Oil and gas producers should be aware of the Financial Accounting Standards Board’s recently issued revenue recognition standard.
The Board announced a new rule that may change how companies recognize revenue and will increase disclosure requirements for both public and private companies. Public companies must begin reporting under the new standard January 1, 2018. Private companies have until January 1, 2019 to begin their reporting compliance.
The new rule details a five-step process for companies to recognize revenue. The steps are:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when each performance obligation is satisfied
Although there is not yet any official oil and gas specific guidance out on the new standard, oil and gas producers should begin considering how this new rule might affect them. It is likely that the new revenue recognition process will have little impact on these entities, but it is crucial that producers have an understanding of the new requirements to address any possible changes to their revenue-recognition processes.
When preparing for this new standard, managers for oil and gas producing companies should consider the following areas and how they might change under the updated rule:
- Commodity exchange arrangements
- Production imbalances
- Contract modifications
- Take-or-pay arrangements
- Sales of mineral interests and production payments
- Royalty payments
The change will have an impact on public and private companies outside of the oil and gas production industry as well, so business owners in general should stay alert to any updates from the American Institute of Certified Public Accountants.
For business owners who are unsure about how to proceed under the new standard, LaPorte’s professionals can offer on-point accounting advice and guidance to make sure owners stay on top of their reporting requirements.