The Effect of ASC 842 on Oil and Gas Production Entities

The Financial Accounting Standards Board (FASB) has issued new accounting standards for leases and created a new section in the Accounting Standards Codification (ASC) – 842 Leases.  This new accounting guidance for leases is already in effect for public entities. For private companies, it does not go into effect until annual financial statements beginning after December 15, 2021, and interim financial statements beginning after December 15, 2022.

The scope of ASC 842 excludes leases to explore for or use oil and natural gas, including the right to use land in which those natural resources are contained (that is unless those rights of use include more than the right to explore for natural resources), but not the equipment used to explore for the natural resources.

For oil and gas entities, identifying leases will require careful and thorough analysis. There are various agreements that typically exist within the oil and gas industry which may fall within the scope of the new lease standard, such as:

  *   Drilling contracts
  *   Compressor rental
  *   Tank rental
  *   Transportation agreements, including rail and midstream infrastructure
  *   Refining arrangements

There could also be other arrangements not specifically related to extractive activities such as rentals of autos and trucks, office space, computers, furniture, etc.

Given the many accounting changes involved, businesses must begin preparing now to comply with the new standards. Read more to find out how your organization may be affected and the range of potential impacts upon adopting these new lease standards.