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Upstream: Complex Financial Reporting: Revenue Recognition & Lease Accounting Implementations

A private exploration and production (E&P) company (“the Company”) is expanding through an asset acquisition and development in the Eagle Ford Basin. In May 2019, the Company purchased Eagle Ford acreage in South Texas from an unrelate public-traded E&P company (“the Seller”). The transaction with the Seller included acreage across five counties, with current net production of approximately 15,000 barrels-of-oil-equivalent-per-day. The transaction represented the Company’s only acquisition of acreage to date.

The Company engaged Opportune’s Complex Financial Reporting (CFR) professionals to assist with its revenue recognition (“ASC 606”) and lease accounting (“ASC 842”) implementations in connection with the Company’s acquisition of the Seller’s Eagle Ford assets. These implementations were unique in that there were two key facets to consider in ensuring successful implementations:

  • Evaluate existing Company contracts for implications related to the new standards (note: this is standard to all implementations); and
  • Identify at-risk contracts acquired via the transaction and evaluate those contracts for implications related to the new standards.

Each implementation involved the following project tasks:

  • Coordination with both the Company’s and the Seller’s teams;
  • Data mining and data review exercises for the Company’s and the Seller’s financial data to ensure complete contract populations;
  • Development of sampling methodologies to review at-risk contracts based on identified revenue streams and lease asset classes;
  • Review and documentation of key contracts identified via the sampling methodology in proprietary checklists for each standard; and
  • Memo documentation of key technical accounting conclusions under each standard.

The Company and the Seller had a Transition Services Agreement (“TSA”) in place; however, this was only effective for a defined period of time subsequent to closing. Given that the Seller, as a public company, had already adopted ASC 606 and ASC 842, it was critical that the Company leverage the Seller’s knowledge to understand the Seller’s at-risk contracts, technical conclusions and application of materiality (which was significantly higher than that of the Company’s materiality threshold) to ensure successful implementations. Opportune added value by facilitating inquiries and discussions with the Seller’s team in an expedited manner to ensure that all relevant information was gathered from the Seller prior to the expiration of the TSA.

Furthermore, Opportune’s revenue recognition and lease accounting teams worked in tandem to ensure that relevant information was leveraged between the two implementations. For example, gas processing arrangements have potential implications under ASC 606 and ASC 842, and the two teams worked together to ensure that these contracts were only reviewed once in the context of both standards. Opportune’s professionals also managed tightened timelines on both projects and successfully delivered technical documentation to the Company’s auditors in a timely manner, which provided the Company with the flexibility to adopt the new standards in the first set of financial statements required post-transaction.

Opportune employs a team-based approach to solve complex issues that management teams face in today’s evolving energy industry. Whether our clients need to improve financial reporting processes, seek to deploy or update technology systems, or undertake a business transformation, we have the expertise to offer them substantial, clear-sighted reporting and technology recommendations and strategic support. Our expertise rivals the multi-national firms, while our focus on the energy market and personalized client service make us a unique player in this advisory arena, offering professional financial reporting and technology consulting. For additional information, CLICK HERE.

Josh Sherman

PartnerOpportune LLP