This week’s GAAP Flash includes articles about improper impairment accounting under ASC 360, Property, Plant and Equipment, inappropriate application of ASC 820, Fair Value Measurement, and the latest FASB proposal accounting for revenue recognition under ASC 606, Revenues from Contracts with Customers.

N.Y. Probes Exxon’s Valuation of Oil Reserves (September 16, 2016) – Bloomberg (@Bloomberg)

Overall, the price of oil has declined since 2014. While consumers may like the lower prices, it’s a different story for big oil companies. Many of them have written down billions of dollars in gas assets due to this decline in prices, acknowledging that previous projections based on higher prices would not be met. Exxon Mobile Corp. has stood out in this regard, though, since it has not impaired its gas-related assets impacted by the slump in oil prices.

According to the article, Exxon does not believe an impairment is warranted, indicating, “Exxon has so far viewed its untapped oil and gas assets as immune from write downs because the company expects them to yield value over the long term.” It also quotes a statement from an Exxon filing with the SEC, stating, “In general, the corporation does not view temporarily low prices or margins as a trigger event for conducting impairment tests.” The attorney general of New York is investigating why no impairment has been taken.

How It’s Relevant: Under U.S. GAAP, a tangible asset is required to be tested for impairment only after a triggering event occurs. If a triggering event is present, an impairment loss should be recognized when the carrying amount of the impaired asset or asset group that is not recoverable exceeds its fair value. It’s also important to remember that, under U.S GAAP, impairment losses cannot be reversed once a write-down is recorded.

Looking back, the price of oil began to decline in the second half of 2014. In June of 2014, oil was trading at over a $100 per barrel, and by early 2015, prices had dropped to $50 per barrel with continued declines throughout much of 2015 to under $40 per barrel by December 2015. Did the decline in oil prices constitute a “triggering event” that would require Exxon to test its oil assets for impairment? And if so, did Exxon appropriately carry out the impairment testing guidance to determine whether impairment should be recognized? That is exactly what the New York attorney general’s office wants to find out since it appears that Exxon is the only major oil-producer that has not recorded impairment due to the plunge in oil prices.

SEC Probes Exxon Over Accounting for Climate Change (September 20, 2016) – The Wall Street Journal (@WSJ)

Exxon is not having a good week! The article above highlighted that Exxon is being investigated by the attorney general in New York for potential accounting inaccuracies related to impairment accounting and indicated that the investigation was part of a broader accounting investigation. Now, the Securities and Exchange Commission (SEC) is also involved. The SEC is conducting its own investigation into Exxon’s asset valuations, looking at how climate change has been taken into consideration.

According to the article, “a potential sticking point in the probe is what price Exxon uses to assess the ‘price of carbon’ when evaluating certain future oil and gas prospects.”

How It’s Relevant: Valuation, valuation, valuation! To determine whether an impairment loss must be recognized, the fair value of an asset must be determined. While we look to ASC 820, Fair Value Measurement, for guidance, there are still a lot of assumptions that factor into the determination of fair value. Although judgment is involved, remember that this guidance stipulates that the views of market participants must be used when estimating an exit price!

FASB Proposes Additional Revenue Recognition Corrections (September 19, 2016) – The Journal of Accountancy (@JoA)

The FASB issued the new revenue recognition standard, ASC 606, Revenue from Contracts with Customers, in May 2014. There have been numerous technical implementation issues that have arisen and been addressed by the FASB with the issuance of four additional Accounting Standards Updates (ASUs) since the initial standard release. On September 19, 2016, the FASB issued an exposure draft to address four additional revenue recognition issues. These proposed amendments affect narrow aspects of the proposed guidance issued on May 18, 2016 and provide clarification or technical improvements for the following topics - loan guarantee fees, contract asset versus receivable considerations, refund liabilities, and advertising costs.

How It’s Relevant: ASC 606 was issued more than two years ago, and while implementation was deferred a year from the original effective date in the initial standard, the final date of required adoption for public companies is quickly approaching! While the initial standard was substantially converged with IFRS, some of the recent issues where the FASB is providing additional guidance may lead to differences in accounting under these two standards. The FASB has an ongoing project on its agenda about “Technical Corrections and Improvements” to clarify and correct the new revenue recognition guidance. Companies should stay abreast of the latest developments as they continue with their implementation efforts.

Crisis of the Week: Fake Accounts Scandal Rocks Wells Fargo (September 19, 2016) – The Wall Street Journal (@WSJ)

The fallout from the Wells Fargo scandal that hit the press lass week continues. Wells Fargo was fined $185 million for unscrupulous activities whereby accounts were opened unbeknownst to and unauthorized by its customers. This article compiles commentary from external parties on their thoughts on how the company is handling the crisis.

How It’s Relevant: It’s hard to believe the unethical, improper, and downright deceitful activities that were going on behind the scenes at this large financial institution, all in the name of meeting internal sales targets and goals. This scandal is far from over as further probes and investigations are sure to follow regarding the pervasiveness of these activities, the company’s culture, and the responsibility of executives and senior management in this matter. So far, it appears to be a complete systemic failure and shines a light on the importance of internal controls in an organization.