Chevron 2004 Annual Report Download - page 71

CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 69
 NEW ACCOUNTING STANDARDS – Continued
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฀Bul-
letin฀(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฀costs฀relating฀to฀share-based฀payments฀be฀
recognized฀in฀the฀company’s฀financial฀statements.฀The฀company฀
currently฀accounts฀for฀those฀payments฀under฀the฀recognition฀and฀
measurement฀principles฀of฀Accounting฀Principles฀Board฀(APB)฀
Opinion฀No.฀25,฀“Accounting฀for฀Stock฀Issued฀to฀Employees,”฀and฀
related฀interpretations.฀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฀29,฀assets฀received฀in฀certain฀types฀of฀nonmonetary฀
exchanges฀were฀permitted฀to฀be฀recorded฀at฀the฀carrying฀value฀
of฀the฀assets฀that฀were฀exchanged฀(i.e.,฀recorded฀on฀a฀carryover฀
basis).฀As฀amended฀by฀FAS฀153,฀assets฀received฀in฀some฀circum-
stances฀will฀have฀to฀be฀recorded฀instead฀at฀their฀fair฀values.฀In฀the฀
past,฀ChevronTexaco฀has฀not฀engaged฀in฀a฀large฀number฀of฀non-
monetary฀asset฀exchanges฀for฀significant฀amounts.


Refer฀to฀Note฀1฀on฀page฀54฀in฀the฀section฀“Properties,฀Plant฀and฀
Equipment”฀for฀a฀discussion฀of฀the฀company’s฀accounting฀policy฀
for฀the฀cost฀of฀exploratory฀wells.฀The฀company’s฀suspended฀wells฀
are฀reviewed฀in฀this฀context฀on฀a฀quarterly฀basis.
The฀SEC฀issued฀comment฀letters฀during฀2004฀and฀in฀Febru-
ary฀2005฀to฀a฀number฀of฀companies฀in฀the฀oil฀and฀gas฀industry฀
related฀to฀the฀accounting฀for฀suspended฀exploratory฀wells,฀partic-
ularly฀for฀those฀suspended฀under฀certain฀circumstances฀for฀more฀
than฀one฀year.฀In฀February฀2005,฀the฀FASB฀issued฀a฀proposed฀FSP฀
to฀amend฀FAS฀19,฀“Financial฀Accounting฀and฀Reporting฀by฀Oil฀and฀
Gas฀Producing฀Companies.”฀Under฀the฀provisions฀of฀the฀draft฀FSP,฀
exploratory฀well฀costs฀would฀continue฀to฀be฀capitalized฀after฀the฀
completion฀of฀drilling฀when฀(a)฀the฀well฀has฀found฀a฀sufficient฀
quantity฀of฀reserves฀to฀justify฀completion฀as฀a฀producing฀well฀
and฀(b)฀the฀enterprise฀is฀making฀sufficient฀progress฀assessing฀
the฀reserves฀and฀the฀economic฀and฀operating฀viability฀of฀the฀
project.฀If฀either฀condition฀is฀not฀met฀or฀if฀an฀enterprise฀obtains฀
information฀that฀raises฀substantial฀doubt฀about฀the฀economic฀or฀
operational฀viability฀of฀the฀project,฀the฀exploratory฀well฀would฀be฀
assumed฀to฀be฀impaired,฀and฀its฀costs,฀net฀of฀any฀salvage฀value,฀
would฀be฀charged฀to฀expense.฀The฀FSP฀provided฀a฀number฀of฀indi-
cators฀needing฀to฀be฀present฀to฀demonstrate฀sufficient฀progress฀
was฀being฀made฀in฀assessing฀the฀reserves฀and฀economic฀viability฀
of฀the฀project.
The฀company฀will฀monitor฀the฀continuing฀deliberations฀of฀
the฀FASB฀on฀this฀matter฀and฀the฀possible฀implications,฀if฀any,฀to฀
the฀company’s฀accounting฀policy฀and฀the฀amounts฀capitalized฀
for฀suspended-well฀costs.฀The฀disclosures฀and฀discussion฀below฀
address฀those฀suggested฀in฀the฀draft฀FSP฀and฀in฀the฀additional฀
guidance฀issued฀by฀the฀SEC฀in฀its฀February฀2005฀comment฀letter฀
to฀companies฀in฀the฀oil฀and฀gas฀industry.
The฀following฀table฀indicates฀the฀changes฀to฀the฀company’s฀
suspended฀exploratory-well฀costs฀for฀the฀three฀years฀ended฀
December฀31,฀2004:
Year ended December 31
 2003 2002
Beginning balance at January 1  $ 478 $ 655
Additions to capitalized exploratory
well costs pending the determination
of proved reserves  346 209
Reclassifications to wells, facilities
and equipment based on the
determination of proved reserves   (145) (310)
Capitalized exploratory well costs
charged to expense  (128) (46)
Other reductions*  (2) (30)
Ending balance at December 31  $ 549 $ 478
* Represents a property sale in 2003 and a retirement due to a legal settlement in 2002.
The฀following฀table฀provides฀an฀aging฀of฀capitalized฀well฀costs,฀
based฀on฀the฀date฀the฀drilling฀was฀completed,฀and฀the฀number฀of฀
projects฀for฀which฀exploratory฀well฀costs฀have฀been฀capitalized฀for฀a฀
period฀greater฀than฀one฀year฀since฀the฀completion฀of฀drilling:
Year ended December 31
 2003 2002
Exploratory well costs capitalized
for a period of one year or less  $ 181 $ 170
Exploratory well costs capitalized
for a period greater than one year  368 308
Balance at December 31  $ 549 $ 478
Number of projects with exploratory
well costs that have been capitalized
for a period greater than one year*   22 27
* Certain projects have multiple wells or fields or both.
Of฀the฀$671฀of฀suspended฀costs฀at฀December฀31,฀2004,฀
approximately฀$290฀related฀to฀30฀wells฀in฀areas฀requiring฀a฀major฀
capital฀expenditure฀before฀production฀could฀begin฀and฀for฀which฀
additional฀drilling฀efforts฀were฀not฀under฀way฀or฀firmly฀planned฀