As we all know from the past year and a half, oil and gas prices have drastically decreased since early 2014. To the average consumer, this has resulted in significant savings at the pump. But, to the companies that make a living in the oil and natural gas industry, this has resulted in a major reevaluation of current operations and the carrying value of assets.
According to the U.S. Energy Information Administration (EIA), the U.S. average retail gas price was $3.36/gal. in 2014, $2.43/gal. to date in 2015, and is projected to average $2.36/gal. in 2016. With the decrease in pricing, oil and gas entities may reconsider the viability of drilling, since the cost of extraction may exceed the revenue generated. Therefore, entities should consider their particular circumstances and be aware of any potential early-warning signs of impairment.
Under FASB guidance ASC 360-10-35 “Impairment or Disposal of Long-Lived Assets,” an asset is to be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Certain impairment triggers are as follows: changes in pricing, drilling costs significantly exceeding expectations, significant increases in DD&A rates, production difficulties, and lease expiration in the near future.
With the average gas price decreasing ($0.93) and -28% from 2014 to 2015, and another ($0.07) decrease expected in 2016, this clearly represents a triggering event for the assessment of impairment. Already, in the first half of 2015, at least 66 U.S. companies had nearly $29 billion in impaired assets. Since the future price outlook appears consistent at a slight decline, ultimately, an impairment analysis should be performed.
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.