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Share price falls pressure asset valuations

The underperformance of oil and gas stocks will lead auditors to closely examine goodwill and impairment testing calculations

Sustained drops in oil and gas companies’ share prices during 2019 and beyond means that the valuation of assets on firms’ balance sheets could be more closely scrutinised by auditors and regulators, warns advisory firm Opportune.

In the final three quarters of 2019, the S&P oil & gas equipment & services select industry index decreased by c.27pc and the S&P oil & gas exploration & production select industry index fell by c.23pc, although both experienced a partial rebound towards the end of the year. Private oil and gas firms are also impacted by these reductions, as the value placed by the market on similar assets owned by their listed peers are used as a guide for their balance sheets too.

The decrease in market capitalisations, compounded by commodity price declines, means auditors and regulators will have a particularly renewed focus on impairment testing for goodwill and long-held assets on firms’ balance sheets, according to the Houston-based consultancy.

Auditors and regulators will have a particularly renewed focus on impairment testing

“Publicly and privately-held companies need to adequately address their year-end 2019 goodwill and long-lived asset impairment testing procedures. Doing so in a timely manner will ensure that year-end and quarterly financial statement audits and reviews will proceed as smoothly as possible, as well as allow for greater shareholder and stakeholder transparency,” says Kevin Cannon, an Opportune director.

In the US, under Accounting Standards Codification topic 350 (ASC350), which covers intangibles, goodwill is tested for impairment at least annually, or more frequently if a triggering event occurs. Likewise, under ASC360, which covers property, plant and equipment, long-held assets are tested for impairment following a triggering event.

“Continued declines in market prices such as those that occurred during most of 2019, along with associated changes in industry fundamentals—such as changes in drilling plans for E&P companies and changes in customer buying patterns for oilfield services companies—may qualify as a triggering event,” Cannon warns.

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