Insights

The Financial Accounting Standards Board (FASB) has recently proposed changes to the accounting for leases. The proposed changes would have an impact energy companies. If passed, the pronouncement would require companies to determine if a lease exists and ensure that they are properly accounting for the lease. The FASB Disclosure Draft on “Accounting for Leases” currently excludes leases used to explore for or use minerals, oil, natural gas and similar resources. However, the new rules would apply to equipment and other machinery that may have service contracts.

To determine if a lease exists, two conditions must be met. First, there must be fulfillment of the arrangement that is dependent on the use of a specific asset. The next criteria that must be met is that the arrangement provides the right to use the asset. For instance, the lease of vehicles or machinery used in drilling or transporting inventory could qualify, and if both of these criteria are met, then a lease has been established.

When a lease has been determined, the cash flows under the terms of the lease must identify their respective components. For most Energy companies, lease agreements would include the right to use, maintenance, fuel supply and service components.

Necessary required disclosures on the financial statements include:
• General description of an entity’s significant lease arrangements
• Total future minimum lease payments at present value
• The carrying amount of assets held under finance leases

For further information on the updates to lease accounting, read the exposure draft is available at www.fasb.org.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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