Summary of Significant Accounting Policies

12 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

2. Summary of Significant Accounting Policies

Principles of Consolidation.  The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned subsidiaries.  All significant intercompany balances and transactions associated with the consolidated operations have been eliminated.

Estimates and Assumptions.  In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make informed judgments, estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period.  In addition, significant estimates are used in determining year end proved oil and gas reserves.  Although management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates.  The estimate of our oil and natural gas reserves, which is used to compute depreciation, depletion, amortization and impairment of oil and gas properties, is the most significant of the estimates and assumptions that affect these reported results.

Cash and Cash Equivalents.  We consider all highly liquid debt instruments purchased with maturities of three months or less and money market funds to be cash equivalents.  We maintain our cash in bank deposit accounts and money market funds.  At March 31, 2012, we had the majority of our cash and cash equivalents with one financial institution.  We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk.

Accounts Receivable.  Our accounts receivable include trade receivables from joint interest owners and oil and gas purchasers.  Credit is extended based on an evaluation of a customer's financial condition and, generally, is uncollateralized.  Accounts receivable under joint operating agreements have a right of offset against future oil and gas revenues if a producing well is completed.  The collectability of receivables is assessed and an allowance is made for any doubtful accounts.  The allowance for doubtful accounts is determined based on our previous loss history.  We have not experienced any significant credit losses.  For the years ending March 31, 2012, 2011 and 2010, no allowance has been made for doubtful accounts.

Oil and Gas Properties.  Oil and gas properties are accounted for using the full cost method of accounting.  Under this method of accounting, the costs of unsuccessful, as well as successful, acquisition, exploration and development activities are capitalized as property and equipment.  This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities.  The carrying amount of oil and gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation (“ARO”) when incurred.  Generally, no gains or losses are recognized on the sale or disposition of oil and gas properties.

Excluded Costs.  Oil and gas properties include costs that are excluded from capitalized costs being amortized.  These amounts represent investments in unproved properties and major development projects. These costs are excluded 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 transferred to the capitalized costs being amortized (the depreciation, depletion and amortization (“DD&A”) pool).  Impairments transferred to the DD&A pool increase the DD&A rate.

Accounting for Long-Lived Assets.  The Company reviews property and equipment for impairment whenever indicators of impairment are present to determine if the carrying amounts exceed the estimated future net cash flows to be realized. Impairment losses are recognized based on the estimated fair value of the asset.

Ceiling Test.  Under the full cost method of accounting, a ceiling test is performed each quarter.  The full cost ceiling test is an impairment test to determine a limit, or ceiling, on the book value of oil and gas properties.  That limit is basically the after tax present value of the future net cash flows from proved crude oil and natural gas reserves, excluding future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet; and, using an average price over the prior 12-month period held flat for the life of production plus the lower of cost or fair market value of unproved properties.  If net capitalized costs of crude oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings as an expense reflected in additional accumulated DD&A.  This is called a "ceiling limitation write-down."  This charge does not impact cash flow from operating activities, but does reduce our stockholders' equity and reported earnings.

Depreciation, Depletion and Amortization.  The depreciable base for oil and gas properties includes the sum of capitalized costs, net of accumulated DD&A, estimated future development costs and asset retirement costs not accrued in oil and gas properties, less costs excluded from amortization and salvage.  The depreciable base of oil and gas properties is amortized using the unit-of-production method.

Asset Retirement Obligations.  We have significant obligations to plug and abandon natural gas and crude oil wells and related equipment at the end of oil and gas production operations.  We record the fair value of a liability for an ARO in the period in which it is incurred and a corresponding increase in the carrying amount of the related asset.  Subsequently, the asset retirement costs included in the carrying amount of the related asset are allocated to expense using the units of production method.  In addition, increases in the discounted ARO liability resulting from the passage of time are reflected as accretion expense in the Consolidated Statement of Operations.

Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration.  We use the present value of estimated cash flows related to the ARO to determine the fair value.  Inherent in the present value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments.  To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the related asset.

Income Taxes.  The Company recognizes deferred tax assets and liabilities for future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates applicable to the years in which those differences are expected to be settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period that includes the enactment date.  Any interest and penalties are recorded as interest expense and general and administrative expense, respectively.

Other Property and Equipment.  Provisions for depreciation of office furniture and equipment are computed on the straight-line method based on estimated useful lives of three to ten years.

Income Per Common Share.  Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period.  In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.

For the year ended March 31, 2012, 40,000 options were excluded from the diluted net income per share calculations because the options are anti-dilutive.  Anti-dilutive stock options have a weighted average exercise price of $6.80 at March 31, 2012.  For the years ended March 31, 2011 and 2010, no potential common shares relating to stock options were excluded in the computation of diluted net income per share.

The following is a reconciliation of the number of shares used in the calculation of basic income per share and diluted income per share for the periods ended March 31:

	2012		2011		2010
Net income	$	329,993	$	155,696	$	400,839
Shares outstanding:
Weighted avg. common shares outstanding – basic		2,028,014		1,947,605		1,888,070
Effect of the assumed exercise of dilutive stock options		8,227		15,051		41,518
Weighted avg. common shares outstanding – dilutive		2,036,241		1,962,656		1,929,588
Earnings per common share:
Basic	$	0.16	$	0.08	$	0.21
Diluted	$	0.16	$	0.08	$	0.21

Revenue Recognition.  Oil and gas sales and resulting receivables are recognized when the product is delivered to the purchaser and title has transferred.  Sales are to credit-worthy energy purchasers with payments generally received within 60 days of transportation from the well site.  We have historically had little, if any, uncollectible oil and gas receivables.

Gas Balancing.  Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold.  A liability is recorded when our excess takes of natural gas volumes exceeds our estimated remaining recoverable reserves (over produced).  No receivables are recorded for those wells where Mexco has taken less than its ownership share of gas production (under produced).  We do not have any  significant gas imbalances.

Stock-based Compensation.  We use the Binomial option pricing model to estimate the fair value of stock based compensation expenses at grant date.  This expense is recognized as compensation expense in our financial statements over the vesting period.  We recognize the fair value of stock based compensation awards as wages in the Consolidated Statements of Operations based on a graded-vesting schedule over the vesting period.

Recent Accounting Pronouncements.  In December 2008, the SEC released Final Rule, Modernization of Oil and Gas Reporting.  The revised rules are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves to help investors evaluate their investments in oil and gas companies.  In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that aligns the FASB's oil and gas reserve estimation and disclosure requirements with the new SEC rule revisions. The accounting standards revised the definition of proved reserves to permit consideration of new technologies in evaluating oil and natural gas reserves; require the use of an average price based on the prior twelve month period rather than year-end prices; permit the disclosure of probable and possible oil and gas reserves; require the reporting of the qualifications and measures taken to assure the independence and objectivity of any business entity or employee primarily responsible for preparing or auditing the reserves estimates; and, revise the disclosure requirements for oil and gas operations.  The final rules and new guidance are effective for fiscal years ending on or after December 31, 2009.  Mexco adopted these requirements as of March 31, 2010 and the results of the adoption are contained herein.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Topic 820: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU No. 2011-04 clarifies application of fair value measurements and disclosure requirements and is effective for Mexco as of April 1, 2012.  We do not believe the guidance will have an impact on our fair value measurement and disclosures.

There were various other accounting standards and interpretations issued during our fiscal year, all of which have been determined to be not applicable or significant by management and once adopted are not expected to have a material impact on the Company’s financial position, operations or cash flows.