Organization, Consolidation and Presentation of Financial Statements

9 Months Ended

Sep. 30, 2011

Organization, Consolidation and Presentation of Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION

Chancellor Group, Inc. (the "Company", "our", "we", "Chancellor" or the

"Company") was incorporated in the state of Utah on May 2, 1986, and then, on

December 30, 1993, dissolved as a Utah corporation and reincorporated as a

Nevada corporation. The Company's primary business purpose is to engage in the

exploration and production of oil and gas. On March 26, 1996, the Company's

corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group,

Inc. The Company's headquarters is in Pampa, Texas.

OPERATIONS

The Company and its wholly-owned subsidiaries, Gryphon Production Company, LLC

and Gryphon Field Services, LLC, own 134 wells, of which 19 are water disposal

wells and 2 are gas wells, although "associated" gas is also produced from some

oil wells. As of September 30, 2011, approximately 67 oil wells and 2 gas wells

located in Gray and Hutchinson counties in the Texas panhandle are actively

producing. We also own and operate our 15.9 acre property, with its shop, yard

and office complex. Company equipment includes two work-over rigs as well as

other oil field related equipment.

In addition, we own approximately 4,830 gross and net acres of production rights

on nine leases, which includes 4,300 acres of developed acreage and 500 acres of

undeveloped acreage, approximately 300 acres of which was previously owned by

Mobil and approximately 200 acres of which are on the Worley Combs lease. The

nine leases have the production rights for oil, casing-head gas and natural gas.

We produced a total of 6,272 barrels of oil and 4,654 mcf of gas in the nine

months ended September 30, 2011. The oil is light sweet crude and the natural

gas has very high heat content, 1600 to 2600 btu/scf.

BASIS OF PRESENTATION

The consolidated financial statements of Chancellor Group, Inc. have been

prepared pursuant to the rules and regulations of the SEC for Quarterly Reports

on Form 10-Q and in accordance with GAAP. Accordingly, these consolidated

financial statements do not include all of the information and footnotes

required by GAAP for annual financial statements. These consolidated financial

statements should be read in conjunction with the consolidated financial

statements and notes in the Chancellor Group, Inc. Annual Report on Form 10-K

for the year ended December 31, 2010.

The consolidated financial statements are unaudited, but, in management's

opinion, include all adjustments (which, unless otherwise noted, include only

normal recurring adjustments) necessary for a fair presentation of such

financial statements. Financial results for this interim period are not

necessarily indicative of results that may be expected for any other interim

period or for this year ending December 31, 2011.

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of

Chancellor Group, Inc.; and its wholly owned subsidiaries: Gryphon Production

Company, LLC, and Gryphon Field Services, LLC. These entities are collectively

hereinafter referred to as "the Company". Any inter-company accounts and

transactions have been eliminated.

ACCOUNTING YEAR

The Company employs a calendar accounting year. The Company recognizes income

and expenses based on the accrual method of accounting under generally accepted

accounting principles in the United States of America.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted

accounting principles requires management to make estimates and assumptions that

affect reported amounts of assets and liabilities and disclosure of contingent

assets and liabilities at the date of the financial statements and the reported

amounts of revenues and expenses during the reporting period. Actual results

could differ from those estimates.

PRODUCTS AND SERVICES, GEOGRAPHIC AREAS AND MAJOR CUSTOMERS

The Company plans to develop its domestic oil and gas properties, located in

Gray and Hutchinson counties in the Texas panhandle, and possibly to acquire

additional producing oil and gas properties. The Company's major customers, to

which the majority of its oil and gas production is sold, are Plains Marketing

and DCP Midstream.

NET INCOME (LOSS) PER SHARE

The net income (loss) per share is computed by dividing the net income (loss) by

the weighted average number of shares of common outstanding. Warrants, stock

options, and common stock issuable upon the conversion of the Company's

preferred stock (if any), are not included in the computation if the effect

would be anti-dilutive and would increase the earnings or decrease loss per

share.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of

six months or less as cash equivalents.

CONCENTRATION OF CREDIT RISK

Some of the Company's operating cash balances are maintained in accounts that

currently exceed federally insured limits. The Company believes that the

financial strength of depositing institutions mitigates the underlying risk of

loss. To date, these concentrations of credit risk have not had a significant

impact on the Company's financial position or results of operations.

