Effective
January 1, 2018,
we adopted ASU
2014
-
09,
Revenue from Contracts with Customers (Topic
606
). Under the new standard, we recognize revenues when the following criteria are met: (i) persuasive evidence of a contract with a customer exists, (ii) identifiable performance obligations under the contract exist, (iii) the transaction price is determinable for each performance obligation, (iv) the transaction price is allocated to each performance obligation, and (v) the performance obligations are satisfied. We derive a majority of our revenues from oil and gas royalties, timber sales, and surface leases. Surface leases are
not
within the scope of ASC
606.
See Note
9
for more detailed information about the Company’s reportable segments.
Oil and gas revenue is generated through customer contracts, where we provide the customer access to a designated tract of land upon which the customer performs exploration, extraction, production and ultimate sale of the oil and gas. The Company receives royalties on all oil and gas produced by the customer. The performance obligation identified in oil and gas related contracts is the oil and gas produced on the designated tract of land. The performance obligation is satisfied at a point in time, which is when the customer produces oil and gas. The transaction price is comprised of fixed fees (royalties) on all oil and gas produced The Company accrues monthly royalty revenues based upon estimates and adjusts to actual as the Company receives payments. Accrued royalty income was
$84,880
and
$93,594
as of
December 31, 2019
and
2018,
respectively. There are
no
capitalized contract costs associated with oil and gas contracts. The accounting for royalty income remains largely unchanged upon implementation of ASC
606.
Timber revenue is generated through customer contracts executed as a pay-as-cut arrangement, where the customer acquires the right to harvest specified timber on a designated tract for a set period of time at agreed-upon unit prices. The performance obligation identified in timber related contracts is the severing of a single tree.
We satisfy our performance obligation when timber is severed, at which time revenue is recognized. The transaction price for timber sales is determined using contractual rates applied to harvest volumes. The Company
may
receive a deposit at the time of entering into a stumpage agreement and this deposit is recorded in unearned revenue until earned. The Company held stumpage agreement deposits of
$87,300
and
$54,300
at
December 31, 2019
and
2018,
respectively. Accrued timber income was
$10,407
and
$9,466
at
December 31, 2019
and
2018,
respectively. The accounting for timber revenue remains largely unchanged upon implementation of ASC
606.
Surface revenue is earned through annual leases for agricultural and hunting activities and the Company records revenues evenly over the term of these leases. Surface revenues from these sources are recurring on an annual basis. Unearned revenues were
$77,857
and
$58,893
at
December 31, 2019
and
2018,
respectively. Accrued surface revenue was
$7,499
and
$15,403
at
December 31, 2019
and
2018,
respectively.
Surface revenue is also earned through right of way and related temporary work-space leases, both of which are
not
unusual in occurrence and are
not
recurring sources of revenue. Generally, a right of way lease relates to either a utility or pipeline right of way that is a permanent servitude or exists for fixed periods of time greater than
thirty
years. The Company retains ownership of the land and the servitude is limited to the use of the surface. Revenue is recorded at the time of the agreement’s execution date. For income tax purposes, these types of agreements are treated as sales of business assets.
Other sources of surface revenue can be commercial activities leases and sales of surface minerals, such as dirt.