PBF Energy 2012 Annual Report Download - page 112

PBF ENERGY INC. AND SUBSIDIARIES
(COMBINED AND CONSOLIDATED WITH PBF ENERGY COMPANY LLC AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT AND BARREL DATA)
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative Instruments (Continued)
All derivative instruments, not designated as normal purchases or sales, are recorded in the balance sheet as
either assets or liabilities measured at their fair values. Changes in the fair value of derivative instruments that
either are not designated or do not qualify for hedge accounting treatment or normal purchase or normal sale
accounting are recognized currently in earnings. Contracts qualifying for the normal purchase and sales
exemption are accounted for upon settlement. Cash flows related to derivative instruments that are not designated
or do not qualify for hedge accounting treatment are included in operating activities.
The Company designates certain derivative instruments as fair value hedges of a particular risk associated with a
recognized asset or liability. At the inception of the hedge designation, the Company documents the relationship
between the hedging instrument and the hedged item, as well as its risk management objective and strategy for
undertaking various hedge transactions. Derivative gains and losses related to these fair value hedges, including
hedge ineffectiveness, are recorded in cost of sales along with the change in fair value of the hedged asset or
liability attributable to the hedged risk. Cash flows related to derivative instruments that are designated as fair
value hedges are included in operating activities.
Economic hedges are hedges not designated as fair value or cash flow hedges for accounting purposes that are
used to (i) manage price volatility in certain refinery feedstock and refined product inventories, and (ii) manage
price volatility in certain forecasted refinery feedstock, refined product, and refined product sales. These
instruments are recorded at fair value and changes in the fair value of the derivative instruments are recognized
currently in cost of sales.
Derivative accounting is complex and requires management judgment in the following respects: identification of
derivatives and embedded derivatives, determination of the fair value of derivatives, documentation of hedge
relationships, assessment and measurement of hedge ineffectiveness and election and designation of the normal
purchases and sales exception. All of these judgments, depending upon their timing and effect, can have a
significant impact on the Company’s earnings.
Recently Issued Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04 to clarify guidance
relating to fair value measurements. The amended guidance also expands the disclosure requirements for entities’
fair value measurements, particularly those relating to measurements based upon significant unobservable inputs.
The Company adopted the amended fair value measurement guidance on January 1, 2012 resulting in additional
disclosures.
In June 2011, the FASB issued ASU No. 2011-05, which changes the required presentation of other
comprehensive income. Under the new guidelines, entities are required to present net income and other
comprehensive income, along with the components of net income and other comprehensive income, in either one
continuous statement of comprehensive income or in two separate but consecutive statements of net income and
comprehensive income. The accounting standards update eliminates the option of presenting the components of
other comprehensive income within the statement of changes in stockholders’ equity. For the year ended
December 31, 2012, the Company presented the components of total comprehensive income in its consolidated
statements of comprehensive income (loss).
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