Skip to Content
Two business professionals walking down a flight of stairs outside.
Article

Energy companies: Q1 2022 accounting and reporting update

April 27, 2022 / 15 min read

In this update, we highlight some of the more important 2022 first quarter accounting, financial reporting, and regulatory developments that may impact energy companies.

Accounting guidance


Accounting guidance issued in first quarter 2022

ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, provides updated guidance for accounting for troubled debt restructurings (TDRs) by creditors and vintage disclosures for entities applying the guidance in ASU 2016-13. The new ASU eliminates the specific accounting guidance for TDRs by creditors while enhancing the disclosure requirements for loan refinancings/restructurings by creditors when the borrower is experiencing financial difficulty. The ASU also updates the vintage disclosure requirements to require disclosure of current period gross write-offs by year of origination. The new ASU is effective for years beginning after Dec. 15, 2022, for entities that have adopted ASU 2016-13. For all other entities, the amendments are effective when the entity adopts ASU 2016-13.

ASU 2022-01, Derivatives and Hedging (Topic 815) — Fair Value Hedging — Portfolio Layer Method, makes it easier for entities to apply the portfolio layer method to qualify for hedge accounting. The amendments include the following main provisions:

This new guidance is effective for public business entities for fiscal years beginning after Dec. 15, 2022. For all other entities the new guidance is effective for fiscal years beginning after Dec. 15, 2023.

Regulatory update


Materiality assessment of errors

On March 9, 2022, Paul Munter, acting chief accountant, issued a statement regarding assessing the materiality of errors in financial statements. Mr. Munter and other SEC staff previously addressed this topic at the 2021 AICPA and CIMA Conference on Current SEC and PCAOB Developments. He noted that whenever a material error is identified in previously issued financial statements, investors must be notified promptly and the error must be corrected. Management’s determination of whether an error is material is an objective assessment focused on whether there is a substantial likelihood it is important to the reasonable investor as discussed in Staff Accounting Bulletin (SAB) No. 99, Materiality and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.

Mr. Munter indicated it is “important for registrants, auditors, and audit committees to carefully assess whether the error is material by applying a well-reasoned, holistic, objective approach from a reasonable investor’s perspective based on the total mix of information. To be objective, those involved in the process must eliminate from the analysis their own biases, including those related to potential negative impacts of a restatement, that would be inconsistent with a reasonable investor’s view. Additionally, the objective analysis should consider all relevant facts and circumstances including both quantitative and qualitative factors.”

Mr. Munter discussed the following topics with key takeaways noted:

Concept of materiality and the correction of material errors

Objective assessment of materiality

Observations from recent interactions with registrants and auditors on materiality

The following arguments were not found to be persuasive.

Identification of an accounting error also impacts management’s assessment of the effectiveness of ICFR, and the statement provides considerations for this assessment.

Compliance and disclosure interpretations updated for business combinations

Division of Corporation Finance (Corp Fin) updated the following Compliance and Disclosure Interpretations (C&DIs):

These updated C&DIs provide additional guidance on disclosures associated with entering into a business combination agreement. This updated guidance includes discussion of when a company must disclose material terms and conditions when entering into a business combination agreement that is reportable under Item 1.01 of Form 8-K. The updated guidance also discusses certain proxy disclosure rules related to whether public communications represent solicitations subject to such rules. Finally, the updated guidance discusses Corp Fin’s views on whether SEC Rule 14e-5 on the prohibition of purchases outside of a tender offer applies to transactions involving special purpose acquisition companies.

SAB 121

On March 31, 2022, the SEC issued Staff Accounting Bulletin (SAB) No. 121, which updates SAB Codification Topic 15, Miscellaneous Accounting, adding interpretive guidance for companies to consider when they have obligations to safeguard crypto-assets held for their platform users. The SAB notes that, “In recent years, the staff has observed an increase in the number of entities that provide platform users with the ability to transact in crypto-assets. In connection with these services, these entities and/or their agents may safeguard the platform user’s crypto-asset(s) and also maintain the cryptographic key information necessary to access the crypto-asset. The obligations associated with these arrangements involve unique risks and uncertainties not present in arrangements to safeguard assets that are not crypto-assets, including technological, legal, and regulatory risks and uncertainties.”

The SAB provides recognition, measurement, and disclosure guidance for obligations to safeguard crypto-assets that an entity holds for platform users. It also addresses how and when a company should initially apply the guidance in its financial statements.

Cybersecurity-related proposals

SEC proposes rules on cybersecurity disclosures for public companies

On March 9, 2022, the SEC proposed amendments to its rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies. The proposed amendments are intended to better inform investors about a registrant’s risk management, strategy, and governance and to provide timely notification to investors of material cybersecurity incidents.

The proposed amendments would require current reporting about material cybersecurity incidents and periodic reporting of, among other things:

The proposal would also require annual reporting or certain proxy disclosure about the board of directors’ cybersecurity expertise, if any.

