Sunoco 2006 Annual Report Download - page 51

flows expected to be generated by the asset are less than
its carrying amount. The impairment recognized is the
amount by which the carrying amount exceeds the fair
market value of the impaired asset.
Goodwill and Intangible Assets
Goodwill, which represents the excess of the purchase
price over the fair value of net assets acquired, and
indefinite-lived intangible assets are tested for impair-
ment at least annually rather than being amortized.
Sunoco determined during the 2004-2006 period that no
such assets were impaired. Intangible assets with finite
useful lives are amortized over their useful lives in a man-
ner that reflects the pattern in which the economic bene-
fit of the intangible assets is consumed.
Environmental Remediation
Sunoco accrues environmental remediation costs for
work at identified sites where an assessment has indicated
that cleanup costs are probable and reasonably estimable.
Such accruals are undiscounted and are based on cur-
rently available information, estimated timing of remedial
actions and related inflation assumptions, existing tech-
nology and presently enacted laws and regulations. If a
range of probable environmental cleanup costs exists for
an identified site, the minimum of the range is accrued
unless some other point in the range is more likely in
which case the most likely amount in the range is
accrued.
Maintenance Shutdowns
Maintenance and repair costs in excess of $500 thousand
incurred in connection with major maintenance shut-
downs are capitalized when incurred and amortized over
the period benefited by the maintenance activities.
Derivative Instruments
From time to time, Sunoco uses swaps, options, futures,
forwards and other derivative instruments to hedge a
variety of commodity price risks. Such contracts are
recognized in the consolidated balance sheets at their fair
value. Changes in fair value of derivative contracts that
are not hedges are recognized in income as they occur. If
the derivative contracts are designated as hedges, depend-
ing on their nature, the effective portions of changes in
their fair values are either offset in income against the
changes in the fair values of the items being hedged or
reflected initially as a separate component of share-
holders’ equity and subsequently recognized in income
when the hedged items are recognized in income. The
ineffective portions of changes in the fair values of de-
rivative contracts designated as hedges are immediately
recognized in income. Sunoco does not hold or issue de-
rivative instruments for trading purposes.
Retirement Benefit Liabilities
At December 31, 2006, prior to the adoption of Statement
of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Post-
retirement Plans” (“SFAS No. 158”) (see below), the
Company recorded a $160 million favorable minimum
pension liability adjustment to the accumulated other
comprehensive loss component of shareholders’ equity due
to improvements in the funded status of the Company’s
defined benefit pension plans. Under the predecessor ac-
counting rules, a minimum pension liability adjustment
was required in shareholders’ equity at December 31, 2005
to reflect the unfunded accumulated benefit obligation re-
lating to these plans that existed at that time.
Effective December 31, 2006, the Company adopted SFAS
No. 158, which amended Statement of Financial
Accounting Standards No. 87, “Employers’ Accounting for
Pensions,” and Statement of Financial Accounting Stan-
dards No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions.” SFAS No. 158, among
other things, requires that the funded status of defined
benefit and postretirement benefit plans be fully recognized
on the balance sheet. The funded status is determined by
the difference between the fair value of plan assets and the
benefit obligation, with the benefit obligation represented
by the projected benefit obligation for defined benefit
plans and the accumulated postretirement benefit obliga-
tion for postretirement benefit plans. Under the new ac-
counting, previously unrecognized actuarial gains (losses)
and prior service costs (benefits) are recognized in the con-
solidated balance sheet as a reduction in prepaid retire-
ment costs and an increase in the retirement benefit
liability with a corresponding charge or credit initially to
the accumulated other comprehensive loss component of
shareholders’ equity. The charge or credit to shareholders’
equity, which is reflected net of related tax effects, is sub-
sequently recognized in net income when amortized as a
component of defined benefit plans and postretirement
benefit plans expense. Upon adoption of SFAS No. 158,
the Company recorded an after-tax charge totaling $192
million to the accumulated other comprehensive loss
component of shareholders’ equity at December 31, 2006.
The adoption of SFAS No. 158 had no impact on Sunoco’s
2006 consolidated statement of income.
The following table sets forth the changes in 2006 in the
accumulated other comprehensive loss balance in share-
holders’ equity related to pensions and other postretire-
ment benefits:
(Millions of Dollars)
Balance at beginning of year $(191)
Minimum pension liability adjustment 160
Adjustment pertaining to adoption of SFAS No. 158 (192)
Balance at end of year $(223)
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