Hess 2011 Annual Report Download - page 63

assets and liabilities. Regular assessments are made as to the likelihood of those deferred tax assets being
realized. If it is more likely than not that some or all of the deferred tax assets will not be realized, a valuation
allowance is recorded to reduce the deferred tax assets to the amount that is expected to be realized. In evaluating
realizability of deferred tax assets, the Corporation refers to the reversal periods for available carryforward
periods for net operating losses and credit carryforwards, temporary differences, the availability of tax planning
strategies, the existence of appreciated assets and estimates of future taxable income and other factors. Estimates
of future taxable income are based on assumptions of oil and gas reserves and selling prices that are consistent
with the Corporation’s internal business forecasts. Additionally, the Corporation has income taxes which have
been deferred on intercompany transactions eliminated in consolidation related to transfers of property, plant and
equipment remaining within the consolidated group. The amortization of these income taxes deferred on
intercompany transactions will occur ratably with the recovery through depletion and depreciation of the carrying
value of these assets. The Corporation does not provide for deferred U.S. income taxes for that portion of
undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations.
Fair Value Measurements: The Corporation’s derivative instruments and supplemental pension plan
investments are recorded at fair value, with changes in fair value recognized in earnings or other comprehensive
income each period as appropriate. The Corporation uses various valuation approaches in determining fair value,
including the market and income approaches. The Corporation’s fair value measurements also include
non-performance risk and time value of money considerations. Counterparty credit is considered for receivable
balances, and the Corporation’s credit is considered for accrued liabilities.
The Corporation also records certain nonfinancial assets and liabilities at fair value when required by
generally accepted accounting principles. These fair value measurements are recorded in connection with
business combinations, the initial recognition of asset retirement obligations and any impairment of long-lived
assets, equity method investments or goodwill.
The Corporation determines fair value in accordance with the FASB fair value measurements accounting
standard which established a hierarchy for the inputs used to measure fair value based on the source of the input,
which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to
estimates determined using related market data (Level 3). Multiple inputs may be used to measure fair value,
however, the level of fair value is based on the lowest significant input level within this fair value hierarchy.
Details on the methods and assumptions used to determine the fair values are as follows:
Fair value measurements based on Level 1 inputs: Measurements that are most observable are
based on quoted prices of identical instruments obtained from the principal markets in which they are traded.
Closing prices are both readily available and representative of fair value. Market transactions occur with
sufficient frequency and volume to assure liquidity. The fair value of certain of the Corporation’s exchange
traded futures and options are considered Level 1.
Fair value measurements based on Level 2 inputs: Measurements derived indirectly from
observable inputs or from quoted prices from markets that are less liquid are considered Level 2. Measurements
based on Level 2 inputs include over-the-counter derivative instruments that are priced on an exchange traded
curve but have contractual terms that are not identical to exchange traded contracts. The Corporation utilizes fair
value measurements based on Level 2 inputs for certain forwards, swaps and options. The liability related to the
Corporation’s crude oil hedges is classified as Level 2.
Fair value measurements based on Level 3 inputs: Measurements that are least observable are
estimated from related market data determined from sources with little or no market activity for comparable
contracts or are positions with longer durations. For example, in its energy marketing business, the Corporation
sells natural gas and electricity to customers and offsets the price exposure by purchasing forward contracts. The
fair value of these sales and purchases may be based on specific prices at less liquid delivered locations, which
are classified as Level 3. Fair values determined using discounted cash flows and other unobservable data are
also classified as Level 3.
Derivatives: The Corporation utilizes derivative instruments for both risk management and trading
activities. In risk management activities, the Corporation uses futures, forwards, options and swaps, individually
or in combination to mitigate its exposure to fluctuations in the prices of crude oil, natural gas, refined petroleum
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