Chesapeake Energy 2014 Annual Report Download - page 68

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Income Tax Expense (Benefit). Chesapeake recorded income tax expense of $1.144 billion in 2014 and $548
million in 2013 and an income tax benefit of $380 million in 2012. Our effective income tax rate was 35.8% in 2014,
38.0% in 2013 and 39.0% in 2012. Our effective tax rate can fluctuate as a result of the impact of state income taxes
and permanent differences. See Note 6 of the notes to our consolidated financial statements included in Item 8 of this
report for a discussion of income tax expense (benefit).
Net Income Attributable to Noncontrolling Interests. Chesapeake recorded net income attributable to
noncontrolling interests of $139 million, $170 million and $175 million in 2014, 2013 and 2012, respectively. Net income
attributable to noncontrolling interests is primarily driven by the dividends paid on preferred stock of our subsidiaries
CHK Utica and CHK Cleveland Tonkawa L.L.C. (CHK C-T), in addition to income or loss related to the Chesapeake
Granite Wash Trust. The decrease from 2013 to 2014 is primarily due to our repurchase of all of the outstanding
preferred shares of CHK Utica from third-party preferred shareholders in 2014. See Note 8 of the notes to our
consolidated financial statements included in Item 8 of this report for a discussion of these entities.
Application of Critical Accounting Policies
Readers of this report and users of the information contained in it should be aware that certain events may impact
our financial results based on the accounting policies in place. The three policies we consider to be the most significant
are discussed below. The Company's management has discussed each critical accounting policy with the Audit
Committee of the Company's Board of Directors.
The selection and application of accounting policies are an important process that changes as our business
changes and as accounting rules are developed. Accounting rules generally do not involve a selection among
alternatives, but involve an implementation and interpretation of existing rules and the use of judgment in the specific
set of circumstances existing in our business.
Oil and Natural Gas Properties. The accounting for our business is subject to special accounting rules that are
unique to the oil and natural gas industry. There are two allowable methods of accounting for oil and natural gas
business activities: the successful efforts method and the full cost method. Chesapeake follows the full cost method
of accounting under which all costs associated with property acquisition, exploration and development activities are
capitalized. We also capitalize internal costs that can be directly identified with our acquisition, exploration and
development activities and do not capitalize any costs related to production, general corporate overhead or similar
activities.
Under the successful efforts method, geological and geophysical costs and costs of carrying and retaining
undeveloped properties are charged to expense as incurred. Costs of drilling exploratory wells that do not result in
proved reserves are charged to expense. Depreciation, depletion, amortization and impairment of oil and natural gas
properties are generally calculated on a well by well or lease or field basis versus the aggregated "full cost" pool basis.
Additionally, gain or loss is generally recognized on all sales of oil and natural gas properties under the successful
efforts method. As a result, our financial statements differ from those of companies that apply the successful efforts
method since we generally reflect a higher level of capitalized costs as well as a higher oil and natural gas depreciation,
depletion and amortization rate, and we do not have exploration expenses that successful efforts companies frequently
have.
Under the full cost method, capitalized costs are amortized on a composite unit-of-production method based on
proved oil and natural gas reserves. If we maintain the same level of production year over year, the depreciation,
depletion and amortization expense may be significantly different if our estimate of remaining reserves or future
development costs changes significantly. Proceeds from the sale of properties are accounted for as reductions of
capitalized costs unless these sales involve a significant change in proved reserves and significantly alter the
relationship between costs and proved reserves, in which case a gain or loss is recognized. The costs of unproved
properties are excluded from amortization until the properties are evaluated. We review all of our unevaluated properties
quarterly to determine whether or not and to what extent proved reserves have been assigned to the properties, and
otherwise if impairment has occurred. Unevaluated properties are grouped by major producing area where individual
property costs are not significant.
We review the carrying value of our oil and natural gas properties under the SEC's full cost accounting rules on
a quarterly basis. This quarterly review is referred to as a ceiling test. Under the ceiling test, capitalized costs, less
accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the
present value of estimated future net revenues (adjusted for oil and natural gas cash flow hedges) less estimated future
expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. In