On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue standard is intended to provide a comprehensive, principles-based framework to account for economically similar transactions in a consistent manner, regardless of the industry.
The new revenue standard will replace nearly all current revenue guidance, including industry-specific revenue guidance. As a result, all companies with U.S. GAAP reporting requirements will apply the same revenue model to their contracts with customers, which likely will require increased judgment for those industries that previously applied industry-specific revenue guidance.
The new revenue standard lays out the following five-step framework to recognize revenue:
- Step 1 – Identify the contract(s) with a customer.
- Step 2 – Identify the performance obligations in the contract.
- Step 3 – Determine the transaction price.
- Step 4 – Allocate the transaction price to the performance obligations in the contract.
- Step 5 – Recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue recognition under the new model will be driven by an evaluation of when an entity has transferred control of its goods or services to its customer. This represents a change from current revenue guidance, which focuses on an evaluation of whether the risks and rewards have transferred to the customer.
Subsequent to issuance, the FASB deferred the effective date of the new revenue standard by one year. As a result, public companies will adopt the new revenue standard for annual reporting periods beginning after December 15, 2017, and private companies will adopt the new standard for annual reporting periods beginning after December 15, 2018. Early adoption is permitted for annual reporting periods beginning after December 15, 2016 (the original effective date of the new revenue standard) for all companies.
What Does This Mean for the Energy Industry?
As noted above, current energy-specific revenue guidance in U.S. GAAP will be superseded by the new revenue standard. In addition, the SEC is reviewing its revenue guidance in SAB Topic 13 to ensure consistency with the new revenue standard. As a result, SEC guidance currently followed by the energy industry may be amended or removed.
Energy companies may face implementation challenges associated with understanding and navigating a revenue model that will no longer address complex arrangements unique to the energy industry.
Significant issues in the energy industry include:
- Variability in contractual cash flows.
- Valuation of long-dated contracts.
- Periodic reporting of long-dated contracts.
- Noncash consideration.
- Blend-and-extend contract modifications.
Given the prominence of revenue as a metric in the financial markets, the new revenue standard will likely have an impact on every energy company’s accounting practices and systems. Preparing an inventory of all revenue streams and related contract templates, as well as specific nuances to provisions therein, will be an important initial step in identifying the potential implementation challenges. Further analysis of a significant number of complex contracts or terms may be required to determine how the new revenue standard will impact reporting practices going forward.
The FASB and the IASB have created a joint Transition Resources Group (TRG) to assist stakeholders in addressing implementation issues related to the new revenue standard. The TRG includes preparers, practitioners and users with backgrounds in a number of industries. Over the past year, the TRG has successfully identified and discussed many broad-reaching issues that have arisen in practice; however, the energy industry does not have significant representation on the TRG.
How Can Opportune Help?
Opportune expects that energy-specific implementation challenges may not be addressed by the TRG, and thus, it may be difficult to interpret the new revenue standard and related TRG papers when evaluating complex energy arrangements. This is where Opportune stands ready to help its clients.
In addition to thought leaders with extensive experience in the energy industry and knowledge of the new revenue recognition standard, Opportune’s Complex Financial Reporting team includes a former FASB staff member that served on the team leading the FASB’s revenue recognition efforts.Opportune’s understanding of the complexities unique to the energy space and participation in FASB deliberations presents Opportune’s clients with a unique opportunity to access first-hand knowledge of the new revenue framework’s potential business and financial reporting implications.
Opportune expects to be on the cutting edge of identifying energy-specific issues related to the implementation of the new revenue standard. As a part of this process, Opportune plans to provide a series of articles and updates that will easily enable companies to stay abreast of key implementation developments.