Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2021

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(a) Basis of Accounting:

The condensed financial statements of the Trust, as prepared on the modified cash basis, reflect the Trust's assets, liabilities, trust corpus, and distributable income as follows:

Royalty income and interest income are recognized in the month in which amounts are received by the Trust.

Trust expenses, consisting principally of routine general and administrative costs, include payments made during the accounting period.

Reserves for liabilities that are contingent or uncertain in amount may also be established if considered necessary.

Net royalty and overriding royalty interests that are producing properties are amortized using the unit-of-production method. This amortization is shown as a reduction of Trust corpus.

Distributions to Unit Holders are recognized when declared by the Trustee.

Production withholding taxes withheld from Unit Holder distributions and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from royalty income in the condensed statement of distributable income.

These condensed statements differ from financial statements prepared in accordance with GAAP and were prepared on the modified cash basis of reporting, which is considered to be the most meaningful because Distributions to Unit Holders are based on net cash receipts. This comprehensive basis of accounting, other than GAAP, corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission as specified by Staff Accounting Bulletin Topic 12E, Financial Statements of Royalty Trusts.

The condensed financial statements of the Trust differ from financial statements prepared in conformity with United States generally accepted accounting principles (GAAP) because of the following:

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Royalty income and interest income are recognized in the month received rather than in the month of production.

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Expenses generally are not accrued.

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Amortization of the net royalty and overriding royalty interests is shown as a reduction to Trust corpus and not as a charge to operating results.

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Reserves may be established for contingencies that would not be recorded under GAAP.

(b) Cash and Cash Equivalents:

The Trust considers all highly liquid financial instruments with original maturities of three months or less when purchased to be cash equivalents.

(c) Related Party:

The Trust was organized to provide an efficient, orderly and practical means of administering the income received from royalty interests and is administered by the Trustee. Pursuant to the terms of the Trust Indenture, the Trust pays the Trustee an annual fee of $100,000. The Trustee may adjust this fee annually in its sole discretion. The Trust pays a Trustee fee of $25,000 per quarter as long as the Trust has sufficient royalty income to make such payments. Going forward, it is unknown how long the Trust can continue to make these quarterly payments.

(d) Impact of COVID-19:

On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The Trust cannot reasonably estimate the length or severity of this pandemic, and the Trust currently cannot anticipate the impact on its financial results or results of operations for fiscal 2021. Further, the pandemic has had a significant impact on the coal industry and the Trust is heavily reliant on revenue from coal mines.

(e) Subsequent Events:

On July 28^th, 2021, the Trust entered into a agreement with Navajo Transitional Energy Company, LLC (“NTEC”) pursuant to which NTEC has agreed to purchase certain overriding royalty interests owned by the Trust in lease MTM-069782 and MTM-110692. The agreement is subject to various closing conditions, including either court approval or Unit Holder approval of the transaction. At closing, the Trust has agreed to convey to NTEC the leases free and clear of all liens in exchange for a total cash value of $105,000, less advance minimum royalties previously received by the Trust of $20,715.67, for an anticipated cash payment of $84,274.33.

(f) Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. While the Trust reported income for the periods presented, the Trust receives substantially all of its royalty payments from the Decker Mine, which filed for bankruptcy in December 2020. After the bankruptcy filing, Decker Mine curtailed its mining operations, and in first quarter 2021, ceased its mining operations. Other than the royalty payments received from the mines, the Trust does not have any other established source of revenues sufficient to cover its operating costs.

Management has assessed the Trust’s ability to continue as a going concern based on the following factors: (i) the Trust’s primary source of revenue, the Decker Mine, recently filed for bankruptcy and ceased mining activity, and the Trust anticipates that the Trust will not receive any additional royalty payments in the foreseeable future, if at all, and (ii) without the Decker Mine, the Trust does not have any additional sources of liquidity, unless it consummates the sale of the Trust assets, and the sale of the royalty interests are subject to legal approvals and market conditions. As a result, the Trust projects that it will not have sufficient cash on hand to meet its obligations as they become due within one year of the date that the financial statements are issued. These conditions, among others, raise substantial doubt about the Trust’s ability to continue as a going concern.

To alleviate the identified conditions and consistent with the terms of the Trust Indenture, the Trust has executed an agreement to sell certain interests in royalty interests held by the Spring Creek Mine and intends to sell all other royalty interests at a public auction in September 2021 to monetize the royalty interests. Refer to note (e) describing the sale of certain royalty interests to NTEC. In addition, the Trust has filed a proof of claim in the bankruptcy court for the royalty income from Decker Mine and has established a reserve for cash received to cover future expenses. However, these plans have not been finalized and are not within the Trust’s control, and therefore cannot be deemed probable. As such, there is no assurance that the Trust’s plans are probable of being implemented.

The Trust has concluded that management’s plans do not alleviate substantial doubt regarding the Trust’s ability to continue as a going concern.

The Trust’s financial statements currently do not include any adjustments that might result from the outcome of any uncertainly as to the Trust’s ability to continue as a going concern.

KIEWIT ROYALTY TRUST 10-Q