Addressing SOX Compliance Challenges With Workiva
Using Workiva to Streamline Energy Reporting and Accounting
Financial accounting and reporting for energy companies is no picnic. It's complex and ever-changing, and it all happens under the harsh gaze of regulators, stakeholders, and the public at large. And that's not an easy spot to be in.
So, to put it mildly, the energy industry needs sound, robust solutions to help it navigate such swirling regulatory waters. That's the critical area where Workiva and similar solutions can provide so much value to energy companies, helping their reporting get and stay compliant, even as the requirements continually evolve and flex.
In fact, to provide energy leaders with a peek at what's possible, we're building on our previous insights on oil and gas financial reporting to discuss what solutions like Workiva bring to the fold. Have you been looking for reliable, scalable, flexible solutions to help you clear complex reporting hurdles like FERC, ESG, joint ventures, and more? Then you came to the right place.
Federal Energy Regulatory Commission (FERC) Reporting
Good ol' FERC. It's the big cheese, the head regulatory honcho in the US energy industry, overseeing the interstate transmission of electricity, natural gas, and oil. As such, FERC overlooks financial accounting and reporting requirements for energy companies, creating a potential headache for companies that don't adequately prepare for FERC reporting requirements.
Specifically, FERC reporting involves comprehensive annual reports, Form No. 1 and Form No. 2 for electric utilities and natural gas companies, respectively, of financial and operational information that, as you might guess, demand extreme accuracy and compliance. Given the sheer volume of detailed information involved in operations for a typical energy company, grappling with all of that information can be a significant hurdle.
From nuanced operational data to exhaustive accounting information, FERC reporting demands the efficient, reliable gathering, organizing, and reporting of data. And that's no easy task when said data is coming out of your ears. Further, since existing requirements frequently change alongside the introduction of new ones, reporting systems must be as flexible as they are robust.
Of course, additional complications can arise from changing accounting treatments under FERC as well. For instance, the cost recovery for self-constructed assets in the treatment of Allowance for Funds Use During Construction (AF UDC) has been a long-standing thorn in the side of FERC-regulated companies. Simply put, FERC reporting is no walk in the park for energy entities.
Workiva and FERC Reporting
Workiva can enhance an energy company's FERC reporting compliance efforts. It simplifies the process, allowing a reporting team to assemble, review, and file FERC forms directly from the platform. Since Workiva is cloud-based, it also centralizes data management, streamlining the data gathering and organization required for FERC reporting.
Companies can also use Workiva's pre-built connectors to integrate with existing systems and, thus, increase data accuracy while reducing non-compliance risk. Since FERC reporting often relies on several different teams, departments, and locations in an energy company, Workiva's collaborative features can ensure a seamless communication flow across those units, minimizing potential discrepancies or delays that are so counterproductive in FERC reporting. Lastly, the platform can quickly accommodate changes in FERC reporting requirements, having the agility to flex to regulatory changes.
Asset Retirement Obligation (ARO) Accounting
ARO accounting is another critical concern for companies in the energy industry. According to both the FASB and IFRS, companies must recognize the fair value of a liability for an ARO in the period a company incurred. A company would capitalize and associated asset retirement cost (ARC) as part of the carrying amount of the long-lived asset.
Digging in further, ARO accounting typically rears its head when an energy company has a legal obligation toward the retirement of tangible long-lived assets resulting from the acquisition, construction, development, or normal operation of such assets. And, yes, that's a mouthful. To downshift a bit, examples of such assets include:
- Obligations for decommissioning costs for offshore platforms
- Closure and post-closure landfill costs
- Nuclear decommissioning costs
One of the biggest challenges in ARO accounting is estimating the timing and amount of settlement for an obligation, an especially difficult task in an industry where assets and infrastructure can sometimes stretch across the globe. Literally. But geography isn't the only potential roadblock to efficient ARO accounting. Companies must also navigate:
- Accurately forecasting removal costs years, sometimes even decades into the future, including secondary costs like site restoration and waste disposal
- Fluctuations in discount rates that impact the present value of future AROs
- Changes in environmental and decommissioning laws that can lead to changes in estimations and, thus, additional uncertainty
The bottom line – ARO accounting requires precise calculations in estimations. Otherwise, a company might not be presenting a true representation of its financial situation, which can lead to an additional boatload of other problems.
Workiva and ARO Accounting
Workiva simplifies the complex process of ARO accounting with customizable templates and automated calculations, helping energy companies estimate their future obligations accurately. The platform's advanced data handling capabilities also inform more accurate forecasting of removal costs, including the aforementioned direct removal costs and auxiliary costs in site restoration and waste disposal.
The Workiva platform also lets companies track changes in environmental and decommissioning laws, data inputs, and discount rates, all of which can significantly impact the present value of future AROs. Additionally, Workiva's robust ARO solution keeps companies ahead of changes, captures the necessary data, and provides clear audit trails, thus, significantly reducing legal and financial risks from inaccurate ARO calculations.
