The Financial Accounting Standards Board (FASB) issues several Accounting Standards Updates (ASUs) that impact oil and gas organizations. Key ASUs for all organizations are discussed in depth in the Accounting and Financial Reporting Developments for Public and Private Companies Newsletters.
Simplifying the Accounting for Income Taxes (ASU 2019-12)
Simplifies the accounting for income taxes by removing the following exceptions from Topic 740:
- Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items.
- Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment.
- Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary.
- Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The ASU also makes the following changes to the accounting for income taxes:
- Requires an entity to recognize a franchise tax (or similar tax) that is based partially on income as an income-based tax and account for any incremental amount incurred as a nonincome-based tax.
- Requires an entity to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
- Specifies that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements.
- Requires an entity to reflect the effect of an enacted change in tax law or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
The standard is effective for public business entities for fiscal years beginning after Dec. 15, 2020. For all other entities, the standard is effective for fiscal years beginning after Dec. 15, 2021. Early adoption is permitted.
Deferral of Effective Dates (ASU 2019-10)
Delays the effective dates of three major accounting standards issued in recent years. The delay is due to feedback from companies regarding the challenges of implementing the new revenue recognition standard as well as the other new rules on the near horizon. The significant new accounting rules have created a significant burden especially for private companies and smaller reporting companies (SRCs).
The proposed effective dates for calendar year-end companies are as follows:
- Lease accounting (Topic 842):
- Public business entities, employee benefit plans, and conduit bond obligors (no change): January 2019
- All other entities: January 2021
- Derivatives and hedging (Topic 815):
- Public business entities (no change): January 2019
- All other entities: January 2021
- Accounting for credit losses (Topic 326):
- Securities and Exchange Commission (SEC) filers, excluding SRCs: January 2020
- All other entities: January 2023
In addition to the changes identified above, based on stakeholder feedback, the Board plans to amend the effective date of ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to align with the amended effective dates for the Accounting for Credit Losses (as noted above).
Codification Improvements – Share-based Consideration Payable to a Customer (ASU 2019-08)
This provides measurement guidance for situations where entities grant share-based payment awards to customers. Prior to the issuance of this update, there was no measurement guidance for these types of transactions. The ASU requires application of the classification and measurement guidance in ASC Topic 718 for share-based payment awards granted to customers. This means the reduction in the transaction price for an award granted to a customer is measured at the award’s grant date fair value. The standard is effective for fiscal years beginning after Dec. 15, 2019, for all entities.
Regulatory Update
SEC proposes to update accredited investor definition to increase access to investments
In December 2019, the SEC voted to propose amendments to the definition of accredited investor, one of the principal tests for those eligible to participate in private capital markets. The proposal would update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets.
The proposed amendments would allow more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications. The proposal would also expand the list of entities that may qualify as accredited investors by, among other things, allowing any entity that meets an investments test to qualify.
The public comment period will remain open for 60 days following publication in the Federal Register.
SEC proposes to implement statutory mandate to adopt resource extraction disclosure rules
In December 2019, the SEC voted to propose rules that would require resource extraction issuers to disclose payments made to foreign governments or to the U.S. federal government for the commercial development of oil, natural gas, or minerals.
The Commission first adopted rules in this area in 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); however, the 2012 rules were vacated by the U.S. District Court for the District of Columbia. The Commission then adopted new rules in 2016, which were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act.
Although the joint resolution of Congress vacated the 2016 rules, the Dodd-Frank Act statutory mandate remains in effect, and the Commission is statutorily obligated to issue a rule. Under the Congressional Review Act, however, the Commission may not reissue the same rule in “substantially the same form” or issue a new rule that is “substantially the same” as the disapproved rule.
The proposed rules would require a domestic or foreign issuer to disclose payments made to a foreign government or the U.S. federal government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the SEC. The issuer would also be required to disclose payments made by a subsidiary or entity controlled by the issuer.
The proposed rules would require public disclosure of company-specific, project-level payment information. The proposed rules include several changes compared to the 2016 rules vacated pursuant to the Congressional Review Act. For example, the proposed rules would:
- Revise the definition of the term “project” to require disclosure at the national and major subnational political jurisdiction level, as opposed to the contract level.
- Revise the definition of “not de minimis” to include both a project threshold and an individual payment threshold so that disclosure with respect to payments to governments that equal or exceed $150,000 would be required when the total of the individual payments related to a project equal or exceed $750,000.
