Moderator: Joel Smith, Partner, Audit, KPMG U.S.
John Barbagallo, Managing Director, KPMG U.S.
Molly Chilakapati, Partner, Advisory, KPMG U.S.
Mark Zajac, Partner, Audit, KPMG U.S.
Moderator Joel Smith, partner, Audit, KPMG LLP (U.S.), began the accounting and reporting session by noting that last year’s major topic, revenue recognition under Accounting Standards Codification (ASC) 606, was replaced this year by ASC 842 for lease accounting. Smith asked a panel of accounting experts about lessons learned about 606 that could be applied by practitioners and energy companies as they implement 842.
Comparing 606 and 842 implementation, John Barbagallo, managing director, KPMG LLP (U.S.), said that a number of revenue recognition amendments issued by the Financial Accounting Standards Board (FASB) in prior years may have unintentionally resulted in companies “putting down their pencils” to wait for the final word from the FASB on various revenue recognition issues. However, he said that there was less likelihood of significant amendments to ASC 842 during 2018. One exception is ASU 2018-01, which allows a practical expedient for land easements existing as of the adoption date to be excluded from the scope of the new leases standard. Going forward, however, new land easements should be analyzed to determine if they meet the new definition of a lease.
Barbagallo also offered some practical words of advice for stakeholders. These included taking steps to help ensure that disclosures are properly robust, consulting with the U.S. Securities and Exchange Commission (SEC) if necessary, keeping in mind the impact to controls, and recognizing the need for adequate 842 systems and processes. Networking with peers was another recommendation.
As with the other panelists, he stressed the importance of not waiting to implement ASC 842. “Implementation takes longer than expected. Beginning the work now is key.”
Molly Chilakapati, partner, Advisory, KPMG LLP (U.S.), discussed a number of issues, including the population of leases. She explained that defining this population in terms of total lease assets and liabilities was critical, but currently there are overlooked or underreported leases.
“Firming those numbers up is not necessarily easy,” she said. “The most important thing to remember is that companies that achieve the highest successes in accurately defining lease populations are the ones that go out into the field and interview personnel in operations, procurement, and commercial, with the objective of gaining an understanding of how they run their business. That helps predefine and identify leases, including embedded or previously unidentified leases.” She added, “Getting down to that level of granularity is one of the most critical procedures you can perform.”
Risks and disclosures for SPACs and MLPs
Mark Zajac, partner, Audit, KPMG in the U.S., suggested several areas that might be of interest to the SEC in 2018, including special purpose acquisition companies (SPACs), also called “blank check companies.” These companies are expanding in popularity and offer an easy way to go public. However, many of these companies have made disclosures about significant changes in controls as well as a number of material witnesses. This sometimes raises their risk profile.
Zajac also mentioned the dissolution of master limited partnerships (MLPs). These entities have competing interests among various stakeholder groups and other complex issues, so disagreements and even lawsuits sometimes emerge during a dissolution, prompting the SEC to pay particular attention to disclosures and related documents.
Additionally, Zajac reviewed casualty loss and insurance related considerations, income taxes, and the need to begin thinking about the new auditor reporting model that will become effective in 2019.