Preparing for a financial statement audit can be an overwhelming task. But there are several simple things you can do to get through your audit this year with minimal frustration: 

 10. Begin working on your schedules well in advance of the audit. And remember, if you have questions, your auditor is just a phone call or email away. 

 9. Keep track of issues you struggled with during the year and communicate those to your auditor. It will help the auditor key in on important areas at the beginning of the audit and prevent surprises down the road. 

 8. Get the confirmations back to the auditors quickly! The more time there is to send these out the better chance we have of getting them back. Every confirmation that’s not returned creates more work for everyone. 

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Anyone…at least that is how one should think when analyzing fraud risks.

Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company - they might change your mind. Because of instances like these, people often think of fraud in large terms, and the mention of the word carries a lot of weight. But fraud can occur in all sizes and forms.

Who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.

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In 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which establishes accounting and disclosure requirements for uncertain tax positions.  FIN 48 applies to all entities that issue GAAP financial statements, including pass-through entities like partnerships and LLCs.  Since its issuance, a number of questions have been raised about how to apply the provisions of the interpretation.  So far, there aren’t many answers.

As a result, the FASB has deferred the effective date of FIN 48 to annual financial statements for fiscal years beginning after December 15, 2008.  The deferral applies to most nonpublic entities with certain exceptions.

If an entity elects to defer adoption of the Interpretation, the entity must disclose its election, as well as its accounting policy for evaluating uncertain tax positions for each set of financial statements were the deferral applies.

 There are some new changes to the 2008 Partnership Tax Return (Form 1065) that could make taxpayers have to do some more digging and have us, preparers, asking a lot more questions.

Schedule B (Other Information) was previously a half-page, list of 12 “yes or no” questions whose repsonses could easily be carried forward from the prior year. The new Schedule B (still labeled Other Information) now spans a page and a half! This makes the Form 1065 five pages instead of four.

New reporting requirements ask that you state any corporation, partnership, or trust that “directly or indirectly owns more than 50% of the profit, loss or capital of the partnership”. A separate section asks about individuals or estates that “directly or indirectly owns more than 50% of the profit, loss or capital of the partnership”. The key word that I think definitely has to be focused on is INDIRECTLY; that word alone will require a taxpayer to do some mapping of ownership amongst its partners.

Another question in Schedule B asks about the partnerships ownership of other entities. It requires you list any corporation or partnership directly with at least 20% or own “directly or indirectly 50% or more of the voting power”. Again, the term “indirectly” pops out to makes us think a little harder beyond just the entity filing the return and its partners.

So, as information is beginning to be gathered and you prepare to file your return or have it filed by your trusted tax professional, do yourself (and them) a favor and get this new information together as well. If you want to review all the new questions and required information, check out the IRS website to view a copy of the form.

The International Accounting Standards Board (IASB) recently released an exposure draft of the small and medium sized entities version of IFRS. Will you be required to adopt these standards? The simple answer is we don’t know at this point. Here are some things to consider as we wait to see:

• Do you account for oil and gas properties under the full cost method?  You may not be allowed to under IFRS.
• Is your accounting staff sufficient to understand the changes and the impact on your business, and if not, how do I accomplish this? You may be able to hire an accounting firm to consult and evaluate your current accounting compared to IFRS.
• When will this possible conversion be required? By most reports, the switch to IFRS could be as early as 2013.

International standards would have a significant affect particularly on oil and gas companies. Read the rest of this entry »

The Modernization of Oil and Gas Reporting, which was released on December 31, 2008 by the SEC, updates the full cost accounting and reserve reporting rules for public oil and gas companies.  The new reporting standards are intended to provide investors with more meaningful and comparable information to help them evaluate the value of oil and gas companies.

One of the new requirements is the use of a 12-month average price in estimating reserves and for full cost accounting purposes, except where prices are defined by contractual agreement. The average is calculated as the unweighted average of the price on the first day of each month within the 12-month reporting period.

Other changes relate to the definitions of proved, developed, and undeveloped reserves, as well as the disclosure of probable and possible reserves, as defined.

Public companies must adopt the new reporting requirements for fiscal years ending on or after December 31, 2009. For private companies, the SEC has stated its intention to coordinate with the FASB align their accounting standards with the new public company rules. As a result, early adoption is not permitted to allow time for the FASB to make the appropriate revisions.

We got the following question from one of our clients: “Is there any benefit to switching from full cost to successful efforts?”

Under successful efforts accounting, a company only capitalizes exploration, acquisition, and development costs that directly result in proved reserves. Exploration costs and costs of unsuccessful projects are expensed as incurred.

Full Cost accounting requires a company to capitalize all costs related to the exploration, acquisition, and development of oil and gas reserves. The full cost method allows a company to capitalize these expenditures into a cost center and amortize those costs as the reserves are produced. A “ceiling” is established for these costs centers to ensure that these costs are recoverable through production. Because the primary component of the ceiling calculation is discounted future net revenues at year-end prices, impairment expenses will increase as oil and gas prices decrease.

Full cost accounting results in much larger cost centers, therefore DD&A and impairment expenses will be greater than for companies that utilize the successful efforts method. However, successful efforts companies will record significant exploration expenses as these costs are incurred.

Changing from one method to another would be a change in accounting principle and require a restatement of the prior year financial statements, which becomes more and more difficult the longer a company has owned its properties.  A conversion would require a substantial amount of resources, especially from full cost to successful efforts because of the detail involved. A change of this type should be carefully considered in light of the facts and circumstances specific to your company.

Accounting standards require that the fair value of a liability for an asset retirement obligation (ARO) be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. With rising costs and environmental concerns in the oil and gas industry, estimates of plugging and abandonment could become more significant than in the past. The important components of calculating the asset retirement obligation for an individual well are shown in the following example:

Example:

The asset and liability are recorded at $25,675 at the spud date. The accretion expense and related liability are recorded monthly for the life of the well. Salvage value of the asset is also not allowed to be netted for purposes of determining estimated costs.

See accounting statement for illustrative examples of calculating the asset retirement obligation.  More on settling AROs to come. Read the rest of this entry »

The Financial Accounting Standards Board (FASB) revised the business combination rules effective for periods beginning after December 15, 2008.  For calendar year entities, any purchase transaction in 2009 will be accounted for under FASB Statement 141(R).

Under current practice, business combinations are accounted for under a cost-accumulation approach, which focuses on the costs paid to acquire the business.  The new standard uses a fair value approach based on marketplace information and exit prices to value assets and liabilities of the acquired business.  In addition, the new standard revises the guidance on accounting for contingencies, restructuring costs, and transaction costs among others.

The new method of recognition could lead to very different results in reporting business combinations:

• actual gain might be recorded on purchase
• subsequent adjustments due to changes in fair value flow through the income statement
• recognition of goodwill attributable to the noncontrolling interest
• retroactive recording of adjustments made during the measurement period to the transaction date

If you have questions on a transaction, let us know.  How will the new rules change the way you consider business combinations?  Give us your thoughts in a comment.