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Permalink Reply by Grillin' - MmmMmm on September 8, 2009 at 3:59

Sesport: I've sat through many classes and training sessions on Financial accounting (that's what SE and FC are). In general, the SEC forces companies to report results using financial accounting which is a way to somewhat standardize reporting for various companies in various industries. However, it is not very close to reality! Cash accounting, which most sane people use for their everyday life, is the way for a royalty owner to think.

Believe me, if companies could completely ignore financial accounting I believe they would and would generate only cash accounting for results. But your benevolent government has determined that companies must keep both sets of books.

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Permalink Reply by sesport on September 8, 2009 at 16:27

Thanks, Mmmarkkk. (BTW, you mentioned MY benevolent government. Have you moved out of the country now with some of those big companies that threatened to take their business overseas? lol)

I have a basic knowledge & understanding of the modified accrual basis of accounting, so I think I get the gist of what you mean by cash accounting. Are you saying then that this is the system used to report expenses to mineral owners, whether for royalties or revenues?

thanks in advance :0)

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Permalink Reply by Grillin' - MmmMmm on September 9, 2009 at 1:17

Sorry sesport...that was a collective and inclusive "your". I'm still here, kicking and screaming!

Yes, royalty owner /UMI owners expenses are reported via that modified accrual thing...isn't it easier to say cash accounting? Bottom line is don't confuse what you see on SEC reports from companies with what you'll see on your mineral interest, UMI interesest or Working Interest statements. They aren't always the same.

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Permalink Reply by Mac Davis on September 8, 2009 at 20:19

Mark, if you mean what I think about when you say "cash" accounting, I think some companies like not using "cash" accounting. You can spend money now, but not report it as an expense on your books. There's an Enron-like factor in this in terms of being able to claim bigger profits than you "really" have. In some ways, it's like borrowing money, and claiming the loaned money as profits.

There's also a legitimate reason to do non-cash accounting. If, for instance, you spend $100 million buying new drilling rigs, you wouldn't really want to report it as a $100 million expense and then report a big loss on your annual report. In theory, you can sell your $100 million drilling rigs for $90 at the end of the year, so you really haven't "lost" all $100 million, you've simply converted some of your cash assets into equipment assets. You would actually be doing your stockholders a disservice by reporting the $100 million as "lost" money. Also, if you later sold some of the rigs off for cash, you'd generate a profit and have to pay taxes.

There's also the point that, in theory, the SEC filings DO list the actual cash accounting numbers if you dig deep enough. In theory, that is. There are lots of legal, semi-legal, and flat-out illegal ways to cook the books.

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Permalink Reply by Grillin' - MmmMmm on September 9, 2009 at 1:20

Agree Mac. I really don't have a problem with a company making that $100 million investment in a year and showing a loss for that year. Its called the business cycle. But some like vanilla, and others like chocolate! As an engineer, I'm not a big fan of accounting in general! But I am also an economist, a manager and an owner so I guess I'll have to deal with it! Kind of like that nasty medicine we used to have to take as kids...its good for you but it sucks when you take it!

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Permalink Reply by Mac Davis on September 9, 2009 at 8:35

I always thought cash accounting would be the right way to go. You get to deduct your expenses immediately instead of loaning the money to the IRS for free while you depreciate things.

However, Wall Street would go ape every time you tried to made an investment. Your CEO would get fired, nobody would make investments if they had to expense them right away.

It will never happen. The tax man is too happy getting to use your money for free while you wait for it to depreciate.

Note that mineral owners have to pay taxes immediately on mineral profits, but the producing company has to wait to deduct their drilling expenses from their profits.

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