Chevron 2005 Annual Report Download - page 62

60 CHEVRON CORPORATION 2005 ANNUAL REPORT
Liabilities related to future remediation costs are recorded
when environmental assessments or cleanups or both are
probable and the costs can be reasonably estimated. For the
company’s U.S. and Canadian marketing facilities, the accrual
is based in part on the probability that a future remediation
commitment will be required. For crude oil, natural gas and
coal producing properties, a liability for an asset retirement
obligation is made, following FAS 143. Refer to Note 24,
beginning on page 83, for a discussion of FAS 143.
For federal Superfund sites and analogous sites under
state laws, the company records a liability for its designated
share of the probable and estimable costs and probable
amounts for other potentially responsible parties when man-
dated by the regulatory agencies because the other parties are
not able to pay their respective shares.
The gross amount of environmental liabilities is based
on the company’s best estimate of future costs using currently
available technology and applying current regulations and
the company’s own internal environmental policies. Future
amounts are not discounted. Recoveries or reimbursements
are recorded as assets when receipt is reasonably assured.
Currency Translation The U.S. dollar is the functional cur-
rency for substantially all of the company’s consolidated
operations and those of its equity affiliates. For those opera-
tions, all gains and losses from currency translations are
currently included in income. The cumulative translation
effects for those few entities, both consolidated and affiliated,
using functional currencies other than the U.S. dollar are
included in the currency translation adjustment in “Stock-
holders’ equity.”
Revenue Recognition Revenues associated with sales of crude
oil, natural gas, coal, petroleum and chemicals products and all
other sources are recorded when title passes to the customer, net
of royalties, discounts and allowances, as applicable. Revenues
from natural gas production from properties in which Chevron
has an interest with other producers are generally recognized
on the basis of the company’s net working interest (entitle ment
method). Refer to Note 15, beginning on page 70, for a
discussion of the accounting for buy/sell arrangements.
Stock Options and Other Share-Based Compensation Effective
July 1, 2005, the company adopted the provisions of Finan-
cial Accounting Standards Board (FASB) Statement No.
123R, “Share-Based Payment,” (FAS 123R) for its share-based
compensation plans. The company previously accounted for
these plans under the recognition and measurement prin-
ciples of Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” (APB 25) and related
interpretations and disclosure requirements established by
FAS 123, “Accounting for Stock-Based Compensation.”
Refer to Note 22, beginning on page 78, for a descrip-
tion of the company’s share-based compensation plans,
information related to awards granted under those plans and
additional information on the company’s adoption of FAS 123R.
The following table illustrates the effect on net income
and earnings per share as if the company had applied the
fair-value recognition provisions of FAS 123 to stock options,
stock appreciation rights, performance units and restricted
stock units for periods prior to adoption of FAS 123R, and
the actual effect on net income and earnings per share for
periods after adoption of FAS 123R.
Year ended December 31
2005 2004 2003
Net income, as reported $ 14,099 $ 13,328 $ 7,230
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects1 $ 81 $ 42 $ 16
Deduct: Total stock-based employee
compensation expense determined
under fair-valued-based method
for awards, net of related
tax effects1,2 $ (108) $ (84) $ (41)
Pro forma net income $ 14,072 $ 13,286 $ 7,205
Net income per share:3,4
Basic – as reported $ 6.58 $ 6.30 $ 3.48
Basic – pro forma $ 6.56 $ 6.28 $ 3.47
Diluted – as reported $ 6.54 $ 6.28 $ 3.48
Diluted – pro forma $ 6.53 $ 6.26 $ 3.47
1 Periods prior to 2005 conformed to the 2005 presentation.
2 Fair value determined using the Black-Scholes option-pricing model.
3 Per-share amounts in all periods refl ect a two-for-one stock split effected as a 100 per-
cent stock dividend in September 2004.
4 The amounts in 2003 include a benefi t of $0.08 for the company’s share of a capital
stock transaction of its Dynegy Inc. affi liate, which under the applicable accounting
rules was recorded directly to the company’s retained earnings and not included in net
income for the period.
NOTE 2.
ACQUISITION OF UNOCAL CORPORATION
On August 10, 2005, the company acquired Unocal Corpo-
ration (Unocal), an independent oil and gas exploration and
production company. Unocal’s principal upstream opera-
tions are in North America and Asia, including the Caspian
region. Also located in Asia are Unocal’s geothermal energy
and electrical power businesses. Other activities include own-
ership interests in proprietary and common carrier pipelines,
natural gas storage facilities and mining operations.
The aggregate purchase price of Unocal was approxi-
mately $17,300, which included approximately $7,500 cash,
169 million shares of Chevron common stock valued at or
about $9,600, and $200 for stock options on approximately
5 million shares and merger-related fees. The value of the com-
mon shares was based on the average market price for a 5-day
period beginning two days before the terms of the acquisition
were fi nalized and announced on July 19, 2005. The issued
shares represented approximately 7.5 percent of the number of
shares outstanding immediately after the August 10 close. The
value of the stock options at the acquisition date was deter-
mined using the Black-Scholes option-pricing model.
A third-party appraisal fi rm has been engaged to assist
the company in the process of determining the fair values
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
Notes to the Consolidated Financial Statements
Millions of dollars, except per-share amounts