Sales and Subleases of Unproved Properties

Have you received an offer to acquire nonessential unproved property? Below we consider key aspects to mineral conveyances.

When unproved properties are sold or exchanged, the accounting treatment depends on the answers to a few questions.

Accounting Treatment Considerations

1. Is the impairment of unproved properties recorded individually or on a group basis?
2. Is the conveyance an entire interest or only a partial interest?

Sale of an entire working interest in unproved properties

If the entire interest in an unproved property is sold, the recognition of gain or loss depends on the method used to determine lease impairment. If impairment was assessed individually, ASC 932-360-55-8 requires recognition of a gain or loss as the difference between the proceeds received and the property’s net carrying value. However, if the unproved property’s impairment was determined as a group, the treatment is different. ASC 932-360-55-8 states that, “For a property amortized by providing a valuation allowance on a group basis, neither gain nor loss shall be recognized when an unproved property is sold unless the sales price exceeds the original cost of the property, in which case gain shall be recognized in the amount of such excess.”

Sale of a share of a working interest in unproved properties

If sales proceeds for a partial interest exceed the entire original cost of the property assessed for impairment within a group, or if such proceeds exceed the carrying amount of a property assessed for impairment individually, a gain should be recorded. Any loss on the sale is recognized by using the impairment test.

Sale of a working interest but maintaining an override

If the working interest is sold for cash and an overriding royalty interest, net profits interest or production payment is retained, the conveyance is considered a sublease. A sublease is treated like selling part of an unproved property interest, and the unrecovered book value is assigned to the retained nonoperating interest.

If you have any questions on conveyances of mineral assets, reach out to Logan Kowcheck.

About Schneider Downs Energy & Resources Services 

The Schneider Downs Energy & Resources industry group provides specialized financial advice and services to our clients in the oil and gas, mining and aggregates, forest products and alternative fuel and energy industries throughout the Columbus and Pittsburgh regions. Our extensive knowledge of industry issues enables us to provide proactive audit, tax and management consulting services.  

To learn more, visit our Energy and Resources Industry Group page.