Oil & Gas Market Volatility - Triggering Potential Impairment

Audit|Energy & Resources

By Dan Braun

As we all know from the past year and a half, oil and gas prices have drastically decreased since early 2014.  To the average consumer, this has resulted in significant savings at the pump.  But, to the companies that make a living in the oil and natural gas industry, this has resulted in a major reevaluation of current operations and the carrying value of assets. 

According to the U.S. Energy Information Administration (EIA), the U.S. average retail gas price was $3.36/gal. in 2014, $2.43/gal. to date in 2015, and is projected to average $2.36/gal. in 2016.  With the decrease in pricing, oil and gas entities may reconsider the viability of drilling, since the cost of extraction may exceed the revenue generated.  Therefore, entities should consider their particular circumstances and be aware of any potential early-warning signs of impairment.

Under FASB guidance ASC 360-10-35 “Impairment or Disposal of Long-Lived Assets,” an asset is to be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  Certain impairment triggers are as follows:  changes in pricing, drilling costs significantly exceeding expectations, significant increases in DD&A rates, production difficulties, and lease expiration in the near future.

With the average gas price decreasing ($0.93) and -28% from 2014 to 2015, and another ($0.07) decrease expected in 2016, this clearly represents a triggering event for the assessment of impairment.  Already, in the first half of 2015, at least 66 U.S. companies had nearly $29 billion in impaired assets. Since the future price outlook appears consistent at a slight decline, ultimately, an impairment analysis should be performed.

Contact us if your company is operating in the oil and gas industry and have questions regarding FASB guidance ASC 360-10-35, "Impairment or Disposal of Long-Lived Assets" and visit our Energy and Resources Industry Group page to learn about the services that we offer.

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