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Q2 2023 accounting, financial reporting, and regulatory developments for energy companies

August 17, 2023 / 4 min read

In this update, we highlight some of the more important 2023 second quarter accounting, financial reporting, and regulatory developments that may impact energy companies. The content is not meant to be all-inclusive.

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:

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:

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:

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