SEC proposes cybersecurity risk management rules and amendments for registered investment advisers and funds

On Feb. 9, 2022, the SEC proposed rules related to cybersecurity risk management for registered investment advisers, and registered investment companies and business development companies (funds), as well as amendments to certain rules that govern investment adviser and fund disclosures. SEC Chair Gary Gensler stated: “The proposed rules and amendments are designed to enhance cybersecurity preparedness and could improve investor confidence in the resiliency of advisers and funds against cybersecurity threats and attacks.”

The proposal would require advisers and funds to:

The proposed rules also would require advisers to report significant cybersecurity incidents affecting the adviser or its fund or private fund clients to the SEC on a new confidential form.

SEC proposes rules to enhance and standardize climate-related disclosures

As discussed in previous quarterly updates, climate change disclosures have been a concern of the SEC as evidenced in various statements and comments letters. In September 2021, the staff in the Division of Corporation Finance (Corp Fin) published an illustrative letter containing sample comments that it may issue to companies regarding their climate-related disclosure or the absence of such disclosure. As stated in the sample comment letter, depending on the particular facts and circumstances, these disclosures may be required as part of a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.

On March 21, 2022, the SEC proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.

The proposed rule changes would require a registrant to disclose information about (1) its governance of climate-related risks and relevant risk management processes; (2) how any identified climate-related risks have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

The proposed rules would also require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

Under the proposed rule changes, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors.

The proposed rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.

SEC proposes rules to enhance disclosure and investor protection relating to special purpose acquisition companies, shell companies, and projections

On March 30, 2022, the SEC proposed new rules and amendments to enhance disclosure and investor protection in initial public offerings by special purpose acquisition companies (SPACs) and in business combination transactions involving shell companies, such as SPACs, and privately operating companies.

The proposed new rules and amendments, among other things are to:

If adopted, the proposed rules would more closely align the required financial statements of privately operating companies in transactions involving shell companies with those required in registration statements for an initial public offering.

SEC issues proposal to reduce risks in clearance and settlement of securities

On Feb. 9, 2022, the SEC proposed rule changes to reduce risks in the clearance and settlement of securities, including by shortening the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one business day after the trade date (T+1). The proposed changes are designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors.

In addition to shortening the standard settlement cycle, the proposal includes rules directed at broker-dealers and registered investment advisers to shorten the process of confirming and affirming the trade information necessary to prepare a transaction for settlement so that it can be completed by the end of the trade date. Further, the proposal includes a new requirement to facilitate straight-through processing, which would apply to certain types of clearing agencies that provide central matching services. Central matching service providers help facilitate the processing of institutional trades between broker-dealers and their institutional customers. The proposed rule would require new policies and procedures directed to straight-through processing and require an annual report on progress with the process.

With the goal of shortening the settlement cycle further, the proposal solicits comments on challenges associated with and potential paths to achieving a same-day settlement cycle.

The SEC’s published fact sheet notes that “reducing time between the execution of a securities transaction and its settlement reduces risk. Two recent episodes of increased market volatility — in March 2020 following the outbreak of the COVID-19 pandemic, and in January 2021 following heightened interest in certain “meme” stocks — highlighted potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle and improving institutional trade processing can mitigate. In the future, it may be beneficial to further shorten the standard settlement cycle beyond T+1. The proposal solicits comments on potential paths to and challenges associated with achieving a same-day settlement cycle.”

Other SEC proposals

Whistleblower program rules

On Feb. 10, 2022, the SEC proposed two amendments to the rules governing its whistleblower program. The first proposed amendment concerns award claims for related actions that would be otherwise covered by an alternative whistleblower program and the second affirms the SEC’s authority to consider the dollar amount of a potential award for the limited purpose of increasing an award but not to lower an award.

Modernize beneficial ownership reporting

On Feb. 10, 2022, the SEC proposed rule amendments governing beneficial ownership reporting under Exchange Act Sections 13(d) and 13(g) to provide more timely information to meet the needs of today’s financial markets.

The proposed amendments to Regulation 13D-G would accelerate the filing deadlines for Schedules 13D beneficial ownership reports from 10 days to five days and require that amendments be filed within one business day; generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (which differ based on the type of filer); expand the application of Regulation 13D-G to certain derivative securities; clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; provide new exemptions to permit certain persons to communicate and consult with one another, jointly engage issuers, and execute certain transactions without being subject to regulation as a “group;” and require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

Short sale disclosure rule, order marking requirement, and CAT amendments

On Feb. 25, 2022, the SEC proposed changes that would provide greater transparency to investors and regulators by increasing the public availability of short sale-related data.

You may also be interested in our quarterly publication that summarizes accounting, financial reporting, and regulatory matters that may impact both public and private companies. Read that report here.

Related Thinking

Business professional using a laptop computer.
March 11, 2022

Acquisitions in the current energy environment

Article 11 min read
Two people wearing protective facemasks sitting at a table in a park.
January 17, 2022

ESG: Best practices for the energy industry

Article 13 min read
A group of business professionals having a meeting wearing protective facemasks.
January 21, 2022

Energy companies: Q4 2021 accounting and reporting update

Article 17 min read