measured at fair value for private companies. The amendments also introduce changes to the accounting for equity investments and the reporting of other comprehensive income for certain financial liabilities and various changes to the presentation and disclosure of financial instruments. The removal of the fair value of financial instruments disclosure may be implemented before the other changes.
- Public company effective date: 2018
- Private company effective date: 2019
(Many oil and gas companies early adopted the guidance.)
Leases (ASU 2016-02, as amended)
Requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. Also impacts certain aspects of lessee accounting for capital leases and lessor accounting.
- Public company effective date: 2019
- Private company effective date: 2020
Improvements to nonemployee share-based payment accounting (ASU 2018-07)
Expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Impacts oil and gas companies that issue equity awards for services.
- Public company effective date: 2019
- Private company effective date: 2020
Hedge accounting (ASU 2017-12)
Expands eligible hedge strategies, simplifies hedge documentation and effectiveness testing and revises presentation of hedging results.
- Public company effective date: 2019
- Private company effective date: 2020
Down-round features in certain financial instruments (ASU 2017-11)
Eliminates requirement to consider down-round features when assessing classification of certain warrants and financial instruments, such as debt or preferred equity, containing conversion features.
- Public company effective date: 2019
- Private company effective date: 2020
Financial instruments – credit losses (ASU 2016-13)
Replaces “incurred loss” with “current expected credit loss” (CECL) methodology to measure credit losses for financial assets. Impacts oil and gas companies holding trade receivables, net investments in leases (see ASU 2016-02), employee loans, notes receivables, as well as other assets.
- Public company effective date: 2020/2021
(SEC filers 2020 and public business entities that are not SEC filers 2021) - Private company effective date: 2021
Targeted improvements to related party guidance for variable interest entities (VIEs) (ASU 2018-17)
Provides an accounting alternative for private companies to not apply the variable interest entity guidance to potential VIEs that are under common control when certain criteria are met. Also changes the guidance for determining if a decision-making fee arrangement is a variable interest for entities under common control.
- Public company effective date: 2020
- Private company effective date: 2021
Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract (ASU 2018-15)
Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license.
- Public company effective date: 2020
- Private company effective date: 2021
Changes to the disclosure requirements for fair value measurements (ASU 2018-13)
Modifies the disclosure requirements on fair value measurements. Certain targeted disclosures are removed, modified, and added.
- Public company effective date: 2020
- Private company effective date: 2020
Simplifying goodwill impairment testing (ASU 2017-04)
Eliminates Step 2 of the goodwill impairment test and requires recognition of an impairment loss if the carrying value of the reporting unit exceeds its fair value.
- Public company effective date: 2020/2021
(SEC filers 2020 and public business entities that are not SEC filers 2021) - Private company effective date: 2022
(Many oil and gas companies early adopted the guidance.)
Reclassification of certain tax effects from accumulated other comprehensive income (ASU 2018-02)
Allows entities the option to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.
- Public company effective date: 2021
- Private company effective date: 2022
Regulatory update
In March 2019, the SEC adopted amendments to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies. The amendments are based on recommendations in the SEC’s staff’s FAST Act Report as well as a broader review of the SEC’s disclosure rules. The amendments are intended to improve the readability and navigability of company disclosures, and to discourage repetition and disclosure of immaterial information.
In May 2019, the SEC voted to propose amendments to the accelerated and large accelerated filer definitions. Under the proposed amendments, smaller reporting companies (SRCs) with less than $100 million in revenues would not be required to obtain an attestation of their Internal Control over Financial Reporting (ICFR) from an outside independent auditor. The proposed amendments would:
- Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available;
- Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; and
- Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
The public comment period for the proposed amendments ends July 29, 2019. We will discuss this proposal in future updates following the comment period and SEC consideration of the responses.
Center for Audit Quality updates
In May 2019, the Center for Audit Quality (CAQ) released a new tool to help audit committees prepare for the new credit losses standard (ASU 2016-13) – Preparing for the New Credit Losses Standard: A Tool for Audit Committees. The CAQ tool should help audit committee members, as well as private company governance committees, execute their oversight responsibilities and is also a useful resource for management. The tool provides important questions to consider related to the company’s implementation efforts.
Also in May 2019, the CAQ issued a publication Emerging Technologies, Risk, and the Auditor’s Focus: A Resource for Auditors, Audit Committees, and Management. This resource discusses the financial reporting implications of the evolving use of technology, such as artificial intelligence, the internet of things, and smart contracts. As the resource highlights, a solid understanding of the benefits and risks of these technologies is necessary for auditors, audit committees, and management to execute their respective responsibilities effectively. This new publication expands on the CAQ’s 2018 publication, Emerging Technologies: An Oversight Tool for Audit Committees. It enumerates key risks and addresses auditor considerations regarding those risks. It also provides discussion into areas of auditor focus when it comes to the impact of emerging technology on business, internal control over financial reporting, and audit committee oversight.
If you have any questions, please give our oil and gas team a call.
