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Energy companies: Q2 2021 accounting and reporting update

July 23, 2021 / 10 min read

In this update, we highlight some of the more important 2021 second-quarter accounting, financial reporting, and regulatory developments that may impact energy companies. The content is not meant to be all-inclusive.

Accounting guidance

Accounting guidance issued in second quarter 2021

ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, is intended to reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options, that remain equity-classified after the modification or exchange. The new ASU provides a framework to measure the impact of the modification or exchange and requires the effect of a modification or an exchange be recognized in the same manner as if cash had been paid as consideration for the transaction. The new guidance is effective for reporting periods beginning after Dec. 15, 2021, and should be applied prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted.

Lease accounting: The time is now

In 2020, the FASB approved the deferral of the effective date for ASC 842 to Jan. 1, 2022, for calendar year-end nonpublic entities. While many energy entities have taken advantage of the deferral, those that have already adopted ASC 842 consistently indicate the implementation process was more time-consuming than initially anticipated. Much of the implementation process and lease contract analysis is manual in nature and can place constraints on the organization’s resources. The following actions should be taken now to avoid a potential rush to the deadline:

FASB evaluating accounting for goodwill

An ongoing project on the FASB’s technical agenda is a review of the subsequent accounting for goodwill for both public business entities and private companies. As part of this project, the FASB is evaluating whether to retain the existing impairment model for accounting for goodwill, modify the impairment model, or move to an amortization method to account for goodwill. The project is still in the early stages; however, tentative decisions made to date can be found on the project page on the FASB’s website.

Regulatory update

Special purpose acquisition companies

The increase in special purpose acquisition companies (SPACs) and the related acquisition transactions has continued to attract attention from regulators. SPACs have recently increased in popularity as they provide quick access to the capital markets. The use of SPACs raises complex financial reporting and governance considerations.

As we discussed in the prior quarter update, the SEC issued reminders of existing rules and their concerns on SPAC acquisition targets not being ready to be issuers following the SPAC acquisition transaction. The SEC reminded boards of directors, audit committees, management, and auditors of operating companies involved in a merger with a SPAC to fulfill their professional responsibilities so that companies meet their obligations under the federal securities laws and investors are provided with high-quality financial reporting at the time of the merger and on an ongoing basis.

Center for Audit Quality (CAQ) alert on SPACs

In May 2021, the CAQ issued Alert 2021-01, Auditor and Audit Committee Considerations Relating to SPAC Initial Public Offerings and Mergers, which provides a good summary of the various phases of a SPAC transaction along with specific considerations auditors, audit committees, and management of private companies preparing to go public through a SPAC should consider prior to and during the transaction.

Management and audit committees of private companies determining whether to “go public” via a SPAC transaction should consider the following (not all-inclusive):

SEC statement on SPAC warrants

In April 2021, John Coates, acting director of the SEC’s Division of Corporation Finance, and Paul Munter, acting chief accountant, said in a statement that certain warrants issued by a SPAC should be classified as liabilities rather than equity. The statement was based on their evaluation of the fact patterns relating to the accounting for warrants issued in connection with a SPAC’s formation and initial registered offering. They noted that while the specific terms of these warrants can vary, certain features of warrants issued in SPAC transactions may be common across many entities.

The statement was issued to highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions. Warrants classified as liabilities rather than equity must be measured at fair value, with changes in fair value included in net income each period. The statement also discussed the financial reporting considerations that apply if a registrant and its auditors determine there is a material error in any previously filed financial statements.

This statement has resulted in many restatements as well as some companies choosing to modify their warrants prior to the SPAC IPO process. We suggest that management carefully consider the statement and the potential implications when determining the accounting treatment for warrants issued in a SPAC transaction.

Climate and environmental, social and governance (ESG) disclosures

ESG programs and disclosures are an increasing focus for energy companies. Significant capital is being invested in funds with an ESG focus, and many investors are directing their investment decisions based on a company’s ESG policies. In Dec. 2020, BlackRock announced plans to vote against directors who fail to act to improve board diversity and asked U.S. companies to disclose the racial, ethnic, and gender makeup of their employees. We recommend that management and boards of directors of public and private energy companies pay attention to the SEC announcements and evolving disclosure requirements.

In March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The initial focus of the task force will be to identify any material gaps or misstatements in issuers’ disclosures of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisors’ and funds’ ESG strategies and work closely with other SEC divisions and offices, including the Divisions of Corporation Finance, Investment Management, and Examinations.

In June 2021, the SEC’s new chair, Gary Gensler, commented that he has asked SEC staff to put together recommendations on mandatory company disclosures on climate risk and human capital. He indicated that the SEC may require public companies to publish data on a whole range of new areas, including greenhouse gas emissions, workforce turnover, and diversity.

Human capital disclosures will build on prior SEC disclosure updates and could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.

Four materiality myths regarding climate and ESG disclosures

In May 2021, SEC Commissioner Allison Herren Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted jointly by the CAQ, AICPA, the Chartered Institute of Management Accountants, and the Sustainability Accounting Standards Board (SASB). She urged attendees to submit comments to the SEC as it plans new ESG disclosure rules and also addressed what she believes are four myths and misconceptions related to materiality as it pertains to climate and ESG disclosures. They are summarized as follows:

If you have any questions, please give our energy team a call.

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