In: Accounting
FASB ASC 17-4 Interim Financial Reports in the Oil and Gas Industry
The FASB ASC provides guidance on the disclosure of certain events in the oil and gas industry in interim financial reports. Find, cite, and copy the FASB ASC paragraphs that disucss this issue.
Key Accounting Issues Although the ASU may not significantly change how O&G entities typically recognize revenue, a number of the ASU’s requirements may be inconsistent with current practice. Discussed below are some key provisions of the ASU that may affect O&G entities.
Scope Considerations Commodity exchange arrangements are common in the O&G industry. In these arrangements, an entity agrees to sell a certain quantity and grade of a commodity to a counterparty at a specified location and simultaneously agrees to buy a specific quantity and grade of a similar commodity from that same counterparty at another location. In effect, specified inventories of the two parties are exchanged (e.g., in-ground natural gas liquids are exchanged at different storage hubs). Entities usually enter into commodity exchange arrangements to meet the operational needs of the business without incurring any ancillary costs (e.g., transportation costs)
Production Imbalances Production imbalances in a well arise when working interest owners in a productionsharing arrangement sell more (“overlift”) commodity production in a given period than they are entitled to sell according to their working interest ownership percentages. The overlift party thus has an obligation to settle the imbalance with the underlift party financially or in kind by the end of the property’s life.
Identifying the Contract With the Customer If the sales contract with the third party is considered a contract with a customer,6 revenue on those sales would be recognized in accordance with the new model. Further, while the SEC staff’s accounting guidance on the sales and entitlements methods (ASC 932-10-S99-5) remains in effect, it does not preclude the underlift party from accounting for the production imbalance under the new revenue model if the overlift party meets the definition of a customer in the ASU.