BP Prudhoe Bay Royalty Trust
Notes to Financial Statements (Unaudited)
(Prepared on a modified basis of cash receipts and disbursements)
June 30, 2018
These unaudited financial statements should be read in conjunction with the financial statements and related
notes in the Trusts Annual Report on Form
10-K
for the fiscal year ended December 31, 2017. The cash earnings and distributions for the interim periods presented are not necessarily indicative of
the results to be expected for the full year.
(3) Royalty Interest
At inception in February 1989, the Royalty Interest held by the Trust had a carrying value of $535,000,000. In accordance with generally accepted accounting
principles, the Trust amortized the value of the Royalty Interest based on the units of production method. Such amortization was charged directly to the Trust corpus, and did not affect cash earnings. In addition, the Trust periodically evaluated
impairment of the Royalty Interest by comparing the undiscounted cash flows expected to be realized from the Royalty Interest to the carrying value, pursuant to the Financial Accounting Standards Board Accounting Standards Codification 360,
Property, Plant, and Equipment
. If the expected future undiscounted cash flows were less than the carrying value, the Trust recognized impairment losses for the difference between the carrying value and the estimated fair value of the Royalty
Interest. By December 31, 2010, the Trust had recognized accumulated amortization of $359,473,000 and aggregate impairment write-downs of $175,527,000 reducing the carrying value of the Royalty Interest to zero.
(4) Income Taxes
The Trust files its federal tax return
as a grantor trust subject to the provisions of subpart E of Part I of Subchapter J of the Internal Revenue Code of 1986, as amended, rather than as an association taxable as a corporation. The Trust Unit holders are treated as the owners of Trust
income and corpus, and the entire taxable income of the Trust will be reported by the Trust Unit holders on their respective tax returns.
If the Trust
were determined to be an association taxable as a corporation, it would be treated as an entity taxable as a corporation on the taxable income from the Royalty Interest, the Trust Unit holders would be treated as shareholders, and distributions to
Trust Unit holders would not be deductible in computing the Trusts tax liability as an association.
(5) Alaska Oil and Gas Production Tax
On April 14, 2013, Alaskas legislature passed an
oil-tax
reform bill amending Alaskas oil and
gas production tax statutes, AS 43.55.10 et seq. (the Production Tax Statutes) with the aim of encouraging oil production and investment in Alaskas oil industry. On May 21, 2013, the Governor of Alaska signed the bill into law
as chapter 10 of the 2013 Session laws of Alaska (the Act). Among significant changes, the Act eliminated the monthly progressivity tax rate implemented by certain amendments to the Production Tax Statutes in 2006 and 2007,
increased the base rate from 25% to 35% and added a stair-step
per-barrel
tax credit for oil production. This tax credit is based on the gross value at the point of production per barrel of taxable oil and may
not reduce a producers tax liability below the minimum tax
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