- Add two new conditional exemptions for situations in which a foreign law or a preexisting contract prohibits the required disclosure.
- Add an exemption for smaller reporting companies and emerging growth companies (EGCs).
- Revise the definition of “control” to exclude entities or operations in which an issuer has a proportionate interest.
- Limit the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the Commission.
- Permit an issuer to aggregate payments by payment type made at a level below the major subnational government level.
- Add relief for issuers that have recently completed their U.S. initial public offerings (IPO).
- Extend the deadline for furnishing the payment disclosures.
The proposal will have a 60-day public comment period following its publication in the Federal Register.
SEC hot topics
Calendar-year companies should consider certain SEC concerns and suggestions when preparing 2019 annual financial statements and disclosures. At the 2019 AICPA Conference on Current SEC and Public Company Accounting Oversight Board (PCAOB) Developments, SEC staff discussed matters related to accounting, financial reporting, and disclosures. A summary of some of the matters follows.
Non-GAAP measures
Various SEC staff, including Chairman Jay Clayton, SEC Chief Accountant Sagar Teotia, Division Deputy Chief Accountant Patrick Gilmore, and others, addressed concerns around non- generally accepted accounting principles (GAAP) measures. Similar to the prior year, they cautioned against using measures that involve individually tailored accounting principles that may not reflect the underlying economics of a transaction and that staff will often object to. Examples include non-GAAP measures that change the GAAP revenue presentation from net to gross, change GAAP gross margin to contribution margin that excludes costs necessary to generate revenues or include adjustments related to the new credit loss standard (when adopted).
Chairman Clayton cautioned that there should not be separate non-GAAP measures provided to the public that are different from those used by management to run the business, and the measures should not change quarter to quarter, but rather should be consistent in order to preserve comparability. If there are changes, they should be clearly explained including what results would have been like without them.
LIBOR
The London Interbank Offered Rate (LIBOR) is anticipated to be phased out in the coming year, which may impact debt agreements, hedge accounting, and other measurements based on LIBOR. In anticipation of the phase out, the FASB issued a proposed ASU to provide relief for accounting for amendments solely related to the LIBOR rate change as a continuation of a contract. Companies need to assess exposure and risks related to the LIBOR transition. SEC staff will monitor the phase-out developments and expects companies to provide detailed disclosures in filings about the anticipated effects, if material.
Revenue Recognition
Implementation of the new revenue standard is now complete for the vast majority of public companies and continues to be a focus of SEC staff, including the Division of Corporate Finance (Corp Fin).
Comments have focused on areas of the standard that require the application of judgment, such as the identification of performance obligations, the timing of revenue recognition, and the determination of whether the company is acting as a principal or as an agent.
Leases
The new leases standard was effective 2019 for calendar year public companies. The Office of the Chief Accountant (OCA) continues to be involved in the new leases standard and welcomes consultation questions. Also, the FASB plans to hold a leases roundtable in the spring of 2020, including discussions on embedded leases and discount rates.
Corp Fin is in the early stage of reviewing disclosures and cautioned to avoid boilerplate disclosures and to tailor specific lease arrangement disclosures, including assumptions used in applying the new standard.
Credit Losses
The new credit losses standard requires companies to recognize credit losses using an expected loss model rather than an incurred loss model, and is effective 2020 for many public companies.
The SEC has discussed its views in consultations, speeches, and the recent issuance of Staff Accounting Bulletin (SAB) 119. Staff emphasized that companies should focus on SAB 74 transition disclosures prior to adoption. Disclosures should address implementation progress including work yet to be completed.
Disclosure of Emerging Risks
A panel discussion of members of Corp Fin discussed financial reporting topics that Corp Fin is reviewing filings for, including:
- Cybersecurity
- Brexit
- Transition from LIBOR
- Others such as tariffs, sustainability reporting, unrest in other countries, etc.
Companies should include transparent disclosures if they expect the risks to be material. It was noted that the disclosures being made to a company’s board of directors by management and those being made to the public in the filings should be similar. Corp Fin also looks for potential disclosures on internal controls covering these areas. Disclosures are expected to evolve over time.
Impact of ASU 2019-10 Deferral of Certain Adoption Dates
In November 2019, the FASB issued ASU 2019-10 as discussed earlier in this update. The new guidance provides a two-bucket framework to stagger effective dates for future accounting standards and also deferred the effective dates for the new hedging, leases, and credit losses standards for certain entities.
