Occidental Petroleum 2003 Annual Report Download - page 56

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In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
non-performing parties.
41
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
ASSET RETIREMENT OBLIGATIONS
Occidental adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations", on January 1, 2003 (see "Accounting Changes" in Note 4). The
following table summarizes the activity of the asset retirement obligations:
For the year ended December 31, (in millions) 2003
================================================================================ ==========
Beginning balance $ --
Cumulative effect of change in accounting principles 151
Liabilities incurred 6
Liabilities settled (7)
Accretion expense 11
Acquisitions and other 1
Revisions to estimated cash flows 5
----------
ENDING BALANCE $ 167
================================================================================ ==========
Before 2003, the estimated future abandonment costs of offshore oil and gas
properties and removal costs for platforms, net of salvage value, were accrued
over their operating lives. Such costs were calculated at unit-of-production
rates based upon estimated proved recoverable reserves and were taken into
account in determining depreciation, depletion and amortization. Occidental
assumed that the salvage value of the oil and gas property would equal the
dismantlement, restoration and reclamation costs for onshore production, so no
accrual was deemed necessary. For the chemical segment, appropriate reserves
were provided when a decision was made to dispose of a property, since
Occidental makes capital renewal expenditures on a continual basis while an
asset is in operation.
DERIVATIVE INSTRUMENTS
On January 1, 2001, Occidental adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This statement
required an entity to recognize derivatives on the balance sheet and measure
those instruments at fair value. Adoption of this new accounting standard
resulted in cumulative after-tax reductions in net income of approximately $24
million and OCI of approximately $27 million in the first quarter of 2001. The
adoption also increased total assets by $588 million and total liabilities by
$639 million as of January 1, 2001.
Occidental applies either fair value or cash flow hedge accounting when
transactions meet specified criteria to obtain hedge accounting treatment. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss is immediately recognized in earnings. If the derivative qualifies
for hedge accounting, the gain or loss on the derivative is either recognized in
income with an offsetting adjustment to the basis of the item being hedged for
fair value hedges, or deferred in OCI to the extent the hedge is effective for
cash flow hedges.
A hedge is regarded as highly effective and qualifies for hedge accounting
if, at inception and throughout its life, it is expected that changes in the