Chevron 2004 Annual Report Download - page 47

CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 45
administrative฀expenses”฀on฀the฀Consolidated฀Statement฀of฀
Income.฀Refer฀to฀the฀business฀segment฀discussions฀elsewhere฀in฀
this฀discussion฀and฀in฀Note฀2฀to฀the฀Consolidated฀Financial฀State-
ments฀on฀page฀56฀for฀the฀effect฀on฀earnings฀from฀losses฀associated฀
with฀certain฀litigation฀and฀environmental฀remediation฀and฀tax฀
matters฀for฀the฀three฀years฀ended฀December฀31,฀2004.
An฀estimate฀as฀to฀the฀sensitivity฀to฀earnings฀for฀these฀periods฀
if฀other฀assumptions฀had฀been฀used฀in฀recording฀these฀liabilities฀
is฀not฀practicable฀because฀of฀the฀number฀of฀contingencies฀that฀
must฀be฀assessed,฀the฀number฀of฀underlying฀assumptions฀and฀the฀
wide฀range฀of฀reasonably฀possible฀outcomes,฀both฀in฀terms฀of฀the฀
probability฀of฀loss฀and฀the฀estimates฀of฀such฀loss.
American฀Jobs฀Creation฀Act฀of฀2004฀ In฀October฀2004,฀the฀
American฀Jobs฀Creations฀Act฀of฀2004฀(the฀Act)฀was฀passed฀into฀law.฀
The฀Act฀provides฀deduction฀from฀income฀for฀qualified฀domestic฀
refining฀and฀upstream฀production฀activities,฀which฀will฀be฀phased฀
in฀from฀2005฀through฀2010.฀For฀that฀specific฀category฀of฀income,฀the฀
company฀expects฀the฀net฀effect฀of฀this฀provision฀of฀the฀Act฀to฀result฀
in฀a฀decrease฀in฀the฀federal฀effective฀tax฀rate฀for฀2005฀and฀2006฀to฀
approximately฀34฀percent,฀based฀on฀current฀earnings฀levels.฀In฀the฀
long฀term,฀the฀company฀expects฀that฀the฀new฀deduction฀will฀result฀
in฀a฀decrease฀of฀the฀federal฀effective฀tax฀rate฀to฀about฀32฀percent฀for฀
that฀category฀of฀income,฀based฀on฀current฀earnings฀levels.
Under฀the฀guidance฀in฀FASB฀Staff฀Position฀No.฀FAS฀109-1,฀
“Application฀of฀FASB฀Statement฀No.฀109,฀‘Accounting฀for฀Income฀
Taxes,’฀to฀the฀Tax฀Deduction฀on฀Qualified฀Production฀Activi-
ties฀Provided฀by฀the฀American฀Jobs฀Creation฀Act฀of฀2004,”฀the฀tax฀
deduction฀on฀qualified฀production฀activities฀provided฀by฀the฀
American฀Jobs฀Creation฀Act฀of฀2004฀will฀be฀treated฀as฀a฀“special฀
deduction,”฀as฀described฀in฀FAS฀109.฀As฀such,฀the฀special฀deduc-
tion฀has฀no฀effect฀on฀deferred฀tax฀assets฀and฀liabilities฀existing฀at฀
the฀enactment฀date.฀Rather,฀the฀impact฀of฀this฀deduction฀will฀be฀
reported฀in฀the฀period฀in฀which฀the฀deduction฀is฀claimed฀on฀the฀
company’s฀tax฀return.
The฀Act฀also฀provides฀for฀a฀limited฀opportunity฀to฀repatriate฀
earnings฀from฀outside฀the฀United฀States฀at฀a฀special฀reduced฀tax฀
rate฀that฀can฀be฀as฀low฀as฀5.25฀percent.฀In฀early฀2005,฀the฀com-
pany฀was฀in฀the฀process฀of฀reviewing฀the฀guidance฀that฀the฀IRS฀
issued฀on฀January฀13,฀2005,฀regarding฀this฀provision฀and฀also฀
considering฀other฀relevant฀information.฀The฀company฀does฀not฀
anticipate฀a฀major฀change฀in฀its฀plans฀for฀repatriating฀earnings฀
from฀international฀operations฀under฀the฀provisions฀of฀the฀Act.

FASB฀Interpretation฀No.฀46,฀“Consolidation฀of฀Variable฀Interest฀
Entities”฀(FIN฀46)฀In฀January฀2003,฀FIN฀46฀was฀issued฀and฀estab-
lished฀standards฀for฀determining฀under฀what฀circumstances฀a฀
variable฀interest฀entity฀(VIE)฀should฀be฀consolidated฀by฀its฀pri-
mary฀beneficiary.฀FIN฀46฀also฀requires฀disclosures฀about฀VIEs฀
that฀the฀company฀is฀not฀required฀to฀consolidate฀but฀in฀which฀it฀
has฀a฀significant฀variable฀interest.฀In฀December฀2003,฀the฀FASB฀
issued฀FIN฀46-R,฀which฀not฀only฀includes฀amendments฀to฀FIN฀
46,฀but฀also฀requires฀application฀of฀the฀interpretation฀to฀all฀
affected฀entities฀no฀later฀than฀March฀31,฀2004,฀for฀calendar฀year-
reporting฀companies.฀Prior฀to฀this฀requirement,฀companies฀were฀
required฀to฀apply฀the฀interpretation฀to฀special-purpose฀entities฀
by฀December฀31,฀2003.฀The฀full฀adoption฀of฀the฀interpretation฀
as฀of฀March฀31,฀2004,฀including฀the฀requirement฀relating฀to฀
special-purpose฀entities,฀did฀not฀have฀a฀material฀impact฀on฀the฀
company’s฀results฀of฀operations,฀financial฀position฀or฀liquidity.
