Sunoco 2006 Annual Report Download - page 52

Minority Interests in Cokemaking Operations
Cash investments by third parties are recorded as an in-
crease in minority interests in the consolidated balance
sheets. There is no recognition of any gain at the dates
cash investments are made as the third-party investors are
entitled to a preferential return on their investments.
Nonconventional fuel credit and other net tax benefits
generated by the Company’s cokemaking operations and
allocated to third-party investors are recorded as a reduc-
tion in minority interests and are included as income in
the Coke segment. The investors’ preferential return is
recorded as an increase in minority interests and is re-
corded as expense in the Corporate and Other segment.
The net of these two amounts represents a noncash
change in minority interests in cokemaking operations,
which is recognized in other income (loss), net, in the
consolidated statements of income.
Cash payments, representing the distributions of the in-
vestors’ share of cash generated by the cokemaking oper-
ations, are recorded as a reduction in minority interests.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted State-
ment of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment” (“SFAS
No. 123R”), utilizing the modified-prospective method.
SFAS No. 123R revised the accounting for stock-based
compensation required by Statement of Financial Ac-
counting Standards No. 123, “Accounting for Stock-
Based Compensation” (“SFAS No. 123”). Among other
things, SFAS No. 123R requires a fair-value-based method
of accounting for share-based payment transactions,
which is similar to the method followed by the Company
under the provisions of SFAS No. 123. SFAS No. 123R
also requires the use of a non-substantive vesting period
approach for new share-based payment awards that vest
when an employee becomes retirement eligible as is the
case under Sunoco’s share-based awards (i.e., the vesting
period cannot exceed the date an employee becomes re-
tirement eligible). The effect is to accelerate expense
recognition compared to the vesting period approach that
Sunoco previously followed under SFAS No. 123.
Adoption of SFAS No. 123R resulted in $7 million higher
after-tax compensation expense in 2006 compared to
what it otherwise would have been under SFAS No. 123,
primarily due to the accelerated expense recognition. The
future impact of the non-substantive vesting period will
be dependent upon the value of future stock-based awards
granted to employees who are eligible to retire prior to
the normal vesting periods of the awards.
Asset Retirement Obligations
At December 31, 2005, Sunoco implemented FASB Inter-
pretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” (“FASB Interpretation No. 47”).
FASB Interpretation No. 47 clarifies that the term
“conditional asset retirement obligation” as used in
Statement of Financial Accounting Standards No. 143,
“Accounting for Asset Retirement Obligations” (“SFAS
No. 143”), refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or
may not be within the control of the entity. FASB Inter-
pretation No. 47 provides that a liability for the fair value
of a conditional asset retirement obligation should be
recognized if that fair value can be reasonably estimated.
FASB Interpretation No. 47 also clarifies when an entity
would have sufficient information to reasonably estimate
the fair value of an asset retirement obligation.
In conjunction with the implementation of FASB Inter-
pretation No. 47, at December 31, 2005, Sunoco re-
corded an increase in asset retirement obligations of $57
million and a related increase in net properties, plants
and equipment of $47 million primarily attributable to
product storage tanks at Company facilities. The $10 mil-
lion cumulative effect of this accounting change ($6 mil-
lion after tax) has been included in cost of products sold
and operating expenses in the 2005 consolidated state-
ment of income. Sunoco did not reflect the $6 million
after-tax charge as a cumulative effect of accounting
change as it was not material. At December 31, 2006,
Sunoco’s liability for asset retirement obligations
amounted to $68 million. Sunoco has legal asset retire-
ment obligations for several other assets at its refineries,
pipelines and terminals, for which it is not possible to
estimate when the obligations will be settled. Con-
sequently, the retirement obligations for these assets can-
not be measured at this time.
New Accounting Principle
In July 2006, FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109” (“FASB Interpretation
No. 48”), was issued. This interpretation clarifies the ac-
counting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with State-
ment of Financial Accounting Standards No. 109,
“Accounting for Income Taxes,” by prescribing the
minimum recognition threshold and measurement attrib-
ute a tax position taken or expected to be taken on a tax
return is required to meet before being recognized in the
financial statements. Sunoco is currently evaluating the
impact of FASB Interpretation No. 48, which must be
implemented effective January 1, 2007.
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