Valuation Perspective: Top 3 Topics Energy Companies Should Consider At Year-End

Opportune LLP

It’s that time of year again: year-end planning. From a valuation perspective, companies should consider the following topics as part of their year-end meeting agenda:

  1. Asset Impairments (ASC Topic 360) – On November 3rd, Reuters reported that a super major, “for the first time in a securities filing that some of [super major’s] oil and gas properties may face impairment due to climate change.” Part of year-end planning should consist of whether a company has experienced any triggering events over the course of the year which could signal a need for asset impairment testing. Like this super major, “certain assets could be at risk for impairment,” according to the Reuters report. Examples of triggering events include a significant decrease in the market price of a long-lived asset, a change in the way an asset or asset group is being used or a change in its physical condition, an adverse change in legal factors, regulation, or business environment, among other things. We expect other integrated oil companies and energy companies to experience similar triggering events related to climate change. Asset impairment tests are performed under the guidelines of ASC Topic 360 – Property, Plant, and Equipment, which tests the recoverability of depreciable, amortizable and/or depletable asset groups, and if the recoverability test is failed, the impairment is then measured.
  2. Goodwill Impairments (ASC Topic 350) – We see a lot of goodwill impairment testing done this time of year as companies typically test at year-end. Goodwill impairment tests are performed at a reporting unit level under the guidelines of ASC Topic 350 – Intangibles – Goodwill and Other in which a company assesses whether goodwill or indefinite-lived intangible assets are impaired and quantifies any impairment as of the test date or in the instance of a triggering event.
  3. Purchase Price Allocations (ASC Topic 805) – While the transaction market has experienced its ups and downs in 2021, acquisitions lead to a need for a purchase price allocation. This analysis consists of taking the transaction price or “purchase price” and allocating it to the acquired assets (and liabilities). Purchase price allocations are performed under the guidelines of ASC Topic 805 – Business Combinations.  Assets and liabilities are estimated based on the fair value (as defined in ASC Topic 820 – Fair Value Measurements and Disclosures) as of the transaction close date.

Final Remarks

As reporting becomes more rigorous, documentation that’s clear and thorough for each of these events, analyses, and valuation topics is required so companies can properly withstand reporting requirements. Planning for these valuation topics at year-end will help companies experience a smooth transition heading into the new year.

Written by:

Opportune LLP

Opportune LLP on:

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