Use of Estimates

12 Months Ended

Dec. 31, 2012

Use of Estimates

Use of Estimates

3. Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates included in the consolidated financial statements are: (1) crude oil, natural gas and natural gas liquids revenues and reserves; (2) depreciation, depletion and amortization; (3) impairment of oil and gas properties; (4) accrued assets and liabilities; (5) stock-based compensation; (6) asset retirement obligations (“AROs”); (7) valuation of derivative instruments and (8) valuation allowances associated with income taxes and accounts receivables.  Although management believes these estimates are reasonable, changes in facts and circumstances or discovery of new information may result in revised estimates.  Actual results could differ from those estimates.

In July 2011 we changed our lease operating accrual process for direct operating expenses.  The change in the accrual process was a direct result of an in depth analysis of recent historical information combined with better insight and improved judgment in estimating direct operating expenses.  In accordance with Accounting Standards Codification 250 “Accounting Changes and Error Corrections” (“ASC 250”) we have treated the adjustment as a change in accounting estimate.  A change in estimate under ASC 250 is defined as a revision in accounting measurement based on the occurrence of new events, additional experience, subsequent developments, better insight, and/or improved judgment.  As required under ASC 250 regarding changes in accounting estimates, we recorded a $2.3 million reduction to accrued liabilities (and related lease operating expenses) in the “period of change” which we have interpreted to be the third quarter of 2011.