FASB฀Staff฀Position฀No.฀FAS฀106-2,฀“Accounting฀and฀Disclosure฀
Requirements฀Related฀to฀the฀Medicare฀Prescription฀Drug,฀
Improvement฀and฀Modernization฀Act฀of฀2003”฀(FSP฀FAS฀106-2)฀ In฀
December฀2003,฀the฀Medicare฀Prescription฀Drug,฀Improvement฀
and฀Modernization฀Act฀of฀2003฀(the฀“Act”)฀became฀law.฀The฀Act฀
introduced฀a฀prescription฀drug฀benefit฀under฀Medicare,฀as฀well฀as฀
a฀federal฀subsidy฀to฀sponsors฀of฀retiree฀health฀care฀plans฀that฀pro-
vide฀a฀benefit฀that฀is฀at฀least฀actuarially฀equivalent฀to฀Medicare฀
Part฀D.฀In฀May฀2004,฀the฀FASB฀issued฀FSP฀FAS฀106-2.฀One฀U.S.฀
subsidiary฀was฀deemed฀at฀least฀actuarially฀equivalent฀and฀eligible฀
for฀the฀federal฀subsidy.฀The฀effect฀on฀the฀company’s฀postretire-
ment฀benefit฀obligation฀and฀the฀associated฀annual฀expense฀was฀
de฀minimis.
FASB฀Statement฀No.฀151,฀“Inventory฀Costs,฀an฀Amendment฀of฀ARB฀
No.฀43,฀Chapter฀4”฀(FAS฀151)฀In฀November฀2004,฀the฀FASB฀issued฀
FAS฀151฀which฀is฀effective฀for฀the฀company฀on฀January฀1,฀2006.฀The฀
standard฀amends฀the฀guidance฀in฀Accounting฀Research฀Bulletin฀
(ARB)฀No.฀43,฀Chapter฀4,฀“Inventory฀Pricing,”฀to฀clarify฀the฀
accounting฀for฀abnormal฀amounts฀of฀idle฀facility฀expense,฀freight,฀
handling฀costs฀and฀spoilage.฀In฀addition,฀the฀standard฀requires฀that฀
allocation฀of฀fixed฀production฀overheads฀to฀the฀costs฀of฀conversion฀
be฀based฀on฀the฀normal฀capacity฀of฀the฀production฀facilities.฀The฀
company฀is฀currently฀evaluating฀the฀impact฀of฀this฀standard.
FASB฀Statement฀No.฀123R,฀“Share-Based฀Payment”฀(FAS฀123R)฀ In฀
December฀2004,฀the฀FASB฀issued฀FAS฀123R,฀which฀requires฀that฀
compensation฀cost฀relating฀to฀share-based฀payments฀be฀recognized฀
in฀the฀company’s฀financial฀statements.฀The฀company฀currently฀
accounts฀for฀those฀payments฀under฀the฀recognition฀and฀measure-
ment฀principles฀of฀Accounting฀Principles฀Board฀(APB)฀Opinion฀No.฀
25,฀“Accounting฀for฀Stock฀Issued฀to฀Employees,”฀and฀related฀inter-
pretations.฀The฀company฀is฀preparing฀to฀implement฀this฀standard฀
effective฀July฀1,฀2005.฀Although฀the฀transition฀method฀to฀be฀
used฀to฀adopt฀the฀standard฀has฀not฀been฀selected,฀the฀impact฀of฀
adoption฀is฀expected฀to฀have฀a฀minimal฀impact฀on฀the฀company’s฀
results฀of฀operations,฀financial฀position฀and฀liquidity.฀Refer฀to฀
Note฀1,฀beginning฀on฀page฀54,฀for฀the฀company’s฀calculation฀of฀the฀
pro฀forma฀impact฀on฀net฀income฀of฀FAS฀123,฀which฀would฀be฀
similar฀to฀that฀under฀FAS฀123R.
FASB฀Statement฀No.฀153,฀“Exchanges฀of฀Nonmonetary฀Assets฀–฀
An฀Amendment฀of฀APB฀Opinion฀No.฀29”฀(FAS฀153)฀In฀December฀
2004,฀the฀FASB฀issued฀FAS฀153,฀which฀is฀effective฀for฀the฀com-
pany฀for฀asset-exchange฀transactions฀beginning฀July฀1,฀2005.฀
Under฀APB฀No.฀29,฀assets฀received฀in฀certain฀types฀of฀nonmone-
tary฀exchanges฀were฀permitted฀to฀be฀recorded฀at฀the฀carrying฀
value฀of฀the฀assets฀that฀were฀exchanged฀(i.e.,฀recorded฀on฀a฀carry-
over฀basis).฀As฀amended฀by฀FAS฀153,฀assets฀received฀in฀some฀
circumstances฀will฀have฀to฀be฀recorded฀instead฀at฀their฀fair฀val-
ues.฀In฀the฀past,฀ChevronTexaco฀has฀not฀engaged฀in฀a฀large฀
number฀of฀nonmonetary฀asset฀exchanges฀for฀significant฀amounts.