Addressing Energy-Specific Issues within
the New Revenue Recognition Standard
Former FASB Staff Member Joins Opportune
Overview
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.
MARCH 2016
 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 1 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U.S. GAAP will be superseded by the new revenue standard.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.
1 In Topic 606, control is defined as “the ability to direct the use of, and obtain substantially all of the benefits from, the asset.” Control also includes “the ability to prevent others from directing the
use of, and obtaining substantially all of the remaining benefits from, the asset.”
Opportune LLP is not a CPA Firm.
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 broadreaching issues that have arisen in practice; however, the energy
industry does not have significant representation on the TRG.
What’s Next?
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.
Stay tuned for upcoming articles analyzing some of the
implementation challenges facing the energy industry.
For further information, please contact:
Josh Sherman, Partner
[email protected]
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.
Kristin Floyd, Senior Consultant
[email protected]
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 LLP is not a CPA Firm.
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