Chesapeake Energy 2012 Annual Report Download - page 100

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
90
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, oil and natural gas liquids (NGL) from underground reservoirs. We also provide substantial marketing, drilling and
other oilfield services. Our operations are located onshore and in the continental United States.
Principles of Consolidation
The accompanying consolidated financial statements of Chesapeake include the accounts of our direct and indirect
wholly owned subsidiaries and entities in which Chesapeake holds a controlling interest. Chesapeake consolidates
subsidiaries in which it holds, directly or indirectly, more than 50% of the voting rights and variable interest entities
(VIEs) in which Chesapeake is the primary beneficiary. We use the equity method of accounting to record our net
interests where Chesapeake holds 20% to 50% of the voting rights and/or has the ability to exercise significant influence.
Under the equity method, our share of net income (loss) is included in our consolidated statements of operations
according to our equity ownership or according to the terms of the applicable governing instrument. Investments in
securities not accounted for under the equity method have been designated as available-for-sale and, as such, are
carried at fair value whenever this value is readily determinable. Otherwise, the investment is carried at cost. See Note
12 for further discussion of investments. All significant intercompany accounts and transactions have been eliminated.
Undivided interests in natural gas and oil exploration and production joint ventures are consolidated on a proportionate
basis.
Variable Interest Entities
An entity is referred to as a VIE pursuant to accounting guidance for consolidation if it possesses one of the
following criteria: (i) it is thinly capitalized, (ii) the residual equity holders do not control the entity, (iii) the equity holders
are shielded from the economic losses, (iv) the equity holders do not participate fully in the entity's residual economics,
or (v) the entity was established with non-substantive voting interests. We consolidate a VIE when we have both the
power to direct the activities that most significantly impact the activities of the VIE and the right to receive benefits or
the obligation to absorb losses of the entity that could be potentially significant to the VIE. Along with the VIEs that are
consolidated in accordance with these guidelines, we also hold variable interests in other VIEs that are not consolidated
because we are not the primary beneficiary. We continually monitor both consolidated and unconsolidated VIEs to
determine if any events have occurred that could cause the primary beneficiary to change. See Note 13 for further
discussion of VIEs.
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.
Estimates of natural gas and oil reserves and their values, future production rates and future costs and expenses
are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data
available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be
revised based on actual production, results of subsequent exploration and development activities, recent commodity
prices, operating costs and other factors. These revisions may be material and could materially affect our financial
statements. The volatility of commodity prices results in increased uncertainty inherent in such estimates and
assumptions. A further decline in natural gas or NGL prices or a significant decline in oil prices could result in actual
results differing significantly from our estimates.