PBF Energy 2013 Annual Report Download - page 87

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All derivative instruments that are not designated as normal purchases or sales are recorded in our 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 in income. Contracts qualifying for the normal purchases and sales exemption are
accounted for upon settlement. Prior to June 30, 2011 we did not apply hedge accounting to any of our derivative
instruments. Effective July 1, 2011, we elected fair value hedge accounting for certain derivatives associated with
our inventory repurchase obligations.
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; identification
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 earnings.
Income Taxes and Tax Receivable Agreement
As PBF LLC is a limited liability company treated as a “flow-through” entity for income tax purposes, there
is no benefit or provision for federal or state income tax in the accompanying financial statements for periods prior
to the closing of our initial public offering on December 18, 2012. Effective with the completion of our initial
public offering, we recognize an income tax expense or benefit in our consolidated financial statements based on
our allocable share of PBF LLC’s pre-tax income (loss). We do not recognize any income tax expense or benefit
related to the noncontrolling interest in PBF LLC.
Effective upon the completion of our initial public offering, we provide for deferred income taxes for
temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities at
each balance sheet date, using enacted tax rates expected to be in effect when the related taxes are expected to be
paid or received. A deferred tax asset may be reduced by a valuation allowance when we, after assessing the
probability of future taxable income and evaluating alternative tax planning strategies, determine that it is more
likely than not that the future tax benefit may not be realized. If future taxable income differs from our estimates
or if expected tax planning strategies are not available as anticipated, adjustments to the valuation allowance may
be needed. Deferred tax assets and liabilities may be adjusted in the future for the effect of changes in tax laws or
rates on the date of enactment.
Pursuant to the tax receivable agreement we entered into at the time of our initial public offering, we are
required to pay PBF LLC Series A Unit holders, who exchange their units for PBF Energy stock or whose units
we purchase, approximately 85% of the cash savings in income taxes that we realize as a result of the increase in
the tax basis of our interest in PBF LLC, including tax benefits attributable to payments made under the tax
receivable agreement. We have recognized a liability for the tax receivable agreement reflecting our estimate of
the undiscounted amounts that we expect to pay under the agreement. Our estimate of the tax agreement liability
is based on forecasts of future taxable income over the anticipated life of our future business operations, assuming
no material changes in the relevant tax law. The assumptions used in the forecasts are subject to substantial
uncertainty about our future business operations and the actual payments that we are required to make under the
tax receivable agreement could differ materially from current estimate. We must adjust the estimated tax receivable
agreement liability each time we purchase PBF LLC Series A Units or upon an exchange of PBF LLC Series A
Units for our Class A common stock. Such adjustments will be based on forecasts of future taxable income and
our future business operations at the time of such purchases or exchanges. Periodically, we may adjust the liability
based on an updated estimate of the amounts that we expect to pay, using assumptions consistent with those used
in our concurrent estimate of the deferred tax asset valuation allowance. These periodic adjustments to the tax
receivable liability, if any, are recorded in general and administrative expense and may result in adjustments to our
income taxe expense and deferred tax assets and liabilities.