Chesapeake Energy 2012 Annual Report Download - page 79

69
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 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion
of VIEs.
Income Taxes. As part of the process of preparing the consolidated financial statements, we are required to
estimate the federal and state income taxes in each of the jurisdictions in which Chesapeake operates. This process
involves estimating the actual current tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as derivative instruments, depreciation, depletion and amortization, and certain
accrued liabilities for tax and accounting purposes. These differences and our net operating loss carryforwards result
in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess,
using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from
future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. Generally, to
the extent Chesapeake establishes a valuation allowance or increases or decreases this allowance in a period, we
must include an expense or reduction of expense within the tax provision in the consolidated statement of operations.
Under accounting guidance for income taxes, an enterprise must use judgment in considering the relative impact
of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should
be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the
more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance
is not needed for some portion or all of the deferred tax asset. Among the more significant types of evidence that we
consider are:
• taxable income projections in future years;
• whether the carryforward period is so brief that it would limit realization of the tax benefit;
• future sales and operating cost projections that will produce more than enough taxable income to realize the
deferred tax asset based on existing sales prices and cost structures; and
• our earnings history exclusive of the loss that created the future deductible amount coupled with evidence
indicating that the loss is an aberration rather than a continuing condition.
If (i) natural gas and oil prices were to decrease significantly below present levels (and if such decreases were
considered other than temporary), (ii) exploration, drilling and operating costs were to increase significantly beyond
current levels, or (iii) we were confronted with any other significantly negative evidence pertaining to our ability to
realize our NOL carryforwards prior to their expiration, we may be required to provide a valuation allowance against
our deferred tax assets. As of December 31, 2012, we had deferred tax assets of $1.566 billion.
Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition that
a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements.
Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions.
Based on this guidance, we regularly analyze tax positions taken or expected to be taken in a tax return based on the
threshold condition prescribed. Tax positions that do not meet or exceed this threshold condition are considered
uncertain tax positions. We accrue interest related to these uncertain tax positions which is recognized in interest
expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses. Additional information
about uncertain tax positions appears in Note 5 of the notes to our consolidated financial statements included in Item
8 of this report.
Disclosures About Effects of Transactions with Related Parties
Chief Executive Officer
As of December 31, 2012 and 2011, we had accrued accounts receivable from our Chief Executive Officer, Aubrey
K. McClendon, of $23 million and $45 million, respectively, representing joint interest billings from December 2012 and
2011 related to Mr. McClendon's participation in Company wells pursuant to the FWPP. These amounts were invoiced
and timely paid in the following month. Since Chesapeake was founded in 1989, Mr. McClendon has acquired working
interests in virtually all of our natural gas and oil properties by participating in our drilling activities under the terms of
his employment agreement and the FWPP and predecessor participation arrangements provided for in Mr. McClendon's
employment agreements. On April 30, 2012, the Company's Board of Directors and Mr. McClendon agreed to the early
termination of the FWPP on June 30, 2014, 18 months before the end of the 10-year term approved by our shareholders
in June 2005. Under the FWPP, Mr. McClendon may elect to participate in all or none of the wells drilled by or on behalf