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Oil and Gas Properties and Impairment The Company follows the full-cost method of accounting |
for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including |
directly related overhead costs, are capitalized. All capitalized costs of oil and gas properties, |
including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved |
reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the |
projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the |
amount of the impairment is included in loss from continuing operations before income taxes, and the adjusted carrying amount of the proved |
properties is amortized on the unit-of-production method. The Company’s oil and gas property represents |
an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are found or until it |
is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. |
The amount of any impairment is charged to expense since a reserve base has not yet been established. Impairment requiring a charge to |
expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information. During the fourth quarter of 2022, the Company |
testing protocol was concluded at the MJ-02 well. The test results confirmed that the MJ-02 well did not contain hydrocarbons in commercial |
quantities in the zones tested. As a result, in the year ended December 31, 2022, the Company recorded a non-cash impairment charge to |
its unproved oil and gas properties of $ 45,615,000 . During the year ended December 31, 2021, the Company did not record any non-cash impairment |
charges (see Note 4). Currently, the Company has no economically recoverable |
reserves and no amortization base. The Company’s unproved oil and gas properties consist of capitalized exploration costs of $ 15,889,000 and $ 46,950,000 as of December 31, 2022, and 2021, respectively. F- 12 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) E. |
Property and Equipment Property and equipment other than oil and gas |
property and equipment is recorded at cost and depreciated by the straight-line method over its estimated useful life of 3 to 14 years. |
Depreciation charged to expense amounted to $ 794,000 , and $ 743,000 for the years ended December 31, 2022, and 2021, respectively. See |
Footnote 2Q for a discussion of the purchase of our drilling rig and related equipment. F. Assets Held for Severance |
Benefits Assets held for employee severance benefits represent |
contributions to severance pay funds and insurance policies that are recorded at their current redemption value. G. Use of Estimates The preparation of the accompanying consolidated |
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to |
make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities |
reported, disclosures about contingent assets and liabilities, and reported amounts of expenses. Such estimates include the valuation |
of unproved oil and gas properties, deferred tax assets, asset retirement obligations, borrowing rate of interest consideration for leases |
accounting and legal contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management |
evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic |
environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when |
facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy markets have combined to increase |
the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual |
results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic |
environment will be reflected in the consolidated financial statements in future periods. The full extent to which the COVID-19 pandemic |
may directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that |
are uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat |
COVID-19, as well as the economic impact on local, regional, national and international markets. We have made estimates of the impact |
of COVID-19 within our consolidated financial statements, and although there is currently no major impact, there may be changes to those |
estimates in future periods. Actual results may differ from these estimates. H. |
Income Taxes Income taxes are accounted for under the asset |
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between |
the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating |
loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable |
income in the years in which those temporary differences are expected to be recovered or settled (see Note 7). The effect on deferred |
tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment |
date. Based on Accounting Standards Codification (ASC) |
740-10-25-6 “Income Taxes,” the Company recognizes the effect of income tax positions only if those positions are more likely |
than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 % likely of being |
realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts |
for interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the statements |
of operations. No liability for unrecognized tax benefits was recognized as of December 31, 2022, and 2021. F- 13 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) I. |
Environmental Costs and Loss Contingencies Liabilities for loss contingencies, including |
environmental remediation costs not within the scope of Financial Accounting Standards Board (FASB) ASC Subtopic 410-20, Asset Retirement |
Obligations and Environmental Obligations – Asset Retirement Obligations, arising from claims, assessments, litigation, fines, and |
penalties and other sources, are recorded when probable that a liability has been incurred and the amount of the assessment and/or remediation |
can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of environmental |
remediation costs from third parties that are probable of realization are separately recorded as assets, and are not offset against the |
related environmental liability. Accruals for estimated losses from environmental |
remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted |
as further information develops or circumstances change. Costs of expected future expenditures for environmental remediation obligations |
are not discounted to their present value. J. Asset |
Retirement Obligation Obligations for dismantlement, restoration and |
removal of facilities and tangible equipment at the end of oil and gas property’s useful life are recorded based on the estimate |
of the fair value of the liabilities in the period in which the obligation is incurred. This requires the use of management’s estimates |
with respect to future abandonment costs, inflation, market risk premiums, useful life and cost of capital. The estimate of asset retirement |
obligations does not give consideration to the value the related assets could have to other parties. The obligation is recorded if sufficient |
information about the timing and (or) method of settlement is available to reasonably estimate fair value (see Note 9C). K. Net Loss per Share |
Data Basic and diluted net loss per share of common |
stock, par value $ 0.01 per share (“Common Stock”) is presented in conformity with ASC 260-10 “Earnings Per Share.” |
Diluted net loss per share is the same as basic net loss per share as the inclusion of 46,038,861 and 18,586,557 Common Stock equivalents |
in 2022, and 2021 respectively, would be anti-dilutive. L. |
Stock Based Compensation ASC 718, “Compensation – Stock Compensation,” |
prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions |
include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership |
plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as |
compensation expense in the consolidated financial statements based on their fair values. That expense is recognized over the period during |
which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting |
period). The Company accounts for stock-based compensation |
issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity – Based Payments to Non-Employees.” |
Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurab |
(a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined |
at the earlier of performance commitment date or performance completion date. F- 14 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) M. |
Fair Value Measurements The Company follows Accounting Standards Codification |
(ASC) 820, “Fair Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial |
Staff Position (FSP) No. 157 and related guidance. Those provisions relate to the Company’s financial assets and liabilities carried |
at fair value and the fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value, expands related |
disclosure requirements, and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair |
value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly |
transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous |
market for that asset or liability. The Company uses a three-tier fair value hierarchy |
to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured |
at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use |
observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined |
as follows: ● Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; ● Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and ● Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. The Company’s financial |
instruments, including cash and cash equivalents, accounts payable and accrued liabilities, are carried at historical cost. At December |
31, 2022 and 2021, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these |
instruments. Derivative instruments are carried at fair value, generally estimated using the Binomial Model. N. |
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