Impairment Considerations for the Energy Sector

As witnessed, the latter months of 2018 saw a dramatic downturn in oil prices. According to the U.S. Energy Information Administration, the West Texas Intermediate spot price, for instance, fell from $75 per barrel at the beginning of October to $46 per barrel by year’s end. With the sharp decrease, regulators are likely to heighten focus on impairment testing for goodwill and on long-lived assets of energy-centric companies.

Under Accounting Standards Codification Topic 360, Property, Plant, and Equipment (ASC 360), impairment is the condition that exists when the carrying amount of a long-lived asset or asset group exceeds its fair value. For the oil and gas industry, assets should be evaluated on a field-by-field basis or other logical grouping of assets.

For long-lived assets to be held and used, companies should consider whether indicators of impairment are present inclusive of triggering events. The impairment evaluation should be performed on both proved and unproved properties at least annually, or when a triggering event is identified. Triggering events within the energy industry include changes in pricing; drilling costs significantly exceeding expectations; large increases in depreciation, depletion and amortization rates; production difficulties; and impending lease expirations.

The following two-step approach can be used to identify, recognize and measure the impairment under ASC 360-10 “Impairment of Disposal of Long-Lived Assets”:

An initial check for impairment can be completed by comparing the estimated undiscounted cash flows attributable to the asset or asset group to the carrying amount of the asset or asset group. If the undiscounted cash flows attributable to the asset are less than the carrying amount of the asset, impairment exists.

The fair value of the long-lived asset and impairment loss should then be determined. Impairment loss should be measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds fair value or discounted cash flow value.

In 2017, the Financial Accounting Standards Board released Accounting Standards Update (ASU) 2017-04 in an effort to simplify the process of testing goodwill for impairments. ASU 2017-04 eliminates the second step from the goodwill impairment test mentioned above, including reporting units with zero or negative carrying amounts. An impairment charge should be recognized for the amount by which the carrying amount exceeds the fair value; however, the loss should not exceed the total amount of goodwill allocated to the reporting unit.

ASU 2017-04 is effective for years beginning after December 15, 2019 for public SEC filing entities and for years beginning after December 15, 2020 fir non-filing public entities. Nonpublic entities will be subject to ASU 2017-04 for years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

As companies finalize 2018 asset balances, the pricing changes and impairment considerations mentioned above should be reviewed due to increased focus on impairment testing from regulators and auditors. If you have questions or concerns about impairment or impairment consideration related to the energy and natural resources industry, we welcome the opportunity to discuss your concerns and become a trusted advisor. Please visit our Energy and Resources Companies page.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

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.

© 2019 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

PA DEP Issues 2018 Oil and Gas Annual Report
Is Your Royalty Check Correct?
Audit, IFRS BY Jeremy Ferkatch
Revenue Recognition: GAAP vs. IFRS: What this Means for Your Company
PUC Distributes Almost $252M in Impact Fees
Delay in New FASB Standard Will Impact Financial Services
Audit BY Adam Goode
Proposed Accounting Standard Update Would Delay Private Company Effective Dates for Leases, Current Expected Credit Losses (CECL) and Hedging Updates by One Year

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102