SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2024

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of The Reserve Petroleum Company and our subsidiaries in which we hold a controlling interest, reflecting ownership of a majority of the voting interest, as of the financial statement date. Additionally, we consolidate VIEs under certain criteria discussed further below. All intercompany accounts and transactions have been eliminated in consolidation.

When necessary, reclassifications to the consolidated financial statements are made to prior period financial information to conform to the current year presentation. These reclassifications had no impact on previously reported net income/(loss) or retained earnings.

Variable Interest Entities

We decide at the inception of each arrangement whether an entity in which an investment is made or in which we have other variable interests is considered a VIE. Generally, an entity is a VIE if (1) the entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, (2) the entity’s investors lack any characteristics of a controlling financial interest or (3) the entity was established with non-substantive voting rights.

We consolidate VIEs when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is generally the party that both: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. If we are not deemed to be the primary beneficiary of a VIE, we account for the investment or other variable interests in a VIE in accordance with other applicable GAAP.

Non-Controlling Interests

When we consolidate an entity, 100% of the assets, liabilities, revenues and expenses of the subsidiary are included in the consolidated financial statements. For those consolidated entities in which our ownership is less than 100%, we record a non-controlling interest as a component of equity on the consolidated balance sheets, which represents the third-party ownership in the net assets of the respective consolidated subsidiary. Additionally, the portion of the net income or loss attributable to the non-controlling interest is reported as net income/(loss) attributable to non-controlling interest on the Consolidated Statements of Operations. Changes in ownership interests in an entity that do not result in deconsolidation are generally recognized within equity. See Note 8 for additional details on non-controlling interests.

Cash and Cash Equivalents

We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

Investments

Marketable Securities:

We classify our debt and marketable equity securities as available for sale. Equity securities with readily determinable fair values and available-for-sale debt securities are recorded at fair value. Unrealized gains and losses on equity securities are reported in current earnings. Unrealized gains and losses on available-for-sale debt securities, which consist entirely of U.S. Government securities, are reported as a component of other comprehensive income when significant to the consolidated financial statements. There were no significant, cumulative unrealized gains or losses on available-for-sale debt securities as of December 31, 2024 or 2023.

Equity Method and Other Investments:

We account for our non-marketable investments in limited liability companies on the equity method if ownership allows us to exercise significant influence.

Other investments, without readily determinable fair values, that are not accounted for on the equity method are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management reviews our other investments and the underlying projects and activity periodically and assesses the need for any impairment. See Note 7 for additional information on investments and impairment.

Receivables and Revenue Recognition

Accounts receivable, net of allowance for credit losses, for the years ending December 31, 2024, 2023 and 2022 were $2,774,487, $2,366,663 and $2,318,183, respectively.

Oil and gas sales and resulting receivables are recognized when the product is delivered to the purchaser and title has transferred. Sales are to credit-worthy major energy purchasers with payments generally received within 60 days of transportation from the well site. Historically, we have had little, if any, uncollectible receivables; therefore, an allowance for credit losses has not been provided for oil and gas receivables.

Our revenues are primarily derived from our interests in the sale of oil and natural gas production. Each barrel of oil or thousand cubic feet of natural gas delivered is considered a separate performance obligation. We recognize revenue from our interests in the sales of oil and natural gas in the period that our performance obligations to provide oil and natural gas to customers are satisfied. Performance obligations are satisfied when we have no further obligations to perform related to the sale and the customer obtains control of product. The sales of oil and natural gas are made under contracts third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. We receive payment from the sale of oil and natural gas production from one to three months after delivery. At the end of each month, as performance obligations are satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in accounts receivable in the consolidated balance sheets. Variances between our

estimated revenue and actual payments are recorded in the month the payment is received; however, differences have been and are insignificant. Accordingly, the variable consideration is not constrained.

A portion of oil and gas sales recorded in the consolidated Statements of Operations are the result of estimated volumes and pricing for oil and gas products not yet received for the year. For the years ending December 31, 2024, 2023 and 2022, that estimate represented approximately $1,986,995, $977,894 and $1,142,304, respectively, of accrued oil and gas sales included in the consolidated Statements of Operations.

