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Basic earnings per common share is based
on the weighted average number of shares of common stock outstanding
during the periods. Diluted earnings per common share is based on
the weighted average number of common shares and all dilutive potential
common shares outstanding during the periods. The Company had outstanding
2,500, 2,500 and 30,000 stock options at December 31, 2006, 2005
and 2004, respectively, that were antidilutive.
Contingencies
Liabilities and other contingencies are
recognized upon determination of an exposure, which when analyzed
indicates that it is both probable that an asset has been impaired
or that a liability has been incurred and that the amount of such
loss is reasonably estimable.
Asset Retirement Obligation
In June 2001, the FASB issued SFAS No. 143,
“Accounting for Asset Retirement Obligations.” SFAS No. 143 requires
that an asset retirement obligation (ARO) associated with the retirement
of a tangible long-lived asset be recognized as a liability in the
period in which a legal obligation is incurred and becomes determinable,
with an offsetting increase in the carrying amount of the associated
asset. The ARO is recorded at fair value, excluding salvage values,
and accretion expense will be recognized over time as the discounted
liability is accreted to its expected settlement value. The fair
value of the ARO is measured using expected future cash outflows
discounted at the company's credit-adjusted risk-free interest rate.
The cost of the tangible asset, including the initially recognized
ARO, is depleted such that the cost of the ARO is recognized over
the useful life of the asset.
In accordance with the provisions of SFAS
No. 143, the Company records an abandonment liability associated
with its oil and natural gas wells when those assets are placed
in service. Under SFAS No. 143, depletion expense is reduced since
a discounted ARO is depleted in the property balance rather than
the undiscounted value previously depleted under the old rules.
The lower depletion expense under SFAS No. 143 is offset, however,
by accretion expense, which is recognized over time as the discounted
liability is accreted to its expected settlement value.
Inherent in the fair value calculation
of ARO are numerous assumptions and judgments including the ultimate
settlement amounts, inflation factors, credit adjusted discount
rates, timing of settlement, and changes in the legal, regulatory,
environmental and political environments. To the extent future revisions
to these assumptions impact the fair value of the existing ARO liability,
a corresponding adjustment is made to the oil and natural gas property
balance. Settlements greater than or less than amounts accrued as
ARO are recovered as a gain or loss upon settlement.
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