Occidental Petroleum 2006 Annual Report Download - page 58

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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 fixed-rate debt, approximates fair value, and the cost, if any, to terminate off-balance-sheet
financial instruments is not significant.
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Occidental has established several shareholder-approved stock-based incentive plans for certain employees (Plans) that are more fully
described in Note 12. Beginning July 1, 2005, Occidental accounted for those Plans under SFAS No. 123(R), "Share Based Payments." Prior to
July 1, 2005, Occidental applied the Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” intrinsic
value accounting method for its stock-based incentive plans. A summary of Occidental’s accounting policy under each method follows below.
SFAS No. 123(R)
For restricted stock units (RSUs) and performance restricted share units (PRSUs), compensation expense is measured on the grant date using
the quoted market price of Occidental’s common stock. For stock options (Options), stock-settled stock appreciation rights (SARs) and performance
stock awards (PSAs), compensation expense is measured on the grant date using valuation models. Compensation expense for RSUs, PRSUs,
Options, stock-settled SARs and PSAs, is recognized on a straight-line basis over the requisite service periods, which is generally over the
awards’ respective vesting or performance periods. For the PSAs, every quarter until vesting, the cash-settled portion is revalued using valuation
models and the stock settled portion is adjusted for any change in the number of shares expected to be issued based on the performance criteria.
For the PRSUs, compensation expense is adjusted for any change in the number of shares expected to be issued based on the performance
criteria. Any change in fair value is recognized as compensation expense. For cash-settled SARs issued prior to the adoption of SFAS 123(R),
compensation expense is initially measured on the grant date using a valuation model and then is recorded on the accelerated amortization
method over the vesting period. Changes in the fair value between the date of grant and the date when the cash-settled SARs are exercised are
recognized as compensation expense. Occidental recognizes compensation expense for all graded vesting awards issued subsequent to the
adoption of SFAS 123(R) on the straight-line method.
APB Opinion No. 25
Through June 30, 2005, compensation expense for Options and RSUs, if any, was measured as the difference between the quoted market
price of Occidental's stock at the grant date, less the amount that the employee must pay to acquire the stock. Any compensation expense for these
awards was recognized on a straight-line basis over the vesting periods of the respective awards. For PSAs, compensation expense was measured
for each period based on the number of shares expected to vest and the changes in the quoted market value of Occidental's stock during the
vesting period. Compensation expense or benefit for PSAs, as applicable, was recognized on a straight-line basis over the vesting periods of the
awards. Compensation expense for SARs, which was recorded on the accelerated amortization method over the vesting period, was measured as
the amount by which the quoted market value of Occidental's stock exceeded the SAR exercise price. The effect of changes in Occidental's share
price between the date of grant and the date when the SARs were exercised or expired was recognized as compensation expense in each period.
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Cash payments, net of refunds, during the years 2006, 2005 and 2004 included federal, foreign and state income taxes of approximately
$2.175 billion, $1.759 billion and $905 million, respectively. Interest paid (net of interest capitalized) totaled approximately $211 million, $253
million and $205 million for the years 2006, 2005 and 2004, respectively. Net cash payments for federal, foreign and state income taxes paid by
discontinued operations during the years 2006, 2005 and 2004 were $57 million, $85 million and $26 million, respectively. (See Note 2 for detail of
noncash investing and financing activities regarding certain acquisitions.)
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The functional currency applicable to all of Occidental’s foreign oil and gas operations is the U.S. dollar since cash flows are denominated
principally in U.S. dollars. Occidental’s chemical operations in Brazil use the Real as the functional currency. Exchange-rate changes on
transactions denominated in non-U.S. dollar functional currencies generated losses of zero in 2006, $9 million in 2005 and $13 million in 2004.
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