Occidental Petroleum 2003 Annual Report Download - page 38

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the obligations it has undertaken in issuing a guarantee. This liability would
be recorded at the inception of a guarantee and would be measured at fair value.
FIN 45 also requires certain disclosures related to guarantees, which are
included in Note 9. Occidental adopted the measurement provisions of this
statement in the first quarter of 2003 and it did not have an effect on the
financial statements when adopted.
EITF ISSUE NO. 02-3
In the third quarter of 2002, Occidental adopted certain provisions of
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities." These provisions prescribed
significant changes in how revenue from energy trading is recorded.
Historically, Occidental had two major types of oil and gas revenues: (1)
revenues from its equity production; and (2) revenues from the sale of oil and
gas produced by other companies, but purchased and resold by Occidental,
referred to as revenue from trading activities. Both types of sales involve
physical deliveries and had been historically recorded on a gross basis in
accordance with generally accepted accounting principles. With the adoption of
EITF Issue No. 02-3, Occidental now reflects the revenue from trading activities
on a net basis. There were no changes in gross margins, net income, cash flow or
earnings per share for any period as a result of adopting this requirement.
However, net sales and cost of sales were reduced by equal and offsetting
amounts to reflect the adoption of this requirement. For the years ended
December 31, 2002 and 2001, net sales and cost of sales were reduced from
amounts previously reported by approximately $2.2 billion (representing amounts
for the first two quarters of 2002) and $5.8 billion, respectively, to conform
to the current presentation.
Since 1999, Occidental has accounted for certain energy-trading contracts
in accordance with EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." EITF Issue No. 98-10 required
that all energy-trading contracts must be marked to fair value with gains and
losses included in earnings, whether the contracts were derivatives or not.
26
In October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
adopted this accounting change in the first quarter of 2003 and recorded a
cumulative effect of a change in accounting principles charge of approximately
$18 million, after tax.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental adopted SFAS No. 146 in the first quarter of 2003 and it did
not have a material effect on its financial statements.
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental implemented SFAS No. 145 in the fourth quarter of
2002 and all comparative financial statements have been reclassified to conform
to the 2002 presentation. Since Occidental had no 2002 extraordinary items,