WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby When Income Counts Somet imes the accounting rules and tax laws are logical and equitable; sometimes they aren’t. However, one question always seems to surface: When is a drilling operation’s revenue considered “income”? Until now, the time to claim income and deductions has been dictated by rules or laws - not the drilling business owner’s opinion. Revenue is an important financial measure used to monitor an operation’s financial performance and its general fi- nancial health. In addition to its impact on every operation’s tax bill, revenue is often used as a basis for determining certain employee compensation and benefits, such as commissions, bonuses, and stock- based compensation. Anticipated revenue may also influence a drilling operation’s tax-planning strategies. After years of deliberations, the Financial Accounting Standards Board issued an Accounting Standards Update, which attempts to answer the question of when revenue is income. In general, the new revenue recognition principle states drilling operations and businesses using the accrual basis of accounting should record revenue only when it has substantially com- pleted a revenue generation process. In other words, revenue is recorded when it has been earned. To illustrate, a drilling business completes a job for its standard fee of $1000. It can recognize the revenue immediately upon completion of the job, even if payment is not expected from the customer for several weeks. A variation on the example shows the same business being paid $10,000 in advance to provide services over a four-month period. In this case, the busi- ness should recognize an increment of the advance payment in each of the four months covered by the agreement, reflecting the pace at which payment is earned. The new rules also provide guidance for transactions which weren't addressed completely, such as service revenue and contract modifications. Unfortunately, the new guidelines require drilling operations and businesses to estimate the effects of sales incentives, discounts, and warranties, resulting in earlier revenue recognition. Nearly all businesses will be affected by the expanded financial disclosures required under the new guidelines. Exceptions to the new rules include insurance contracts, leases, financial instruments, guarantees, and nonmonetary exchanges between entities in the same line of business, to facilitate sales. With only about 18 months remaining until all drilling contractors using the accrual basis method of accounting will be required to report revenue following hundreds of pages of new accounting guidance, seek- ing the all-so-necessary professional help in complying is an important first step for avoiding last-minute panic. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com 4< * '3* "& > > > > ,'< ? /2+ '6* /3+6 /3+6 ')1/3- " " !8=2+ /7843 4* 4* ')1/3- !+8 5)7 !8'3*'6* $'2:+ 9((+6 6':+2 $'2:+ 9((+6 !+'87 9((+6 $'2:+ 37+687 #6+8.'3+ $'2:+ 37+687 $'2:+ !56/3- ! ! $'2:+ 4:+6 '71+8 ? !;/:+2 ')1/3- ? !+6/+7 ? !+6/+7 ? !+6/+7 ? !+6/+7 ? !+6/+7 ? !+6/+7 < /3+6 < /3+6 < /3+6 < /3+6 < /3+6 6/)+7 !9(0+)8 "4 .'3-+ %/8.498 48/)+ ! < < < < < 21 WorldWide Drilling Resource ® OCTOBER 2016 December Issue Deadlines! Space Reservation: October 25 th Display & Classified Ad Copy: November 1 st