Baker Hughes 2015 Annual Report Download - page 63

Baker Hughes Incorporated
Notes to Consolidated Financial Statements
54
Environmental Matters
Estimated remediation costs are accrued using currently available facts, existing environmental permits,
technology and enacted laws and regulations. Our cost estimates are developed based on internal evaluations and
are not discounted. Accruals are recorded when it is probable that we will be obligated to pay for environmental site
evaluation, remediation or related activities, and such costs can be reasonably estimated. As additional information
becomes available, accruals are adjusted to reflect current cost estimates. Ongoing environmental compliance
costs, such as obtaining environmental permits, installation of pollution control equipment and waste disposal are
expensed as incurred. Where we have been identified as a potentially responsible party in a U.S. federal or state
Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) site, we accrue our share
of the estimated remediation costs of the site. This share is based on the ratio of the estimated volume of waste we
contributed to the site to the total volume of waste disposed at the site.
Foreign Currency
A number of our significant foreign subsidiaries have designated the local currency as their functional currency
and, as such, gains and losses resulting from balance sheet translation of foreign operations are included as a
separate component of accumulated other comprehensive loss within stockholders’ equity. Gains and losses from
foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-
functional currency, are included in marketing, general and administrative (“MG&A”) expenses in the consolidated
statements of income (loss) as incurred. For those foreign subsidiaries that have designated the U.S. Dollar
("USD") as the functional currency, monetary assets and liabilities are remeasured at period-end exchange rates,
and nonmonetary items are remeasured at historical exchange rates. Gains and losses resulting from this balance
sheet remeasurement are also included in MG&A expenses as incurred.
In 2015 and 2014, the Venezuelan government modified its currency exchange systems, which impacted the
rate at which we could reasonably expect to exchange the Venezuelan Bolivars Fuertes ("BsF") for the U.S. Dollar.
As a result of the change in the exchange rate, in 2015 and 2014, we recognized a foreign currency loss of
approximately $5 million and $12 million, respectively, related to the remeasurement of our BsF denominated assets
and liabilities. This loss was recorded in MG&A expenses. We believe any further devaluation of Venezuela's
currency would not have a material impact on our financial position, results of operations or cash flows.
In 2013, Venezuela's currency was devalued from the prior exchange rate of 4.3 BsF per USD to 6.3 BsF per
USD. The impact of this devaluation was a loss of $23 million that was recorded in MG&A expenses.
Fair Value Measurement
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at a measurement date. The Company applies the
following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the
categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value
measurement:
• Level One: The use of quoted prices in active markets for identical financial instruments.
• Level Two: The use of quoted prices for similar instruments in active markets or quoted prices for identical
or similar instruments in markets that are not active or other inputs that are observable in the market or can
be corroborated by observable market data.
• Level Three: The use of significantly unobservable inputs that typically require the use of management's
estimates of assumptions that market participants would use in pricing.
Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable, investments, accounts
payable, short and long-term debt, and derivative financial instruments. Except for long-term debt, the estimated
fair value of our financial instruments at December 31, 2015 and 2014 approximates their carrying value as