Energy companies: Q3 2022 accounting and reporting update
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 haven’t 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. Some of the areas that have taken longer than initially anticipated include compiling a complete inventory of leases, determining the lease term, determining the discount rate, and inputting the leases into a software solution. Entities that haven’t started working on their implementation efforts should get started as soon as possible in order to ensure a successful outcome. See our “Accounting, financial reporting, and regulatory developments: Second quarter 2022,” article for additional information on key considerations implementing the new lease standard.
SEC amends whistleblower rules
In August 2022, the SEC adopted two amendments to the rules governing its whistleblower program. The amendments allow the SEC to pay whistleblowers for their information and assistance in connection with non-SEC actions in additional circumstances and affirm 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 the amount.
SEC adopts pay versus performance disclosure rules
In August 2022, the SEC adopted amendments to its rules to require registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. The rules implement a requirement mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The amendments require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. With respect to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant’s peer group, its net income, and a financial performance measure chosen by the registrant. Then, using the information in the table, registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance. Smaller reporting companies will be subject to scaled disclosure requirements under the rules.
Registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after Dec. 16, 2022.
SEC issues final rule on inflation adjustments
In September 2022, the SEC issued a final rule to make certain inflation adjustments in response to a mandate of the Jumpstart Our Business Startups Act, which requires the SEC to make such adjustments at least once every five years. The final rule adjusts the revenue thresholds in the definition of “emerging growth company” from $1.070 billion to $1.235 billion as well as dollar amounts in Regulation Crowdfunding.
SEC updates questions and answers (Q&As) for compliance and disclosure interpretations (C&DI) of rule 14a-19
The SEC added three Q&As in their proxy rules and Schedule 14A C&DIs relating to dissident or contested shareholder notices in Questions 139.01, 139.02, and 139.03.
The SEC’s proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and annual reports were discussed in the prior quarters’ updates, and the SEC is expected to issue final rules in the fourth quarter 2022. On October 7, the SEC reopened the public comment period for comments due to a technological error that resulted in a number of public comments submitted through the SEC’s internet comment form not being received. The majority of the affected comments were submitted in August 2022; however, the technological error is known to have occurred as early as June 2021. Comments can be submitted until 14 days following publication of the reopening release in the Federal Register.
Meanwhile, the SEC has issued comment letters to registrants regarding climate disclosures required under existing disclosure rules.
SEC Chair Gensler spoke at the September Practicing Law Institute’s annual SEC Speaks Conference regarding regulation of cryptocurrency and intermediaries. He stated that “Nothing about the crypto markets is incompatible with the securities laws. Investor protection is just as relevant, regardless of underlying technologies.”
Chair Gensler noted he believed that the vast majority of tokens in the crypto market are securities and offers and sales are covered under the securities laws. He also noted that crypto intermediaries in essence function as exchanges, brokers and dealers, and custodians. Accordingly, they should assess their registration obligations. He said that “the public benefits when intermediaries are registered and overseen.”
PCAOB releases 2022 audit committee resource
In August 2022, the PCAOB released a new publication, “Spotlight: Audit Committee Resource.” The Spotlight serves as a timely reference for auditors, audit committee members, investors, and other personnel, and includes questions that audit committees of public companies might want to consider as part of their ongoing engagement and discussion with their auditors. Questions include how the auditors are responding to the financial reporting and audit risks posed by the current economic environment. We also encourage management to consider the Spotlight in preparing financial statements and disclosures and in communications with the audit committee.
Topics covered in the publication include:
- Fraud and other risks
- IPOs and mergers and acquisitions
- Audit execution
- Audit firms’ quality control systems
- Compliance with auditor independence requirements
- Technology (auditing digital assets, responding to cyberthreats, and use of data and technology in the audit)
Impacts of inflation and rising interest rates on financial reporting
While most entities are familiar with the impact that inflation and rising interest rates are having on operations, it’s also important to consider the financial reporting implications.
In addition to the impact inflation has on costs, entities also must take into account expectations of future inflation when they are required to use projected financial information. When developing projected financial information, those projections will need to take into account estimates of whether and how inflation will persist into the future. Some common areas where projected financial information is required to be used include:
- Goodwill impairment
- Long-lived asset impairment
- Loan or investment impairment
- Going-concern assessments
- Valuations of assets acquired and liabilities assumed in a business combination or asset acquisition
- Fair value measurements of derivatives and other financial instruments
- Fair value measurements of share-based payment arrangements
- Asset retirement obligations
- Realization of deferred tax assets
- Any other valuations that rely on financial projections
In instances where there is significant uncertainty around the anticipated level of future inflation, entities may need to develop projections for multiple scenarios and weigh those scenarios by likelihood to account for the uncertainty.
Many entities have been impacted by the rising interest rates and the resulting increased borrowing costs and interest expense. In addition to these direct impacts, rising interest rates can also impact financial reporting by causing an increase in discount rates, which are a significant input into discounted cash flow models. Common areas where discounted cash flow models can affect financial reporting include:
- Goodwill impairment
- Long-lived asset impairment
- Calculation of lease liabilities and right-of-use assets
- Valuation of investments
- Valuations of intangible assets
- Valuation of share-based payment arrangements
- Valuations of debt and equity securities
The impact of increasing discount rates is a corresponding decrease in many valuations. As a result, more entities may be required to evaluate potential asset impairments in 2022 resulting from these potential declines in asset valuations.
Inflation Reduction Act
President Joe Biden signed the Inflation Reduction Act of 2022 (Act) into law on Aug. 16, 2022. A summary and discussion of the key provisions is included in our article, “Congress completes reconciliation bill with key tax changes.”
The Act has potential accounting and financial reporting implications for provisions related to a new corporate minimum tax rate, public company excise tax on stock buybacks, and various tax credits and incentives for clean energy technologies. We encourage companies to become familiar with the Act and assess the potential impacts.
Reference Rate Reform
Many entities have contractual arrangements that use LIBOR as a reference rate. Because the remaining LIBOR indices are scheduled to sunset on June 30, 2023, FASB has provided optional practical expedients in ASC Topic 848, Reference Rate Reform, which provide entities with the option to not apply modification accounting if an agreement is modified to change the reference rate. To qualify for this simplified alternative, modifications must meet specific criteria, most notably that changes can’t substantively affect terms other than the reference rate. Currently, the simplifications are only available to modifications made on or before Dec. 31, 2022; however, in a recent board meeting, FASB decided to issue an ASU that will extend the date by which modifications to change the reference rate can be made until Dec. 31, 2024. While not yet issued, the final ASU is expected by the end of 2022.
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