## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 

## EARTHSTONE ENERGY, INC. 

Noncontrolling Interest represents third-party equity ownership of EEH and is presented as a component of equity in the Consolidated Balance Sheet as of December 31, 2018 and 2017, as well as an adjustment to Net income in the Consolidated Statement of Operations for the years ended December 31, 2018 and 2017. As of December 31, 2018, Earthstone and Lynden US owned a 44.7% membership interest in EEH while Bold Holdings, the noncontrolling third party, owned the remaining 55.3%. See further discussion in Note 9. Noncontrolling Interest . 

## Segment Reporting 

Operating segments are components of an enterprise that (i) engage in activities from which it may earn revenues and incur expenses (ii) for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating resources and assessing performance. 

Based on our organization and management, we have only one reportable operating segment, which is oil and natural gas exploration and production. 

## Comprehensive Income 

The Company has no elements of comprehensive income other than net income. 

## Asset Retirement Obligations 

Asset retirement obligations associated with the retirement of long-lived assets are recognized as liabilities with an increase to the carrying amounts of the related long-lived assets in the period incurred. The cost of the asset, including the asset retirement cost, is depreciated over the useful life of the asset. Asset retirement obligations are recorded at estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value. If estimated future costs of asset retirement obligations change, an adjustment is recorded to both the asset retirement obligations and the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions to estimated inflation rates, and changes in the estimated timing of abandonment. For further discussion, see Note 14. Asset Retirement Obligations . 

## Business Combinations 

The Company accounts for its acquisitions of oil and gas properties not commonly controlled in accordance with FASB ASC Topic 805, Business Combinations, which, among other things, requires the Company to determine if an asset or a business has been acquired. If the Company determines an asset(s) has been acquired, the asset(s) acquired, as well as any liabilities assumed, are measured and recorded at the acquisition date cost. If the Company determines a business has been acquired, the assets acquired and liabilities assumed are measured and recorded at their fair values as of the acquisition date, recording goodwill for amounts paid in excess of fair value. 

## Revenue Recognition 

Revenues for the sale of oil, natural gas and natural gas liquids are recognized when the recognition criteria of ASC 606 “Revenue from Contracts with Customers,” are met, which generally occurs as the product is delivered to customers’ custody transfer points and collectability is reasonably assured. The Company fulfills its performance obligations under its customer contracts through daily delivery of oil, natural gas and natural gas liquids and revenues are recorded on a monthly basis and the Company receives payment from one to three months after delivery. The prices received for oil, natural gas and natural gas liquids sales under the Company's contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, revenues from the sale of oil, natural gas and natural gas liquids will decrease if market prices decline. The sales of oil, natural gas and natural gas liquids as presented on the Consolidated Statements of Operations represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, natural gas and natural gas liquids on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded. The Company follows the sales method of accounting for gas imbalances. The Company had no significant gas imbalances as of December 31, 2018 or 2017. 

## Concentration of Credit Risk 

Credit risk represents the actual or perceived financial loss that the Company would record if its purchasers, operators, or counterparties failed to perform pursuant to contractual terms. 