The new two-bucket framework is:
- Bucket 1 – All public business entities (PBEs that are SEC filers (as defined by GAAP), excluding SRCs (as defined by the SEC).
- Bucket 2 – All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans.
The new approach raises questions for many companies, including entities filing an initial registration statement, EGCs, and entities meeting the definition of a PBE solely because their financial statements or financial information is included in an SEC filing related specifically to their adoption of the new leases standard. SEC staff addressed these concerns and provided the following guidance:
Entities Filing An Initial Registration Statement
An entity that is in the process of an IPO does not meet the definition of an SEC filer until its initial registration statement is declared effective; therefore, an entity may apply the Bucket 2 adoption dates for the financial statements included in its initial registration statement. However, after the initial registration statement is declared effective, the entity, as a registrant, must apply the Bucket 1 adoption dates for the financial statements included in its next filing unless the entity is an SRC or an EGC that has elected to defer adoption of the new standards.
If the registrant is an SRC when it files its initial registration statement, the staff would not object if it continues to apply the Bucket 2 adoption for the dates for the financial statements included in filings after its initial registration statement becomes effective. In this case, SAB 74 disclosures should be included in the footnotes to the financial statements and Management Discussion & Analysis (MD&A) to disclose the expected effects of the new standard on its financial statements in the period of adoption.
Emerging Growth Companies
Under SEC rules, an EGC is not required to comply with new or revised accounting standards as of the effective dates for PBEs and may elect to take advantage of the extended transition provisions by applying non-PBE (or private company) adoption dates for as long as the issuer qualifies as an EGC.
SEC staff addressed transition requirements related to the adoption of the new credit losses standard for EGCs and clarified that ASUs 2019-09 and 2019-10 do not benefit non-SRC registrants that are EGCs that plan to adopt a new standard by using Bucket 2 adoption dates but subsequently lose their EGC status. As a result, loss of EGC status before the non-PBE adoption date (Bucket 2) would affect the adoption date of a new standard.
Effective Date for New Leases Standard for Entities That Meet the Definition of a PBE Solely Because Their Financial Statements or Financial Information is Included in a Filing with the SEC
The SEC staff announcement (codified into ASC 842-10-S65-1) provides relief from the requirement to apply the PBE effective date for the leases standard for entities that meet the definition of a PBE solely because their financial statements or financial information is included in a filing with the SEC. ASU 2019-10 did not amend the prior staff announcement. SEC staff suggested that such entities would be afforded the relief provided to other private entities through ASC 2019-10, and staff would not object if these entities adopted ASC 842 for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
SEC Public Statement on Audit Committees
In December 2019, a Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities was issued by SEC Chairman Clayton, Chief Accountant Teotia, and Director of Corp Fin Hinman.
The statement stressed that audit committees play a vital role in the financial reporting system through their oversight of financial reporting, including the internal control over financial reporting (ICFR) and the external, independent audit process. In addition, they reiterated that the measures related to audit committees have proven to be some of the most effective financial reporting enhancements included in the Sarbanes-Oxley Act.
The statement provides observations and reminders on a number of potential areas of focus for audit committees. Issuers and independent auditors should also be mindful of these considerations, ensuring that audit committees have the resources and support they need to fulfill their obligations. The observations and reminders are not intended to reflect a comprehensive list of all audit committee responsibilities. Below are excerpts from the statement.
Tone at the Top — “We encourage audit committees to focus on the “tone at the top” with the objective of creating and maintaining an environment that supports the integrity of the financial reporting process and the independence of the audit. In this regard, it is important for the audit committee to set an expectation for clear and candid communications to and from the auditor, and likewise to set an expectation with both management and the auditor that the audit committee will engage as reporting and control issues arise.”
Auditor Independence — “The audit committee plays a critical role in auditors’ compliance with the auditor independence rules, in part because the Sarbanes-Oxley Act mandates that audit committees be directly responsible for the oversight of the engagement of the company’s independent auditor. We encourage audit committees to consider periodically the sufficiency of the auditor’s and the issuer’s monitoring processes.”
Generally Accepted Accounting Principles — “Particularly in light of the significant new accounting standards recently implemented (e.g., the new revenue and leases standards), we encourage audit committees to engage proactively with management and auditors in the implementation process of new standards to understand management’s implementation plan, including whether the plan provides sufficient time and resources to develop well-reasoned judgments and accounting policies. It is also important for an audit committee to understand management’s processes to establish and monitor controls and procedures over adoption and transition.”
