Chesapeake Energy 1998 Annual Report Download - page 79

Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and
fmancial reporting purposes. The tax effected temporary differences and tax loss carryforwards which comprise
deferred taxes are as follows:
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
SFAS 109 requires that the Company record a valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In 1998, the Transition Period and fiscal 1997, the
Company recorded an $826 million writedown, a $110 million writedown and a $236 million writedown,
respectively, related to the impairment of oil and gas properties. The writedowns and significant tax net operating
loss carryforwards (caused primarily by expensing intangible drilling costs for tax purposes) resulted in a net
deferred tax asset at December 31, 1998 and 1997 and June 30, 1997. Management believes it is more likely than
not that the Company will generate future tax net operating losses for at least the next five years.. Therefore, the
Company has recorded a valuation allowance equal to the net deferred tax asset.
At December 31, 1998, the Company had U.S. and Canadian regular tax net operating loss carryforwards of
approximately $571 million and $1 million, respectively, and U.S. alternative minimum tax net operating loss
carryforwards of approximately $196 million. The U.S. loss carryforward amounts will expire during the years
2007 through 2018. The Company also had a percentage depletion carryforward of approximately $4 million at
December 31, 1998, which is available to offset future federal income taxes payable and has no expiration date.
In accordance with certain provisions of the Tax Reform Act of 1986, a change of greater than 50% of the
beneficial ownership of the Company within a three-year period (an "Ownership Change") would place an annual
limitation on the Company's ability to utilize its existing tax carryforwards. Under regulations issued by the Internal
Revenue Service, the Company has had two Ownership Changes. However, management believes this will not
result in a significant limitation of the tax carryforwards. Acquired tax carryforwards are subject to separate
limitations; however, management believes these will not result in a significant limitation of the acquired tax
carryforwards.
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1998 1997 1997 1996
Deferred tax liabilities:
Acquisition, exploration and development costs and
related depreciation, depletion and
(5 in thousands)
amortization $$(49,657) $ (49,831) $ (63,725)
Deferred tax assets:
Acquisition, exploration and development costs
and related depreciation, depletion and amortization 242,765 --
Net operating loss carryforwards 214,602 126,485 112,889 50,776
Percentage depletion carryforward 1,536 1,106 1,058 764
458,903 127,591 113,947 51,540
Net deferred tax asset (liability) 458,903 77,934 64,116 (12,185)
Less: Valuation allowance (458,903) (77,934) (64,116)
Total deferred tax asset (liability) $$$$ (12,185)
Year Ended
December 31,
1998
Six Months Ended
December 31,
1997 Year Ended June 30, 1997 1996
(S in thousands)
Computed "expected" income tax provision (benefit) $ (322,182) $(11,051) $ (63,116) S 12,673
Tax percentage depletion (430) (48) (294) (238)
Valuation allowance 380,969 13,818 64,116
State income taxes and other (58,357) (2,719) (4,279) 419
$$$(3,573) $ 12,854