ASC 842 Expected to Impact Natural Resource Sector

Accounting Standard Codification (ASC) Topic 842 - Leases, the new FASB lease accounting standard aimed at closing a major concern of stakeholders in lease accounting in accordance with ASC 840, went live for public companies this past January 1 and will be effective for nonpublic companies beginning January 1, 2020. Although the new standard scopes out leases for the exploration of minerals, oil, natural gas and other non-regenerative resources subject to the guidance of FASB ASC 930, Extractive Activities - Mining and ASC 932, Extractive Activities - Oil and Gas, companies in the natural resource sector are paying particular attention to the implementation rules.

Under ASC 842, more arrangements are expected to meet the definition of a lease compared with previous accounting standards. In accordance with the new guidance, a contract is or contains a lease if it conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. That means agreements for processing and pipelines, gathering and transportation, and drill rig contracts may meet the definition of a lease under ASC 842.

Additionally, many lease arrangements include both lease and non-lease components as part of the consideration a company pays throughout a contract. In accordance with ASC 842, unless a company adopts a practical expedient to combine them, companies are now required to allocate a portion of the consideration paid to the different components based on standalone selling prices. Drill rig contracts deemed to be within the scope of ASC 842 could require such a review of the various components. 

The new lease accounting standard is a significant change from the prior accounting rule. Assessing the impact will be important for companies as they communicate the changes to stakeholders.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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