Our contracts with customers originate at or near the time of delivery and transfer of control of oil and natural gas to the purchasers. As such, we do not have significant unsatisfied performance obligations. Our oil is typically sold at delivery points under contract terms that are common in our industry. Our natural gas produced is delivered by the well operators to various purchasers at agreed upon delivery points under a limited number of contract types that are also common in our industry. However, under these contracts, the natural gas may be sold to a single purchaser or may be sold to separate purchasers. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and natural gas at specified prices, and then the well operators will remit payment to us for our share in the value of the oil and natural gas sold.

Our disaggregated revenue has two primary revenue sources, which are oil sales and natural gas sales. The following is an analysis of the components of oil and gas sales:


	Year Ended December 31,
	2024		2023
Oil Sales	$	12,008,568	$	10,037,559
Natural Gas Sales	2,721,772		2,155,986
Miscellaneous Oil and Gas Product Sales	409,195		296,502
	$	15,139,535	$	12,490,047

We recognize revenue from lease bonuses when we have received an executed lease agreement with a third party transferring the rights to explore for and produce any oil or gas they may find within the terms of the lease, the payment has been collected and we have no obligation to refund the payment. We recognize the lease bonus as a cost recovery with any excess above our cost basis in the mineral properties being treated as income. Water well drilling revenue and resulting receivables are recognized based on our right to invoice as services are performed. See Note 8 for information related to allowance for credit losses of uncollectible TWS receivables recorded in 2024.

Property, Plant and Equipment

Oil and gas properties are accounted for on the successful efforts method. The acquisition, exploration and development costs of producing properties are capitalized. We have not historically had any capitalized exploratory drilling costs that are pending determination of reserves for more than one year. All costs relating to unsuccessful exploratory wells, geological and geophysical costs, delay rentals and abandoned properties are expensed. Lease costs related to unproved properties are amortized over the life of the lease and are assessed for impairment when indicators of impairment are present. Any impairment of value is charged to expense.

We assess our proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. Such events include, but are not limited to, declines in commodity prices, increases in operating costs, unfavorable reserve revisions, poor well performance, changes in development plans and potential property divestitures. The impairment test compares undiscounted future net cash flows to the assets’ net book value. These undiscounted cash flows are driven by significant assumptions, including our expected future development activity, reserve estimates, forecasted pricing, future operating costs, capital expenditures and severance taxes. If the net capitalized costs exceed undiscounted future net cash flows, then the cost of the property is written down to fair value utilizing a discounted future net cash flow analysis.

Depreciation, depletion and amortization of producing properties is computed on the units-of-production method on a property-by-property basis. The units-of-production method is based primarily on estimates of proved reserve quantities. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised in the near term. Changes in estimated reserve quantities are applied to depreciation, depletion and amortization computations prospectively.

Other property and equipment are depreciated on the straight line, declining balance, or other accelerated method as appropriate.

The following estimated useful lives, in years, are used for property and equipment:


Furniture and Fixtures	5	to	10
Automobiles	5	to	8
Salt Water Disposal and Injection Wells, Other Equipment	7	to	10

Income Taxes

We utilize an asset/liability approach to calculating deferred income taxes. Deferred income taxes are provided to reflect temporary differences in the basis of net assets and liabilities for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance if a determination is made that it is more likely than not that some or all the deferred assets will not be realized based on the weight of all available evidence.

We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, based upon the technical merits of the position. We will record the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with taxing authorities.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. There were no uncertain tax positions as of December 31, 2024 and 2023. The federal income tax returns for 2021, 2022 and 2023 are subject to examination. See Note 6 for discussion of income taxes.

