Topic 606 And More

Public midstream firms need to prepare for the impact of new accounting rules.

By Reid Brooks and Josh Sherman

Public midstream oil and gas entities continue to face ever-increasing complexity related to filing financial statements that are compliant with GAAP and the U.S. Securities and Exchange Commission (SEC). The SEC has been actively commenting on registrants’ filings and making public remarks about the importance of quality disclosures, especially around revenue recognition transition disclosures, non-GAAP measures and cybersecurity.

Many organizations are trying to make sense of the new and developing financial reporting requirements and the steps they can take to minimize SEC inquiry by increasing the decision-usefulness of financial statement disclosures.

Revenue Recognition

The public entity effective date for the new revenue recognition standard, Topic 606, passed with the filling of first-quarter 2018 10-Q filings, the first time these entities reported under the new standard. Despite this, many midstream oil and gas entities are still working through the adoption of Topic 606 in preparation for 2019 implementation.

While midstream oil and gas entities have generally been less impacted than industries such as telecommunications and software, Topic 606 has created additional disclosures, new controls processes and additional reporting for both commercial and accounting departments.

The SEC made numerous remarks throughout 2017 about the need for robust transition disclosures foreshadowing the anticipated effects new accounting standards would likely have on a company’s financial statements. If the initial Topic 606 filing in first-quarter 2018 resulted in material changes to timing, method or disclosures of revenue—but the annual report preceding this initial filing made few or zero disclosures regarding the anticipated impacts of the new standard—the SEC will likely initiate an inquiry. This inquiry could potentially lead to enforcement actions due to a failure to disclose decision-useful information to readers of the financial statements.

The SEC addresses these disclosure requirements within its Interpretive Response to Question No. 2 of Staff Accounting Bulletin (SAB) Topic 11.M, commonly referred to as SAB 74:

The following disclosures should generally be considered by the registrant:

  • A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier;
  • A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined;
  • A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made; and
  • Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.

In January 2017, the Financial Accounting Standards Board (FASB) incorporated the following SEC Staff Observer comments on SAB Topic 11.M within Accounting Standards Update 2017-03 (emphasis added):

“…the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.

Auditors have increased their analysis of whether a company’s Topic 606 SAB 74 disclosure sufficiently describes the efforts the company has undertaken to implement the standard as well as any known impacts to the timing or method of revenue recognition as a result of this implementation. Even if the company does not anticipate a significant change in the timing or method of recognition, almost all companies will be impacted by Topic 606’s additional disclosure requirements. These changes should be foreshadowed as part of an effective transition disclosure.



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