Below are a few points concerning potential impacts of the new revenue recognition standard (ASC 606) on the oil, gas and natural resources industry. The information presented here does not represent a comprehensive assessment of the outcome of applying the new standard, but these points may help when considering how ASC 606 could impact you.
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OIL, GAS AND NATURAL RESOURCES REVENUE RECOGNITION
Step(s) within Five-Step Model: Scope
Description and Examples: Entities must consider whether certain arrangements are fully or partially subject to Topic 606, including but not limited to:
- Commodity sale contracts – consider derivatives guidance, including normal purchase normal sales exception
- Joint operating arrangements
- Distinguishing conveyances of interest (Topic 932) versus gains and losses from derecognition of nonfinancial assets (Subtopic 610-20)
Issue: Brand licensing and franchise arrangements
Step(s) within Five-Step Model: 2, 4, 5
Description and Examples: Entities need to consider the nature of promises and fees in a franchise license arrangement to determine how many separate promises (performance obligations) exist within the contract. Revenue for some performance obligations may be recognized over time, while others may be at a point in time.
Issue: Estimating variable consideration
Step(s) within Five-Step Model: 3
Description and Examples: Entities must estimate variable consideration, apply the constraint on variable consideration and update estimates each reporting period.
Pricing may be a variable dependent upon commodity price at a future date or other factors.
Links to Relevant AICPA Task Force resources:
Oil, gas and natural resources revenue recognition and the implications of the new standard can be complicated to navigate, and the topics presented above may not be representative of what your organization will need to address when considering the new standard. Please consult your Warren Averett advisor for more information specific to your business, its particular situation and natural resources revenue recognition.