RESTRICTED CASH

Included in cash in bank at September 30, 2011 are deposits totaling $250,000

which are assigned and held as collateral for a letter of credit issued to the

Railroad Commission of Texas as required for its oil and gas activities.

ACCOUNTS RECEIVABLE

The Company reviews accounts receivable periodically for collectibles and

establishes an allowance for doubtful accounts and records bad debt expense when

deemed necessary. An allowance for doubtful accounts was not considered

necessary or recorded at September 30, 2011.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated under the straight

line method over the estimated useful life of the equipment. The estimated

useful life of leasehold costs, equipment and tools ranges from five to seven

years. The useful life of the office building and warehouse is estimated to be

twenty years.

OIL AND GAS PROPERTIES

The Company follows the successful efforts method of accounting for its oil and

gas activities. Under this accounting method, costs associated with the

acquisition, drilling and equipping of successful exploratory and development

wells are capitalized. Geological and geophysical costs, delay rentals and

drilling costs of unsuccessful exploratory wells are charged to expense as

incurred. The carrying value of mineral leases is depleted over the minimum

estimated productive life of the leases, or ten years. Undeveloped properties

are periodically assessed for possible impairment due to un-recoverability of

costs invested. Cash received for partial conveyances of property interests is

treated as a recovery of cost and no gain or loss is recognized.

DEPLETION

The carrying value of the mineral leases is depleted over the minimum estimated

productive life of the leases, or ten years.

INCOME TAX

Deferred taxes are provided on a liability method whereby deferred tax assets

are recognized for deductible temporary differences and operating loss

carry-forwards and deferred tax liabilities are recognized for taxable temporary

differences. Temporary differences are the differences between the reported

amounts of assets and liabilities and their tax bases. Deferred tax assets are

reduced by a valuation allowance when, in the opinion of management, it is more

likely than not that some portion or all of the deferred tax assets will not be

realized. Deferred tax assets and liabilities are adjusted for the effects of

changes in tax laws and rates on the date of enactment.

REVENUE RECOGNITION

The Company recognizes revenue when a product is sold to a customer, either for

cash or as evidenced by an obligation on the part of the customer to pay.

FAIR VALUE MEASUREMENTS AND DISCLOSURES

The Company estimates fair values of assets and liabilities which require either

recognition or disclosure in the financial statements in accordance with FASB

ASC Topic 820 "FAIR VALUE MEASUREMENTS". There is no material impact on the

consolidated financial statements related to fair value measurements and

disclosures. Fair value measurements include the following levels:

Level 1: Quoted market prices in active markets for identical assets or

           liabilities. Valuations for assets and liabilities traded in active

           exchange markets, such as the New York Stock Exchange. Level 1 also

           includes U.S. Treasury and federal agency securities and federal

           agency mortgage-backed securities, which are traded by dealers or

           brokers in active markets. Valuations are obtained from readily

           available pricing sources for market transactions involving identical

           assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are

           corroborated by market data. Valuations for assets and liabilities

           traded in less active dealer or broker markets. Valuations are

           obtained from third party pricing services for identical or similar

           assets or liabilities.

Level 3: Unobservable inputs that are not corroborated by market data.

           Valuations for assets and liabilities that are derived from other

           valuation methodologies, including option pricing models, discounted

           cash flow models and similar techniques, and not based on market

           exchange, dealer, or broker traded transactions. Level 3 valuations

           incorporate certain assumptions and projections in determining the

           fair value assigned to such assets or liabilities.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of the Company's financial instruments, including cash and

cash equivalents, accounts receivable and accounts payable, as reported in the

accompanying consolidated balance sheet, approximates fair values.

EMPLOYEE STOCK-BASED COMPENSATION

Compensation expense is recognized for performance-based stock awards if

management deems it probable that the performance conditions are or will be met.

Determining the amount of stock-based compensation expense requires us to

develop estimates that are used in calculating the fair value of stock-based

compensation, and also requires us to make estimates of assumptions including

expected stock price volatility which is derived based upon our historical stock

prices.

