Chesapeake Energy 2012 Annual Report Download - page 104

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Two primary factors impacting the ceiling test are reserves levels and natural gas, oil and NGL prices, and their
associated impact on the present value of estimated future net revenues. Revisions to estimates of natural gas and
oil reserves and/or an extended increase or decrease in prices can have a material impact on the present value of
estimated future net revenues. Any excess of the net book value, less deferred income taxes, is written off as an
expense.
We account for seismic costs in accordance with Rule 4-10 of Regulation S-X. Specifically, Rule 4-10 requires
that all companies that use the full cost method capitalize exploration costs as part of their natural gas and oil properties
(i.e., full cost pool). Exploration costs may be incurred both before acquiring the related property and after acquiring
the property. Further, exploration costs include, among other things, geological and geophysical studies and salaries
and other expenses of geologists, geophysical crews and others conducting those studies. Such costs are capitalized
as incurred. The Company reviews its unproved properties and associated seismic costs quarterly in order to ascertain
whether impairment has occurred. To the extent that seismic costs cannot be directly associated with specific
unevaluated properties, they are included in the amortization base as incurred.
Other Property and Equipment
Other property and equipment consists primarily of oilfield services equipment, including drilling rigs, rental tools,
hydraulic fracturing and mining equipment, natural gas compressors, land, buildings and improvements, vehicles, office
equipment, natural gas gathering systems and treating plants. The majority of our natural gas gathering systems and
treating plants were sold in 2012 as discussed in Note 11 to these consolidated financial statements. Major renewals
and betterments are capitalized while the costs of repairs and maintenance are charged to expense as incurred. The
costs of assets retired or otherwise disposed of and the applicable accumulated depreciation are removed from the
accounts, and the resulting gain or loss is reflected in operating costs. See Note 14 for further discussion of our gains
and losses on the sales of other property and equipment. Other property and equipment costs, excluding land, are
depreciated on a straight-line basis. A summary of our other property and equipment held for sale as of December 31,
2012 is summarized in Held for Sale Assets and Liabilities below. A summary of other property and equipment held
for use and the useful lives is as follows:
December 31, Useful
2012 2011 Life
($ in millions) (in years)
Oilfield services equipment ...................................................................... $ 2,130 $ 1,632 3 - 15
Natural gas gathering systems and treating plants .................................. — 1,455 3 - 20
Buildings and improvements ................................................................... 1,580 1,202 10 - 39
Natural gas compressors ......................................................................... 505 303 20
Land ........................................................................................................ 515 926 —
Other ....................................................................................................... 1,178 1,124 2 - 20
Total other property and equipment, at cost...................................... 5,908 6,642
Less: accumulated depreciation and amortization ............................ (1,293) (1,082)
Total other property and equipment, net ............................................ $ 4,615 $ 5,560
Realization of the carrying value of other property and equipment is reviewed for possible impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined
to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the asset,
including disposal value, if any, is less than the carrying amount of the asset. If any asset is determined to be impaired,
the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. An estimate of
fair value is based on the best information available, including prices for similar assets and discounted cash flow. We
determined that certain of our property, plant and equipment were being carried at values that were not recoverable
and in excess of fair value. As a result, we recognized impairments of $340 million, $46 million and $21 million in 2012,
2011 and 2010, respectively. See Note 14 for further discussion of these impairments.
Noncontrolling Interests
Noncontrolling interests represent third-party equity ownership in certain of our consolidated subsidiaries, VIEs
or our investments and are presented as a component of equity. See Note 8 for further discussion of noncontrolling
interests.