10-K/A: Kimbell Royalty Partners Files Amended 10-K After Identifying Accounting Error and Material Weakness

Kimbell Royalty Partners has filed an amendment to its annual report to correct an accounting error related to changes in ownership of a subsidiary and to disclose a material weakness in internal control over financial reporting.

Summary

• Kimbell Royalty Partners filed an amendment to its original 10-K report due to an accounting error related to how changes in ownership of its subsidiary, Kimbell Royalty Operating, LLC (OpCo), were recorded.
• The error involved reallocating non-controlling interest at fair value instead of adjusting the carrying value to reflect the change in ownership, as required by ASC 810-10.
• This error resulted in a reclassification within unitholders' equity, specifically between Common Units and Non-Controlling Interest in OpCo, but did not impact total unitholders' equity, the statement of operations, or cash flows.
• The company determined the error was not material to previously issued financial statements, and it did not affect key performance indicators, non-GAAP metrics like Adjusted EBITDA, or compliance with financial covenants.
• However, the company identified a material weakness in its internal control over financial reporting as of December 31, 2023, due to insufficient oversight of the accounting guidance related to changes in OpCo ownership.
• The amendment updates the unitholders' equity portion of the balance sheet, the statement of changes in unitholders' equity, and includes a note discussing the error.
• The company also revised its assessment of the effectiveness of internal control over financial reporting and disclosure controls and procedures, concluding they were not effective as of December 31, 2023.
• A revised audit report from Grant Thornton LLP on internal control over financial reporting is included, along with new certifications from the CEO and CFO.

Sentiment

Score: 4

Explanation: The document reveals a material weakness in internal controls and an accounting error, which are negative signals. However, the company is taking steps to remediate the issues, which is a positive. Overall, the sentiment is slightly negative due to the identified problems.

Positives

• The accounting error did not result in a material misstatement of previously issued financial statements.
• The error did not impact the total unitholders' equity, the statement of operations, or cash flows.
• The error did not affect key performance indicators, non-GAAP metrics, or compliance with financial covenants.
• The company is taking steps to remediate the identified material weakness in internal controls.

Negatives

• A material weakness in internal control over financial reporting was identified as of December 31, 2023.
• The company's disclosure controls and procedures were deemed not effective as of December 31, 2023.
• The company had to amend its original 10-K filing to correct the accounting error and disclose the material weakness.

Risks

• The identified material weakness in internal control over financial reporting could lead to future misstatements if not properly remediated.
• The company's disclosure controls and procedures were not effective as of December 31, 2023, which could impact the reliability of future financial reporting.
• There is a risk that the company may not be able to maintain effective internal controls over financial reporting and disclosure controls and procedures in the future.
• The company's ability to accurately apply accounting guidance related to changes in ownership of subsidiaries is a potential ongoing risk.

Future Outlook

The company is in the process of remediating the internal control weakness and will implement new controls to ensure proper accounting for changes in ownership of subsidiaries. The material weakness will not be considered remediated until the enhanced controls operate for a sufficient period of time and management has concluded, through testing, that the related controls are effective.

Management Comments

• Management concluded that the consolidated financial statements included in this Amendment fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
• Management is in the process of remediating the internal control weakness related to our accounting for changes in ownership of OpCo.

Industry Context

This announcement highlights the importance of accurate accounting practices and robust internal controls, particularly for companies with complex ownership structures. It also underscores the scrutiny that public companies face regarding their financial reporting.

Comparison to Industry Standards

• The identification of a material weakness in internal control is not uncommon, but it does raise concerns about the company's financial reporting processes.
• Companies in the oil and gas industry, especially those with complex partnership structures, often face challenges in accounting for non-controlling interests.
• The company's response to the issue, including the amendment and remediation efforts, will be closely watched by investors and regulators.
• Comparable companies such as Viper Energy Partners LP (VNOM) and Black Stone Minerals LP (BSM) also operate in the royalty and mineral space and are subject to similar accounting standards and scrutiny.

Stakeholder Impact

• Shareholders may be concerned about the material weakness in internal controls and the potential for future misstatements.
• Employees may be affected by changes in internal control procedures.
• Creditors may be concerned about the company's financial reporting reliability.

Next Steps

• The company will implement new controls to ensure proper accounting for changes in ownership of subsidiaries.
• Management will monitor the effectiveness of its remediation plan and refine it as appropriate.
• The company will continue to test the effectiveness of the enhanced controls.

Key Dates

Keywords

internal control, accounting error, material weakness, financial reporting, Kimbell Royalty Partners, OpCo, ASC 810-10, unitholders' equity, Form 10-K, financial statements