Chesapeake Energy 2010 Annual Report Download - page 124

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Company
Chesapeake Energy Corporation (“Chesapeake” or the “company”) is a natural gas and oil exploration and
production company engaged in the exploration, development and acquisition of properties for the production
of natural gas and oil from underground reservoirs, and we provide marketing and other midstream services.
Our properties are located in Alabama, Arkansas, Colorado, Kansas, Kentucky, Louisiana, Maryland, Michigan,
Mississippi, Montana, Nebraska, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania,
Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.
Principles of Consolidation
The accompanying consolidated financial statements of Chesapeake include the accounts of our direct
and indirect wholly owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Change in Accounting Principles
Effective January 1, 2010, in accordance with new authoritative guidance for variable interest entities, we
ceased consolidating our midstream joint venture with Global Infrastructure Partners within our financial
statements and began to account for the joint venture under the equity method (see Note 12). Adoption of this
new guidance resulted in an after-tax cumulative effect charge to retained earnings of $142 million, which is
reflected in our consolidated statement of equity for the year ended December 31, 2010. This charge reflects
the difference between the carrying value of our initial investment in the joint venture, which was recorded at
carryover basis as an entity under common control, and the fair value of our equity in the joint venture as of the
formation date.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Cash Equivalents
For purposes of the consolidated financial statements, Chesapeake considers investments in all highly
liquid instruments with original maturities of three months or less at date of purchase to be cash equivalents.
Accounts Receivable
Our accounts receivable are primarily from purchasers of natural gas and oil and exploration and
production companies which own interests in properties we operate. This industry concentration has the
potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers may
be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of
all our counterparties. We generally require letters of credit for receivables from customers which are judged to
have sub-standard credit, unless the credit risk can otherwise be mitigated. During 2010 and 2008, we
recognized nominal amounts of bad debt expense related to potentially uncollectible receivables. During 2009,
we recognized $13 million of bad debt expense related to potentially uncollectible receivables.
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