BUSINESS COMBINATIONS

The Company accounts for business combinations in accordance with FASB ASC Topic

805 "BUSINESS COMBINATIONS". This standard modifies certain aspects of how the

acquiring entity recognizes and measures the identifiable assets, the

liabilities assumed and the goodwill acquired in a business combination. The

Company did not enter into any business combinations during the quarter ending

September 30, 2011.

The Company complies with the accounting guidance related to consolidation of

variable interest entities ("VIEs") that requires a reporting entity to

determine if a primary beneficiary that would consolidate the VIE from a

quantitative risk and rewards approach, to a qualitative approach based on which

variable interest holder has the power to direct the economic performance

related activities of the VIE as well as the obligation to absorb losses or

right to receive benefits that could potentially be significant to the VIE. This

guidance requires the primary beneficiary assessment to be performed on an

ongoing basis and also requires enhanced disclosures that will provide more

transparency about a company's involvement in a VIE. The Company did not have

any VIEs that required consolidation in these financial statements during the

quarter ending September 30, 2011.

SUBSEQUENT EVENTS

Events occurring after September 30, 2011, were evaluated through the date this

Quarterly Report was issued, in compliance FASB ASC Topic 855 "SUBSEQUENT

EVENTS", to ensure that any subsequent events that met the criteria for

recognition and/or disclosure in this report have been included.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued Accounting Standards Update ("ASU") 2010-03 to

align the oil and gas reserve estimation and disclosure requirements of

Extractive Industries -- Oil and Gas Topic of the Accounting Standards

Codification with the requirements in the SEC's final rule, "MODERNIZATION OF

THE OIL AND GAS REPORTING REQUIREMENTs." We implemented ASU 2010-03 as of

December 31, 2009. Key items in the new rules include changes to the pricing

used to estimate reserves and calculate the full cost ceiling limitation,

whereby a 12-month average price is used rather than a single day spot price,

the use of new technology for determining reserves, the ability to include

nontraditional resources in reserves and the ability to disclose probable and

possible reserves. Management has elected not to include probable and possible

reserves in its reserve studies and related disclosures.

In January 2010, the FASB issued ASU 2010-6, "IMPROVING DISCLOSURES ABOUT FAIR

VALUE MEASUREMENTS." This update requires additional disclosure within the roll

forward of activity for assets and liabilities measured at fair value on a

recurring basis, including transfers of assets and liabilities between Level 1

and Level 2 of the fair value hierarchy and the separate presentation of

purchases, sales, issuances and settlements of assets and liabilities within

Level 3 of the fair value hierarchy. In addition, the update requires enhanced

disclosures of the valuation techniques and inputs used in the fair value

measurements within Levels 2 and 3. The new disclosure requirements are

effective for interim and annual periods beginning after December 15, 2009,

except for the disclosure of purchases, sales, issuances and settlements of

Level 3 measurements. Those disclosures are effective for fiscal years beginning

after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures, the

adoption of this update did not have a material effect on its financial

position, cash flows and results of operations.

In May 2011, ASU 2011-04 was issued which amends U.S. GAAP to confirm with

measurement and disclosure requirements in International Financial Reporting

Standards. The amendments in this Update change the wording used to describe the

requirements in U.S. GAAP for measuring fair value and for disclosing

information about fair value measurements. The amendments include the following:

1. Those that clarify the Board's intent about the application of

existing fair value measurement and disclosure requirements.

2. Those that change a particular principle or requirement for measuring

fair value or for disclosing information about fair value

measurements.

In addition, to improve consistency in application across jurisdictions some

changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value

measurement and disclosure requirements are described in the same way (for

example, using the word shall rather than should to describe the requirements in

U.S. GAAP). The amendments in this Update are to be applied prospectively and

are effective during interim and annual period beginning after December 15,

2011.

In June 2011, ASU 2011-05, "COMPREHENSIVE INCOME" was issued to provide guidance

on the presentation of total comprehensive income, the components of net income,

and the components of other comprehensive income. The amendments in this update

are to be applied retrospectively and are effective for financial statements

issued for fiscal years, and interim periods within those years, beginning after

December 15, 2011. The provisions of ASU 2011-05 are not expected to have a

material impact on our financial statements.

There were various other updates recently issued, most of which represented

technical corrections to the accounting literature or application to specific

industries, and are not expected to have a material impact on the Company's

financial position, results of operations or cash flows.