| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies consistently applied by management in the preparation of the accompanying financial statements follows: Basis of Presentation – the financial statements include only those assets, liabilities and results of operations of the partners which relate to the business of the Partnership. The statements do not include any assets, liabilities, revenues or expenses attributable to any of the partners’ other activities. Management’s Estimate – The preparation of the Partnership’s financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires this Partnership to make estimates and assumptions that affect the amounts reported in this Partnership’s financial statements and accompanying notes. Actual results could differ from those estimates. Estimates which are particularly significant to the financial statements include estimates of natural gas and natural gas liquids (“NGL”) sales revenue, proved reserves, future cash flows from natural gas and NGL’s properties. Cash and Cash Equivalents - The Partnership’s cash and cash equivalents include cash and interest-bearing money market deposits held by major financial institutions having original maturities of 90 days or less. The balance in the Partnership account is insured by Federal Deposit Insurance Corporations, up to $250,000. The balance in these accounts may at times be in excess of federally insured amounts. The Partnership has not experienced losses in any such accounts to date and limits the Partnership’s exposure to credit loss by placing its cash and cash equivalents with high-quality financial institutions. Accounts Receivable - related party – The Partnership records an estimate of revenue to be received in future months for production in the months prior to the end of the reporting period, based upon estimated production information that is available to it. Substantially all of the Partnership’s production is sold to a related party of the Partnership. Management determined that no allowance for uncollectible amounts was necessary at December 31, 2015 and 2014, respectively, however this estimate may change in the future periods. Natural Gas Properties - The Partnership accounts for its natural gas properties under the successful efforts method of accounting. Costs of proved developed producing properties and developmental dry hole costs are capitalized and depreciated or depleted by the unit-of-production method based on estimated proved developed producing reserves. Property acquisition costs are depreciated or depleted on the unit-of-production method based on estimated proved reserves. Leased property was contributed by the managing general partner, and was utilized in the drilling efforts of the Partnership. The Partnership calculates depreciation, depletion and amortization (DD&A) expense by using as the denominator the Partnership’s estimated period-end reserves adjusted to add back current period production.
Upon the sale or retirement of significant portions of or complete fields of depreciable or depletable property, the net book value thereof, less proceeds or salvage value, is recognized in the statement of operations as a gain or loss. Upon the sale of individual wells, the proceeds are credited to accumulated DD&A. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs and costs of carrying and retaining unproved properties are expensed. The estimates of proved reserves are based on quantities of gas that engineering and geological analysis demonstrates, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic conditions. Annually, the Partnership engages independent petroleum engineers to prepare a reserve and economic evaluation of all our properties on a well-by-well basis as of December 31. The process of estimating and evaluating gas reserves is complex, requiring significant decisions in the evaluation of available geological, geophysical, engineering and economic data. The data for a given property may also change substantially over time as a result of numerous factors, including additional development activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, revisions in existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the Partnership’s most accurate assessments possible, the subjective decisions and variances in available data for various properties increase the likelihood of significant changes in these estimates. Because estimates of reserves significantly affect this Partnership’s DD&A expense, a change in this Partnership’s estimated reserves could have an effect on the Partnership’s income or loss. Proved Property Impairment - The Partnership assesses its producing natural gas properties for possible impairment, upon a triggering event, by comparing net capitalized costs to estimated undiscounted future net cash flows on a well by well basis using estimated production based upon prices at which the Partnership reasonably estimates the commodities to be sold. The estimates of future prices may differ from current market prices of natural gas. Certain events, including but not limited to, downward revisions in estimates to the Partnership’s reserve quantities, expectations of falling commodity prices or rising operating costs, could result in a triggering event and, therefore, a possible impairment of the Partnership’s proved crude oil properties. If net capitalized costs exceed undiscounted future net cash flows, the measurement of impairment is based on estimated fair value utilizing a future discounted cash flows analysis, which is predominantly unobservable