Derivative Instruments and Fair Value Measurement
Energy certainly isn't the only industry that relies on derivatives. But few lean on these instruments like energy does, with derivatives providing a critical first line of defense to hedge against price volatility. While we'll spare you a deep dive into futures, forwards, swaps, and options, our key takeaway is this – these complex instruments can lead to significant challenges in financial accounting and reporting for an energy company. And then some.
The guidance requires businesses to recognize derivatives on the balance sheet at fair value. And as you know, a fair value measurement can be extremely intricate, requiring a heavy dose of mathematics, an in-depth understanding of market dynamics, and robust valuation models. That said, a lack of liquidity in the energy derivatives market can make it very difficult to determine this value, making estimates a critical go-to.
Throwing salt onto an already open wound, disclosure of these derivatives in an energy company's financials can be yet another headache. In theory, disclosures should provide enough detail so financial statement users can understand the impact of derivatives on a company's financial position, performance, and cash flows. But that can be easier said than done, particularly when dealing with such a complex, dynamic area.
Workiva and Derivatives & Fair Value Measurement
Workiva lets energy companies accurately measure the fair value of derivatives, even when there isn't a liquid derivatives market. By automating complex calculations, consolidating multi-source data, and monitoring changes in accounting standards, Workiva provides an effective tool for derivative disclosures. Likewise, its ability to handle sophisticated reporting requirements ensures companies place derivative disclosures in financial statements correctly, making this information more accessible to all stakeholders.
Specialized Reporting Considerations
With energy being such a capital-intensive industry, it just makes sense for companies to form joint ventures to share financial risk, combine resources, and maximize efficiencies. However, as useful as these ventures are, they also carry unique financial reporting and accounting responsibilities. This is especially true when trying to accurately allocate revenues and expenses or wrestling with the many complexities of joint property and resource accounting.
Likewise, another major challenge can be aligning the different accounting policies between the partnering organizations. Differences in financial reporting systems, fiscal year ends, and procedures and policies can make a joint venture's financial consolidation process tough.
Segment reporting is another area of reporting that's front and center for energy companies, giving stakeholders specific information on the performance of specific business segments. However, with factors like geographic location, product type, and customer class pushing and pulling different segments in different directions, reporting timely, relevant, and reliable information can be a real chore.
Workiva and Specialized Energy Reporting
Workiva can align disparate data sources and accounting policies, making financial consolidation easier and more accurate for joint ventures. It can also automate multiple complex calculations involved in such ventures, including the allocation of profits, costs, and losses among the partnering organizations.
By streamlining data sharing and communication across joint venture partners, Workiva ensures transparency and collaboration among partners, both critical in joint venture accounting. The platform also allows energy companies to stay compliant with specific joint venture regulatory guidelines like ASC 845 and IFRS 11.
Obviously, this is an area where we could go on for days and never run out of relevant information. But to cut to the chase – sustainability reporting is already an integral part of financial accounting and reporting for energy companies, whose importance will only grow with time.
But ESG reporting is a lot more complicated than three simple letters. Yes, just looking at the most basic environmental, social, and governance-related reporting requirements can make you dizzy. But throw something like Scope 3 emissions information into the mix and mere dizziness can quickly become full-blown panic.
Using Scope 3 as an example, companies not only have to deal with their own emissions metrics and strategies, but their partners' across the value chain as well. And that's patently uncharted territory for any business, energy obviously included. This is yet another area where energy leaders must grapple with an absolute mountain of complex data – both financial and non-financial – stemming from disparate operations and locations.
In short, effective sustainability reporting must tie all of these loose threads together into something coherent that report users can digest and understand. Otherwise, a business faces both regulatory and reputational consequences, neither of which does a body good.
Workiva Sustainability Reporting
While ESG reporting is still quite new to organizations, it's not an entirely foreign concept. As we discussed in our comprehensive guide to ESG reporting, sustainability reporting still uses the same data channels and processes as management and financial reporting. So, just like most regulatory or financial reports, Workiva can transform ESG reporting into a streamlined, efficient process.
Specifically, the platform can help collect, collate, consolidate, verify, and quantify the mountains of sustainability data from varying operations – both financial and non-financial, like GHG emissions – to ensure data consistency and completeness. And since Workiva has such vast experience in helping companies prepare regulatory and financial reports, the platform enhances the transparency and accuracy stakeholders demand regarding ESG metrics and strategy, even providing pre-built ESG frameworks and templates to maximize insight and efficiency.
Now, has this sounded like a big ol' advertisement for Workiva? Probably. But it's a platform we wholeheartedly believe in and use on a daily basis with clients. And since Embark has such deep roots in the energy industry – a sector that faces increasingly stringent reporting and accounting requirements – it just makes sense to play matchmaker for a bit. Hopefully, we've at least piqued your interest in Workiva or a comparable solution that can turn an energy company's reporting frown upside down. And if you have additional questions or need some guidance, you know where to find us.