On Wednesday, July 21, 2010,  the Dodd-Frank Act took effect which, among other measures, exempts smaller reporting companies from the Sarbanes-Oxley (SOX) requirement under Section 404(b) for an auditor report on management’s assessment of internal controls over financial reporting.  Under the new law. exempt companies are those that are  “non-accelerated filers” which are defined by the SEC as company with non-affiliated market capitalization under 75 million or more, measured at the end of the previous year’s second quarter.

In January 2010, the SEC staff issued a small entity compliance guide on oil and gas reporting to assist smaller companies in implementing the new reporting requirements under the SEC final rule, Modernization of Oil and Gas Reporting.  The final rule modernizes and updates the oil and gas disclosure requirements to align them with current practices and changes in technology.  The guide summarizes and explains rules adopted by the SEC, but is not a substitute for a rule itself.  Only a rule itself can provide complete and definitive information regarding its requirements.  The final rule is effective for registration statements filed on or after January 1, 2010, and for annual reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009.

The small entity compliance guide on oil and gas reporting includes an overview of the following information from the SEC final rule.

Changes to Oil and Gas Definitions in Rule 4-10 of Regulations S-X

The guide describes revisions to the following oil and gas definitions resulting from the final rule:

• Average price
• First-of-the month pricing
• Reliable technologies
• Nontraditional resources
• Eliminate “certainty” test
• Supporting definitions

Consolidation of Disclosure Requirement in Subpart 1200

The guide describes how the final rule resulted in the creation of Subpart 1200, Disclosure by Registrants Engaged in Oil and Gas Producing Activities, in Regulation S-K. This new subpart consolidates the industry-specific disclosure requirements for oil and gas companies found in Item 102 of Regulation S-K and Industry Guide 2. The new subpart contains the following disclosure items:

• Item 1201. General instructions to oil and gas industry-specific disclosures
• Item 1202. Disclosure of reserves
• Item 1203. Proved undeveloped reserves (PUDs)
• Item 1204. Oil and gas production, production prices and production costs
• Item 1205. Drilling and other exploratory and development activities
• Item 1206. Present activities
• Item 1207. Delivery commitments
• Item 1208. Oil and gas properties, wells, operations, and acreage

Other Significant Issues

The guide also describes the following issues related to oil and gas reporting addressed in the final rule:

• MD&A Guidance – The adopting release also includes interpretative guidance regarding the types of issues an oil and gas company should consider when preparing its MD&A, including disclosure regarding material changes due to technology, prices and concession conditions.
• Ceiling Test Limitation for Capitalized Costs under Full Cost Method – The amendments change the Commission’s full cost method of accounting to use a 12-month average price for reserves quantity disclosures and for accounting purposes.
• Accounting Treatment and no Retroactive Revision – The adopting release includes accounting guidance stating that any change to accounting figures that result from the amendments should be treated as a change in the method of applying an accounting principle that is inseparable from a change in accounting estimate, which would not require retroactive revision.

The SEC’s small entity compliance guide on oil and gas reporting can be found at http://www.sec.gov/info/smallbus/secg/oilgasreporting-secg.htm.

From John Lehman
GBH CPAs, PC
www.gbhcpas.com

Final Stage of Section 404 of Sarbanes-Oxley to begin in June 2010 requiring small public companies to provide audited assessment of internal controls over financial reporting

The SEC announced the final stage of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX Act) which will require the smallest publicly traded companies to comply with the SOX Act by June 2010. Small public companies, those with a public float below $75 million, must begin providing audited assessments of their internal controls over financial reporting beginning with their annual reports for fiscal years ending on or after June 15, 2010.

Section 404(b) of the SOX Act requires the company’s audit firm to issue an opinion on the effectiveness of the company’s internal control over financial reporting (SOX Opinion).  In order to issue a SOX Opinion, the audit firm must perform an audit of the company’s internal control over financial reporting in accordance with the standards established for attestation engagements

“Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance,” said SEC Chairman Mary L. Schapiro.

The SEC press release is available at: http://www.sec.gov/news/press/2009/2009-213.htm

GBH CPAs, PC has provided a brief summary of what this final SOX Act change means for small public companies. http://www.secfile.net/docs/gbh082009.pdf