Occidental Petroleum 2003 Annual Report Download - page 57

fair value or cash flows of the hedged item are almost fully offset by the
changes in the fair value of changes in cash flows of the hedging instrument and
actual effectiveness is within a range of 80 percent to 125 percent. In the case
of hedging a forecasted transaction, the transaction must be highly probable and
must present an exposure to variations in cash flows that could ultimately
affect reported net profit or loss. Occidental discontinues hedge accounting
when it is determined that a derivative has ceased to be highly effective as a
hedge; when the derivative expires, or is sold, terminated, or exercised; when
the hedged item matures or is sold or repaid; or when a forecasted transaction
is no longer deemed highly probable.
Derivative assets are classified in receivables from joint ventures,
partnerships and other, and long-term receivables; derivative liabilities are
reported in accrued liabilities and deferred credits and other liabilities -
other.
FINANCIAL INSTRUMENTS FAIR VALUE
Occidental values financial instruments as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The carrying amounts of
cash and cash equivalents approximate fair value because of the short maturity
of those instruments. The carrying value of other on-balance-sheet financial
instruments, other than debt, approximates fair value, and the cost, if any, to
terminate off-balance-sheet financial instruments is not significant.
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STOCK INCENTIVE PLANS
Occidental has stock incentive plans (Plans) that are more fully described
in Note 12. Occidental accounts for those Plans under APB No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Occidental's policy
is to recognize compensation expense for the Plans over the vesting period of
the award. Had compensation expense for those Plans been determined in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation",
Occidental's pro-forma net income and earnings per share would have been as
follows:
Year ended December 31, (in millions) 2003 2002 2001
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Net income, as reported $ 1,527 $ 989 $ 1,154
Add: Stock-based employee compensation expense included in reported net income
determined under APB No. 25, net of related tax effects 38 18 16
Deduct: Total stock-based employee compensation expense determined under the SFAS No. 123
fair-value-based method for all awards, net of related tax effects (56) (37) (33)
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Pro-forma net income $ 1,509 $ 970 $ 1,137
========================================================================================= ========== ========== ==========
Earnings Per Share:
Basic - as reported $ 3.98 $ 2.63 $ 3.10
Basic - pro forma $ 3.93 $ 2.58 $ 3.06
Diluted Earnings per Share
Diluted - as reported $ 3.93 $ 2.61 $ 3.09
Diluted - pro forma $ 3.88 $ 2.55 $ 3.04
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The fair value of each option grant, for pro-forma calculation purposes, is
estimated using the Black-Scholes option-pricing model. The weighted average
grant-date fair value of options granted was $3.20, $5.36 and $5.90 in 2003,
2002 and 2001, respectively. The fair value of each option grant is estimated
with the following weighted average assumptions:
Year ended December 31, 2003 2002 2001
================================================================================ ========== ========== ==========
Assumptions used:
Risk-free interest rate 1.63% 3.89% 4.84%
Dividend yield 3.37% 3.93% 3.74%
Volatility factor 21% 32% 29%
Expected life (years) 2.4 3.5 5.0
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