Occidental Petroleum 2003 Annual Report Download - page 62

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Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. Occidental adopted this statement in the third quarter of 2003 and it did
not have a material effect on its financial statements.
46
FIN 46 AND FIN 46-R (REVISED)
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a company to
consolidate a VIE if it is designated as the primary beneficiary of that entity
even if the company does not have a majority of voting interests. A VIE is
generally defined as an entity whose equity is unable to finance its activities
or whose owners lack the risks and rewards of ownership. The statement also
imposes disclosure requirements for all the VIEs of a company, even if the
company is not the primary beneficiary. The provisions of this statement apply
at inception for any entity created after January 31, 2003. Occidental adopted
the provisions of this Interpretation for its existing entities on April 1,
2003, which resulted in the consolidation of its OxyMar investment. As a result
of the OxyMar consolidation, assets increased by $166 million and liabilities
increased by $178 million. There was no material effect on net income as a
result of the consolidation. In September 2003, Marubeni indicated it would
exercise its option to put its interest in OxyMar to Occidental by paying
approximately $25 million to Occidental. In connection with the transfer, which
is expected to be complete in April 2004, Occidental will assume Marubeni's
guarantee of OxyMar's debt. As all the OxyMar debt is already consolidated in
Occidental's financial statements with the adoption of FIN 46, the exercise of
the put will not have a material effect on Occidental's financial position or
results of operations.
See Note 14 for more information on VIEs where Occidental is not the
primary beneficiary.
In December 2003, the FASB revised FIN 46 to exempt certain entities from
its requirements and to clarify certain issues arising during the initial
implementation of FIN 46. Occidental will adopt the revised interpretation in
the first quarter of 2004 and it is not expected to have a material impact on
the financial statements when adopted.
FIN 45
In January 2003, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires a company to recognize a liability for
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