data or inputs, and is measured by the amount by which the net capitalized costs exceed their fair value. Estimated undiscounted future net cash flows are determined using prices from the forward price curve at the measurement date. Estimated discounted future net cash flows are determined utilizing a risk adjusted discount rate that is based on rates utilized by market participants that are commensurate with the risks inherent in the development of the underlying natural gas reserves. Due to the availability of new reserve information, the Partnership reviewed its proved natural gas properties for impairment at December 31, 2015. The Partnership recognized an impairment charge of proved properties of approximately $5,182,000, and $6,629,000 for the year ended December 31, 2015, and 2014. Production Tax Liability – Production tax liability represents estimated taxes, primarily ad valorem and property to be paid to the states and counties in which the Partnership operates. The Partnership’s share of the tax expense is included in gathering expense. The Partnership’s taxes payable are included in accounts payable on the balance sheets. Asset Retirement Obligations - The Partnership applies the provisions of “Accounting for Asset Retirement Obligations” and “Accounting for Conditional Asset Retirement Obligations” and accounts for asset retirement obligations by recording the fair value of its plugging and abandonment obligations when incurred, which is at the time the well is completely drilled. Upon initial recognition of an asset retirement obligation,
the Partnership increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the asset retirement obligations are accreted, over the estimated life of the related asset, for the change in their present value. The initial capitalized costs are depleted over the useful lives of the related assets, through charges to depreciation, depletion and amortization. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs and changes in the estimated timing of settling asset retirement obligations. As managing general partner, MDS has the right to withhold $200 per month of Partnership revenues in Partnership reserves to cover future plugging and abandonment costs of the well, beginning one year after each Partnership well begins producing. This $200 also includes the managing general partner’s share of revenues. The managing general partner’s retained revenues will be used exclusively for plugging and abandonment of the well. To the extent any portion of those reserves ultimately is not required for the plugging and abandonment costs of the well it will be returned to the general operating revenue of the Partnership. There were no funds withheld from the Partnership’s revenues for future plugging and abandonment costs during the years ended December 31, 2015 and 2014. Commitments- In its capacity as MGP, MDS maintains performance bonds for plugging, reclaiming and abandoning of this Partnership’s wells as required by governmental agencies. If a government agency were required to access these performance bonds to cover plugging, reclaiming or abandonment costs on a Partnership well, this Partnership would be obligated to fund any amounts in excess of funds previously withheld by the managing general partner to cover these expenses. Equipment Proceeds - Proceeds from the sale or other disposition of equipment will be credited to the parties charged with the costs of the equipment in the ratio in which the costs were charged. Income Taxes - Since the taxable income or loss of the Partnership is reported in the separate tax returns of the individual partners, no provision has been made for income taxes by the Partnership. Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard. The Partnership did not have any unrecognized tax benefits, and there was no effect on its financial condition. The Partnership has not identified any uncertain tax positions and as such no interest or penalties have been included in other expense on the statement of operations. The Partnership will file a U.S. federal income tax return, but income will be passed through to the partners. Revenue Recognition - Recent Accounting Pronouncements - In May 2014, the FASB and the International Accounting Standards Board issued their converged standard on revenue recognition that provides a single, comprehensive model that entities will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard outlines a five-step approach to apply the underlying principle: (a) identify the contract with the customer, (b) identify the separate performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to separate performance obligations and (e) recognize revenue when (or as) each performance obligation is satisfied. The revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and can be adopted under the full retrospective method or simplified transition method. Early adoption is not permitted. The Partnership plans to adopt the revenue standard beginning January 1, 2018 and is currently evaluating the impact that these changes will have on our financial statements. In August 2014, FASB issued ASU No. 2014-15 Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. (ASU No. 2014-15) ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual reporting periods beginning after December 15, 2016, with early application permitted. Management is currently assessing the provisions of ASU 2014-15 and is evaluating the impact that it will have on its footnote disclosures, results of operations, financial position or cash flows. |
