HollyFrontier 2015 Annual Report Download - page 71

Table of Contents HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
63
Balance Sheet Offsetting: We purchase and sell inventories of crude oil with certain same-parties that are net settled in accordance
with contractual net settlement provisions. Our policy is to present such balances on a net basis because it more appropriately
presents our economic resources (accounts receivable) and claims against us (accounts payable) and the future cash flows associated
with such assets and liabilities.
Accounts Receivable: Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum
industry. Credit is extended based on our evaluation of the customer's financial condition, and in certain circumstances collateral,
such as letters of credit or guarantees, is required. We reserve for doubtful accounts based on our historical loss experience as well
as specific accounts identified as high risk, which historically have been minimal. Credit losses are charged to the allowance for
doubtful accounts when an account is deemed uncollectible. Our allowance for doubtful accounts was $2.3 million and $2.4 million
at December 31, 2015 and 2014, respectively.
Accounts receivable attributable to crude oil resales generally represent the sell side of excess crude oil sales to other purchasers
and / or users in cases when our crude oil supplies are in excess of our immediate needs as well as certain reciprocal buy / sell
exchanges of crude oil. At times we enter into such buy / sell exchanges to facilitate the delivery of quantities to certain locations.
In many cases, we enter into net settlement agreements relating to the buy / sell arrangements, which may mitigate credit risk.
Inventories: Inventories are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil, unfinished and
finished refined products and the average cost method for materials and supplies, or market. Cost, consisting of raw material,
transportation and conversion costs, is determined using the LIFO inventory valuation methodology and market is determined
using current replacement costs. Under the LIFO method, the most recently incurred costs are charged to cost of sales and inventories
are valued at the earliest acquisition costs. In periods of rapidly declining prices, LIFO inventories may have to be written down
to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method
may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales
with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end
of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management's estimates
of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.
At December 31, 2015, and 2014, market values had fallen below historical LIFO inventory costs and, as a result, we recorded
lower of cost or market inventory valuation reserves of $624.5 million and $397.5 million, respectively.
Derivative Instruments: All derivative instruments are recognized as either assets or liabilities in our consolidated balance sheets
and are measured at fair value. Changes in the derivative instrument's fair value are recognized in earnings unless specific hedge
accounting criteria are met. See Note 12 for additional information.
Long-lived assets: We calculate depreciation and amortization based on estimated useful lives of our assets. We evaluate long-
lived assets for potential impairment by identifying whether indicators of impairment exist and, if so, assessing whether the long-
lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss, if any, to be
recorded is equal to the amount by which a long-lived asset's carrying value exceeds its fair value, which is generally determined
under an income approach using the forecasted cash flows associated with the underlying asset. Estimates of future cash flows
require subjective assumptions with regard to future operating results and actual results could differ from those estimates. No
impairments of long-lived assets were recorded during the years ended December 31, 2015, 2014 and 2013.
Asset Retirement Obligations: We record legal obligations associated with the retirement of long-lived assets that result from the
acquisition, construction, development and / or the normal operation of long-lived assets. The fair value of the estimated cost to
retire a tangible long-lived asset is recorded as a liability with the associated retirement costs capitalized as part of the asset's
carrying amount in the period in which it is incurred and when a reasonable estimate of the fair value of the liability can be made.
If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is
available to estimate the liability's fair value. Certain of our refining assets have no recorded liability for asset retirement obligations
since the timing of any retirement and related costs are currently indeterminable.
Our asset retirement obligations were $20.7 million and $19.8 million at December 31, 2015 and 2014, respectively, which are
included in “Other long-term liabilities” in our consolidated balance sheets. Accretion expense was insignificant for the years
ended December 31, 2015, 2014 and 2013.