Earnings Per Share

Accounting guidance for Earnings Per Share (EPS) establishes the methodology of calculating basic earnings per share and diluted earnings per share. The calculations of basic earnings per share and diluted earnings per share differ in that instruments convertible to common stock (such as stock options, warrants and convertible preferred stock) are added to weighted average shares outstanding when computing diluted earnings per share. For 2024 and 2023, the Company had no dilutive shares outstanding; therefore, basic and diluted earnings per share are the same.

Concentrations of Credit Risk and Major Customers

Our receivables relate primarily to sales of oil and natural gas to purchasers with operations in Arkansas, Kansas, Oklahoma, South Dakota, Texas and Wyoming. We had two purchasers in 2024 whose total purchases were 34% of total oil and gas sales and one purchaser in 2023 whose purchases were 11% of total oil and gas sales.

We maintain our cash in bank deposit accounts, which at times may exceed federally insured limits. We have not experienced any losses in such accounts and believe that we are not exposed to any significant credit risk with respect to cash and cash equivalents.

Our investment in marketable equity securities consists of equity interests in both U.S. and international entities involved in a broad range of industries. These marketable equity securities are subject to overall market risks, which could result in a temporary or permanent decline in the fair value of these securities.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include oil and natural gas reserve quantities that form the basis for the calculation of amortization and impairment of oil and natural gas properties. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent reserve discoveries are more imprecise than those for properties with long production histories. Actual results could differ from the estimates and assumptions used in the preparation of our consolidated financial statements.

Gas Balancing

Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold. A liability is recorded when our excess takes of natural gas volumes exceed our estimated remaining recoverable reserves (over-produced). No receivables are recorded for those wells where we have taken less than our ownership share of gas production (under-produced).

Guaranties

At the inception of a guaranty or subsequent modification, we record a liability for the fair value of the obligation undertaken in issuing the guaranty. We record a liability for our obligations when it becomes probable that we will have to perform under the guaranty. We have issued guaranties associated with our consolidated VIE, Grand Woods and our equity method investments. See Note 7 for discussion of equity investments.

Asset Retirement Obligation

We record the fair value of our estimated liability to retire our oil and natural gas producing properties in the period in which it is incurred (typically the date of first sales). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators, inflating it over the life of the property and discounting the estimated obligation to its present value. Current year inflation rate used is 2.50%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value. Current year discount rate used is 7.50%.

The following table summarizes the asset retirement obligation for 2024 and 2023:


	2024		2023
Beginning balance at January 1	$	2,566,368	$	2,809,257
Liabilities incurred	15,310		22,482
Liabilities settled (wells sold or plugged)	—		(33,015)
Accretion expense	167,756		72,885
Revision to estimate	(387,374)		(305,241)
Ending balance at December 31	$	2,362,060	$	2,566,368

New Accounting Pronouncements

In November 2024, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU requires public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Specifically, they will be required to:

•Disclose the amounts of (a) purchases of inventory; (b) employee compensation; (c) depreciation; (d) intangible asset amortization; and (e) depreciation, depletion, and amortization recognized as part of oil and gas producing activities (or other amounts of depletion expense) included in each relevant expense caption.

•Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.

•Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. And disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.

This ASU is effective for annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. We do not anticipate the adoption of this update to have a material impact on our financial position, results of operations or cash flow.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. ASU 2023-09 intends to provide investors with enhanced information about an entity’s income taxes by requiring disclosure of items such as disaggregation of the effective tax rate reconciliation as well as information regarding income taxes paid. This ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued. We do not anticipate the adoption of this update to have a material impact on our financial position, results of operations or cash flow.

On August 23, 2023, the FASB issued ASU 2023-05, Business Combinations— Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). This ASU is effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. We do not anticipate the adoption of this update to have a material impact on our financial position, results of operations or cash flow.

Pronouncements Adopted in 2024

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segments Disclosures. Under this ASU, the scope and frequency of segment disclosures is increased to provide investors with additional detail about information utilized by an entity’s “Chief Operating Decision Maker.” This ASU was effective for annual reporting periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The new guidance did not have any impact on our financial position, results of operations or cash flows.

RESERVE PETROLEUM CO 10-K