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Accounting Concepts Applicable to Federal Royalties

Howard A. Roach, Patricia A. Patten, Royalty Valuation and Management (1988)

Our paper will address several issues that will likely have significant impact on the accounting and administrative process your firms or clients use to calculate and pay Federal and Indian Royalties.

First, you should be aware that existing Notices to Lessees which relate to valuation issues were terminated March 1. Specifically cancelled were NTL-1 which applied to onshore federal production, NTL 1-A which applied to Indian production, NTL-5 which applied to onshore federal and Indian gas, and those OCS NTL's which concerned royalty payments on oil and gas lost or used on leases or units. These Notices should no longer be relied upon for guidance in valuing production for royalty purposes.

The new regulations rely primarily on actual transactions occurring in the marketplace to establish value for royalty purposes. Proceeds accruing to the lessee under the terms of arm's-length sales contracts are the first and primary indicator of value. Not all contracts you might regard as arm's-length will qualify, however, so it is necessary that accountants and royalty administrators know and understand the distinctions. Under the regulations, no contract between inter-company affiliates or relatives is considered to be arm's-length. Further, firms and corporations are considered to be affiliated if one controls, is controlled by, or is under common control with anot