ICFR — “Audit committees are responsible for overseeing ICFR, including in connection with their consideration of management’s assessment of ICFR effectiveness and, when applicable, the auditor’s attestation. We believe audit committees are most effective when they have a detailed understanding of identified ICFR issues and engage proactively to aid in their resolution.”
Communications to the Audit Committee from the Independent Auditor — “We remind audit committees of the year-end financial reporting process under PCAOB AS 1301, Communications with Audit Committees, which requires the auditor to communicate with the audit committee regarding certain matters related to the conduct of the audit and to obtain certain information from the audit committee relevant to the audit. We encourage audit committees to incorporate this dialogue in carrying out their responsibilities.”
Non-GAAP Measures — “It is important that audit committees understand whether—and how and why — management uses non-GAAP measures and performance metrics, and how those measures are used in addition to GAAP financial statements in the company’s financial reporting and in connection with internal decision-making. We encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.”
Reference Rate Reform (LIBOR) — “We encourage audit committees to understand management’s plan to identify and address the risks associated with reference rate reform, and specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR.”
Critical Audit Matters (CAMs) — “While the independent auditor is solely responsible for writing and communicating CAMs, we encourage audit committees to engage in a substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAM, the auditor’s basis for the determination of each CAM and how each CAM is expected to be described in the auditor’s report.”
PCAOB conversations with Audit Committee chairs
In 2019, the PCAOB had conversations with the audit committee chairs of almost all of the U.S. issuers whose audits were inspected. The PCAOB expects to have spoken with nearly 400 audit committee chairs by year-end; in comparison, they spoke to only 88 audit committee chairs in 2018. Audit committee chairs provided informative and valuable feedback. The PCAOB shared their perspectives in the publication, Conversations with Audit Committee Chairs: What We Heard & FAQs. The document details what the PCAOB frequently heard from audit committee chairs, their perspectives on what is working well to help improve audit quality, an overview of the inspections process, and staff responses to frequently asked questions during conversations.
The publication contains detailed responses from audit committees on what procedures are working well regarding the following areas:
- Evaluating audit quality
- Relationship & communication with the auditor
- New auditing & accounting standards
- Technology-driven changes
We recommend that audit committees and management read the publication, as there are very good suggestions on procedures that could benefit audit committees. There is also a summary discussion of the PCAOB inspection process.
Critical Audit Matters: Spotlight
In December 2019, the PCAOB published a Critical Audit Matters Spotlight. The PCAOB conducted extensive outreach to audit firms and other stakeholders as well as issued guidance and other resource tools. In 2019, they selected 12 audits of large accelerated filers with fiscal years ending on or after June 30, 2019, to specifically review how auditors of these filers implemented the CAM requirements. The new Spotlight focuses on observations from their inspections of these new requirements and from their outreach and data analysis activities.
The PCAOB believes that sharing initial observations from the experiences of the first adopters of CAM requirements could help auditors, companies, audit committees, and other stakeholders. Only a limited number of audits have been subject to the CAM requirements to date. The second effective date, which impacts audits of all other companies to which the requirements apply, is for audits of fiscal years ending on or after Dec. 15, 2020.
The Spotlight is not staff guidance but rather it highlights timely and relevant observations for auditors and other key stakeholders.
Managing cyber risk in a digital age
In December 2019, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), in collaboration with Deloitte Risk & Financial Advisory, released new guidance, Managing Cyber Risk in a Digital Age.
The new guidance is written to boards of directors, audit committee members, executive management, and cyber practitioners, and addresses how companies can apply COSO’s “Enterprise Risk Management-Integrating with Strategy and Performance (ERM Framework)” to protect against cyberattacks. The guidance provides insight into how organizations can leverage the five components and 20 principles of the ERM Framework to identify and manage cyber risks.
As business and technology evolve, so has COSO’s ERM Framework, which was updated in 2017 to highlight the importance of applying ERM throughout an organization, particularly in strategic planning. One of the foundational drivers behind the 2017 update was to address the need for organizations to improve their approach in managing cyber risks. This new guidance is designed to provide context related to the fundamental concepts of cyber risk management, making it easier for organizations to leverage existing technical cybersecurity frameworks.
The guidance notes that the fast-evolving cyberthreat landscape makes it imperative for boards of directors to increase their cyber competencies so that they may effectively evaluate how well these risks are being addressed. It’s crucial that boards develop cybersecurity expertise themselves or identify advisors with relevant skills.
If you have any questions, please give our oil and gas team a call.
