Accounting guidance
Current expected credit losses (CECL) considerations for private companies implementing in 2023
Accounting Standards Update (ASU) 2016-13 is effective for fiscal years beginning after Dec. 15, 2022, for all companies that have not yet implemented the standard. ASU 2016-13 requires credit losses to be recognized using an expected loss model instead of an incurred loss model, which has historically been used. Under the incurred loss model, companies were required to recognize credit losses when it was probable that a loss had been incurred. This differs from an expected loss model, which requires the development of an estimate of expected lifetime losses when the instrument is originated, with recognition of those losses at origination. ASU 2016-13 requires consideration of the following when developing the estimate of expected losses:
- The company’s historical loss experience for similar assets
- Adjustments for current conditions
- Adjustments for reasonable and supportable forecasts
Some of the financial instruments reported by energy companies that could be impacted include trade accounts receivable, net investment in leases by the lessor, contract assets recorded under ASC 606, and producer and pipeline imbalances. While companies previously considered their historical losses and adjustments for current conditions in an incurred loss model, the need to consider forward-looking information related to reasonable and supportable forecasts is a new requirement under the expected loss model. Incorporating this new information will likely require changes to internal controls and processes to capture and process the data underlying the assumptions used.
Under the expected credit loss model, the assessment must be performed at the portfolio level by grouping assets with similar risk characteristics into portfolios. With the assessment done at the portfolio level, the new guidance makes it clear that it’s generally not appropriate for expected losses to be zero given the uncertainty associated with future events. When developing estimates using reasonable and supportable forecasts, leading indicators that provide the best information about the expected future credit losses will need to be identified.
Determining what the relevant leading indicators will be impacted by the company’s industry (e.g.: oil and gas upstream or midstream, renewable sector), geography, as well as customer-specific factors. Determining the relevant leading indicators and assessing how those indicators may correlate to expected credit losses will require significant judgment and appropriate time will need to be allocated for this process. Given this, companies that have not started working on their implementation efforts should look to get started as soon as possible to ensure a successful outcome.
FASB Exposure Drafts issued in second quarter 2023
The Financial Accounting and Standards Board (FASB) continues to work through technical projects and improvements to the Codification. While the FASB didn’t issue any new ASUs in second quarter of 2023, the following is a list of proposed accounting standards updates for which FASB recently issued exposure drafts that could impact energy companies:
- Proposed ASU — Compensation — Stock Compensation (Topic 718): Scope Application of Profits Interest Awards, is intended to help address stakeholder concerns with challenges companies face in determining whether profits interests should be accounted for in accordance with Topic 718 or Topic 710. The proposed ASU provides illustrative examples to assist entities in applying the scope guidance in Topic 718, Compensation — Stock Compensation, to profits interests and similar awards. The amendments in this proposed Update would apply to all reporting entities that account for profits interest awards as compensation to employees in return for goods or services.
- Proposed ASU — Income Taxes (Topic 740): Improvements to Income Tax Disclosures include amendments requiring additional disaggregation of certain income tax disclosures by taxing jurisdiction. The proposal is in response to investors’ feedback that disaggregated information about income tax expense and income tax paid by jurisdiction would provide useful decision information. The amendments in this proposed Update would apply to all entities that are subject to income taxes; however, certain disclosures would only be required for public business entities.
As these issues make their way through the FASB’s new standard-setting process, we will provide updates in subsequent versions of this newsletter.
Regulatory update
SEC reopens comment period for proposed rule amendments to modernize beneficial ownership reporting
In April 2023, the SEC reopened the comment period for its proposed amendments to modernize the rules governing beneficial ownership reporting, and the staff of the Commission’s Division of Economic and Risk Analysis released a memorandum that provides supplemental data and analysis related to the proposed amendments’ economic effects.
The public comment period has ended.
SEC adopts amendments to modernize share repurchase disclosure
In May 2023, the SEC adopted amendments to modernize the disclosure requirements relating to repurchases of an issuer’s equity securities, including requiring issuers to provide daily repurchase activity on a quarterly or semiannual basis, depending on the type of issuer. The amendments will improve disclosure and provide investors with enhanced information to assess the purposes and effects of share repurchases. The timing and disclosure requirements are outlined in the amendment.
Digital assets tool for audit committees
In May 2023, the Center for Audit Quality (CAQ) published a resource for audit committee members, “Continuing Your Digital Assets Journey: A Tool for Audit Committees,” with oversight of companies that hold or transact with digital assets that includes information on topics and questions for audit committees to consider, such as:
- Legal and regulatory environment: The digital asset legal and regulatory environment is rapidly evolving with domestic and international regulators and legislators prioritizing this topic.
- Risk assessment: Engaging with digital assets can introduce new or heightened risks for companies, including risks of fraud.
- Safeguarding digital assets: Custody practices are a key focus for companies holding and transacting with digital assets.
- Third-party service providers: Companies that rely on third-party service providers in the digital asset ecosystem must perform due diligence on the third parties they plan to engage with.
- Accounting and auditing considerations: Engaging with digital assets introduces a number of new accounting and auditing considerations.
