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Energy companies: Q2 2022 accounting and reporting update

July 25, 2022 / 9 min read

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

Accounting guidance

Accounting guidance issued in second quarter 2022

ASU 2022-03, Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions, provides updated guidance on determining the fair value of equity securities when those securities have contractual sales restrictions. The new ASU clarifies that a contractual sales restriction should not be considered when determining the fair value of the equity security. The new guidance also adds additional disclosure requirements for equity securities subject to contractual sales restrictions. The new ASU is effective for public business entities for fiscal years beginning after Dec. 15, 2023. For all other entities, the new guidance is effective for fiscal years beginning after Dec. 15, 2024.

New lease accounting standard effective for 2022

The FASB’s new lease accounting standard, ASC Topic 842, will be effective for calendar year-end entities that have not previously adopted the new guidance for their 2022 annual financial statements. Many entities that have already adopted ASC Topic 842 have indicated the implementation process was more time-consuming than initially anticipated. Given this, entities that have not started working on their implementation efforts should look to get started as soon as possible in order to ensure a successful outcome. Some of the key steps for a successful implementation include:

FASB drops project on subsequent accounting for goodwill

In June 2022, the FASB voted unanimously to remove its project on the subsequent accounting for goodwill. This ongoing project had been evaluating whether changes should be made to the subsequent accounting for goodwill, including amortization of goodwill. As the project was dropped from the FASB’s agenda, any tentative decisions made will not become effective.

Regulatory update

Sample letter to companies regarding disclosures pertaining to Russia’s invasion of Ukraine and related supply chain issues

In May 2022, staff in the SEC’s Division of Corporation Finance (Corp Fin) posted a sample letter in their article, “Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues.” They noted that companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that Russia’s invasion of Ukraine and the international response have had or may have on their business. To satisfy these obligations, Corp Fin believes that companies should provide detailed disclosure, to the extent material or otherwise required, regarding:

  1. Direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus.
  2. Direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia.
  3. Actual or potential disruptions in the company’s supply chain.
  4. Business relationships, connections to, or assets in Russia, Belarus, or Ukraine.

The financial statements may also need to reflect and disclose the impairment of assets, changes in inventory valuation, deferred tax asset valuation allowance, disposal or exiting of a business, deconsolidation, changes in exchange rates, and changes in contracts with customers or the ability to collect contract considerations. Corp Fin also notes that since Russia’s invasion of Ukraine, many companies have experienced heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure.

In addition, Corp Fin states that, “Companies also should consider how these matters affect management’s evaluation of disclosure controls and procedures, management’s assessment of the effectiveness of internal control over financial reporting, and the role of the board of directors in risk oversight of any action or inaction related to Russia’s invasion of Ukraine, including consideration of whether to continue or to halt operations or investments in Russia and/or Belarus.”

We suggest that management and audit committees carefully review this sample letter as it relates to their exposure and business to ensure appropriate disclosures.

SEC proposal on climate-change disclosures

In May 2022, the SEC extended the comment period for proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and annual reports. The comment period for the release was originally scheduled to close on May 20, 2022. The new comment period ended on June 17, 2022. This proposal was discussed in the prior quarter’s update.

Digital assets and crypto investments

On May 16, 2022 at a FINRA conference, Chair Gensler made several speeches dealing with investor protections and specifically warned about investing in cryptocurrencies following the significant price declines. On May 17, 2022, in a speech at the 2022 NASAA Spring Meeting & Public Policy Symposium, Chair Gensler stated: “I think there’s a need to bring greater investor protection to these crypto markets,” and “The crypto-related events in recent weeks have highlighted yet again how important it is to protect investors in this highly speculative asset class.”

Other developments

Accounting and reporting implications of the Russia/Ukraine war

As the impacts of Russia’s invasion of Ukraine are being felt throughout the world, there will also be accounting and financial reporting implications that entities need to consider in addition to the humanitarian considerations.

The impacts from the war in Ukraine have already begun for many entities both directly and indirectly. Some of the areas where entities may be impacted include (not all-inclusive):

For each of the areas above, see “Accounting, financial reporting, and regulatory developments: First quarter 2022” for additional considerations on the financial reporting impacts. In addition to the items discussed above, entities should also consider other financial statement disclosures that may be appropriate. Entities that may be impacted should consider whether disclosure should be included in their risks and uncertainties disclosures or as a subsequent event.

If SEC registrants are considering including non-GAAP financial metrics in their filings as a result of the war in Ukraine, they should consider the SEC’s rules and guidance on including non-GAAP metrics within their Form 10Q or Form 10K.

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. This content is not meant to be all-inclusive.

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