WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby New and Expensive Lease Accounting Rules Today, few leases get recorded on a drilling operation’s books. If an obligation is not recorded on a balance sheet, it makes the business appear less leveraged than it really is. However, this is all changing - and not for the good. Thanks to negotiations between the International Accounting Standards Board which sets rules for many countries around the globe, and the U.S. Financial Accounting Standards Board which writes the rules in the United States, the lease accounting rules as we currently know them are changing. The new rules will soon require many businesses to add all but the shortest leases to their balance sheets as liabilities, much like debt, affecting the way potential lenders, investors, and suppliers view the drilling operation. The new guidance is not expected to prevent any drilling contractor, supplier, or distributor from acquiring the equipment and business assets necessary to grow their operations. In fact, there are many reasons to lease equipment, and the primary factors will remain intact under the new rules - from maintaining cash flow to preserving capital, to obtaining flexible financial solutions to avoiding obsolescence. Publicly traded companies will be required to adopt the new standard for fiscal years beginning after December 15, 2018. For calendar year-end public companies, this means an adoption date of January 1, 2019, and retroactive application to pre- viously issued annual and interim financial statements for 2017 and 2018. Nonpublic companies, such as most privately-owned drilling operations and businesses, will be required to apply the new leasing standard for fiscal years beginning after December 15, 2019. Thus, for most drilling businesses this means an adoption date of January 1, 2020, and retroactive application to previously issued annual financial statements for 2018 and 2019. Although these effective dates might seem like they are quite far away, every business should begin preparing for the new lease accounting requirements now. After all, with many drilling operations involved with a number of leases - and lessors - the long adoption period can mean fewer surprises with existing leases. Although taxes play a role in whether to lease or purchase, they should not be the deciding factor. Will the new accounting guidelines and the accompanying impact on the operation’s financial status come as a surprise? Most importantly, when should your drilling operation or business begin playing under the new rules? Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com 27 WorldWide Drilling Resource ® JUNE 2016