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ERNEST ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 16 Note 2 - Summary of Significant Accounting Policies (cont'd.) Leases The Company recognizes leases in accordance with FASB ASC Topic 842, Leases, which requires all lessees to recognize a right-of-use asset and a lease liability for all lease agreements with a term greater than 12 months, initially measured at the present value of the lease payments. For the year ended December 31, 2023, the Company did not have leases with a term greater than 12 months. The short-term lease expense was $156,188 for the year ended December 31, 2023. Income Taxes The Company accounts for income taxes pursuant to the asset and liability method, which requires deferred tax assets and liabilities to be computed annually for temporary differences between the financial statement for U.S. GAAP reporting and income tax reporting. The accompanying provision for income taxes represents only taxes due plus deferred taxes related primarily to differences between accrual and cash differences in financial statement and income tax reporting, net operating loss carryforwards, depreciation and amortization, and other related timing differences. The deferred tax asset or liability, as applicable, represents the future tax return consequences of those differences, which will either be deductible or taxable when the asset or liability is recovered or settled. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has determined that the Company had no uncertain tax positions as of December 31, 2023. The Company uses cash basis of accounting for income tax purposes. Adoption of ASU No. 2016-13 As of January 1, 2023, the Company adopted FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all subsequently issued related amendments, which changed the methodology used to recognize impairment of the Company’s contract receivables. Under this ASU, financial assets are presented at the net amount expected to be collected, requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. This is in contrast to previous U.S. GAAP, under which credit losses were not recognized until it was probable that a loss had been incurred. The Company performed its expected credit loss calculation based on historical accounts receivable write-offs, including consideration of then-existing economic conditions and expected future conditions. The adoption of this ASU did not have a significant impact on the consolidated financial statements. Note 3 - Concentration of Credit Risk The Company maintains cash balances in several financial institutions. Such balances are insured by the Federal Deposit Insurance Corporation ("FDIC") for up to $250,000 per institution. From time to time, the Company's balances may exceed these limits.