Occidental Petroleum 2008 Annual Report Download - page 60

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The following table summarizes the activity of the asset retirement obligation, of which $480 million and $445 million is included in
deferred credits and other liabilities - other, with the remaining current portion in accrued liabilities at December 31, 2008 and 2007,
respectively.
For the years ended December 31, (in millions) 2008 2007
Beginning balance $471 $362
Liabilities incurred 38 31
Liabilities settled (30) (17)
Accretion expense 30 23
Acquisitions and other 45 9
Revisions to estimated cash flows (33) 63
Ending balance $521 $471
DERIVATIVE INSTRUMENTS
Derivative instruments are carried at fair value. Occidental applies either fair value or cash flow hedge accounting when transactions
meet specified criteria for hedge accounting treatment. If a derivative does not qualify as a hedge or is not designated as a hedge, any fair
value gains or losses are recognized in earnings. If the derivative qualifies for hedge accounting and is designated and documented as a
hedge, 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. Cash flow hedge-realized gains and losses, and
any ineffectiveness, are classified within the net sales line item. Gains and losses are reported net in the income statement and are also
netted on the balance sheets when a right of offset exists.
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 fair value or cash flows of the hedged item are almost fully offset by the changes in the fair value or changes in cash flows of
the hedging instrument and actual effectiveness is within a range of 80 to 125 percent. In the case of hedging a forecasted transaction, the
transaction must be probable and must present an exposure to variations in cash flows that could ultimately affect reported net income or
loss. Occidental discontinues hedge accounting when it determines 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 probable.
FINANCIAL INSTRUMENTS FAIR VALUE
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.
STOCK-BASED INCENTIVE PLANS
Occidental has established several shareholder-approved stock-based incentive plans for certain employees (Plans) that are more fully
described in Note 12. A summary of Occidental’s accounting policy under each Plan follows below.
For restricted stock units (RSUs), performance restricted share units (PRSUs) and cash-settled share units (CSSUs), 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), performance stock awards (PSAs) and total shareholder return incentives (TSRIs), compensation
expense is measured on the grant date using valuation models. Compensation expense for RSUs, PRSUs, Options, stock-settled SARs,
CSSUs, PSAs and TSRIs is recognized on a straight-line basis over the requisite service periods, which is generally over the awards’
respective vesting or performance periods. In addition, for PSAs and TSRIs, 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 PRSUs, compensation expense is adjusted quarterly for any change in the number of shares expected to be issued
based on the performance criteria. For CSSUs, changes in fair value of the market price of Occidental common stock after the grant date until
the date of vesting are recognized in periodic compensation expense. For cash-settled SARs issued prior to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 123(R), compensation expense is initially measured on the grant date using a valuation model
and is then 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 No. 123(R) on the straight-line method.
46
SUPPLEMENTAL CASH FLOW INFORMATION