Chevron 2006 Annual Report Download - page 59

CHEVRON CORPORATION 2006 ANNUAL REPORT 57CHEVRON CORPORATION 2006 ANNUAL REPORT 57
Properties, Plant and Equipment The successful efforts
method is used for crude oil and natural gas exploration and
production activities. All costs for development wells, related
plant and equipment, proved mineral interests in crude oil
and natural gas properties, and related asset retirement obli-
gation (ARO) assets are capitalized. Costs of exploratory
wells are capitalized pending determination of whether the
wells found proved reserves. Costs of wells that are assigned
proved reserves remain capitalized. Costs are also capitalized
for exploratory wells that have found crude oil and natural
gas reserves even if the reserves cannot be classifi ed as proved
when the drilling is completed, provided the exploratory
well has found a suffi cient quantity of reserves to justify its
completion as a producing well and the company is making
suffi cient progress assessing the reserves and the economic
and operating viability of the project. All other exploratory
wells and costs are expensed. Refer to Note 20, beginning
on page 71, for additional discussion of accounting for sus-
pended exploratory well costs.
Long-lived assets to be held and used, including proved
crude oil and natural gas properties, are assessed for possible
impairment by comparing their carrying values with their
asso ciated undiscounted future net before-tax cash fl ows.
Events that can trigger assessments for possible impair-
ments include write-downs of proved reserves based on fi eld
performance, signifi cant decreases in the market value of
an asset, signifi cant change in the extent or manner of use
of or a physical change in an asset, and a more-likely-than-
not expectation that a long-lived asset or asset group will be
sold or otherwise disposed of signifi cantly sooner than the
end of its previously estimated useful life. Impaired assets
are written down to their estimated fair values, generally
their discounted future net before-tax cash fl ows. For proved
crude oil and natural gas properties in the United States,
the company generally performs the impairment review on
an individual fi eld basis. Outside the United States, reviews
are performed on a country, concession, development area,
or fi eld basis, as appropriate. In the refi ning, marketing,
transportation and chemical areas, impairment reviews are
generally done on the basis of a refi nery, a plant, a marketing
area or marketing assets by country. Impairment amounts are
recorded as incremental “Depreciation, depletion and amorti-
zation” expense.
Long-lived assets that are held for sale are evaluated for
possible impairment by comparing the carrying value of the
asset with its fair value less the cost to sell. If the net book
value exceeds the fair value less cost to sell, the asset is consid-
ered impaired and adjusted to the lower value.
As required under Financial Accounting Standards
Board (FASB) Statement No. 143, Accounting for Asset Retire-
ment Obligations (FAS 143), the fair value of a liability for
an ARO is recorded as an asset and a liability when there is a
legal obligation associated with the retirement of a long-lived
asset and the amount can be reasonably estimated. Refer also
to Note 24, on page 82, relating to AROs.
Depreciation and depletion of all capitalized costs of
proved crude oil and natural gas producing properties, except
mineral interests, are expensed using the unit-of-production
method by individual fi eld as the proved developed reserves
are produced. Depletion expenses for capitalized costs of
proved mineral interests are recognized using the unit-of-
production method by individual fi eld as the related proved
reserves are produced. Periodic valuation provisions for
impairment of capitalized costs of unproved mineral interests
are expensed.
Depreciation and depletion expenses for mining assets
are determined using the unit-of-production method as the
proven reserves are produced. The capitalized costs of all
other plant and equipment are depreciated or amortized over
their estimated useful lives. In general, the declining-balance
method is used to depreciate plant and equipment in the
United States; the straight-line method generally is used to
depreciate international plant and equipment and to amortize
all capitalized leased assets.
Gains or losses are not recognized for normal retirements
of properties, plant and equipment subject to composite
group amortization or depreciation. Gains or losses from
abnormal retirements are recorded as expenses and from
sales as “Other income.”
Expenditures for maintenance (including those for
planned major maintenance projects), repairs and minor
renewals to maintain facilities in operating condition are
generally expensed as incurred. Major replacements and
renewals are capitalized.
Goodwill Goodwill acquired in a business combination is not
subject to amortization. As required by FASB Statement No.
142, Goodwill and Other Intangible Assets, the company tests
such goodwill at the reporting unit level for impairment on
an annual basis and between annual tests if an event occurs or
circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount.
The goodwill arising from the Unocal acquisition is described
in more detail in Note 2, beginning on page 58.
Environmental Expenditures Environmental expenditures that
relate to ongoing operations or to conditions caused by past
operations are expensed. Expenditures that create future ben-
efi ts or contribute to future revenue generation are capitalized.
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
mineral producing properties, a liability for an asset retire-
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued