Chevron 2011 Annual Report Download - page 39

Chevron Corporation 2011 Annual Report 37
Properties, Plant and Equipment e successful eorts
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 also are capitalized
for exploratory wells that have found crude oil and natural
gas reserves even if the reserves cannot be classied as proved
when the drilling is completed, provided the exploratory
wellhas found a sucient quantity of reserves to justify its
completion as a producing well and the company is making
su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 19, beginning
on page 55, for additional discussion of accounting for
suspended exploratory well costs.
Long-lived assets to be held and used, including proved
crude oil and natural gas properties, are assessed for pos-
sible impairment by comparing their carrying values with
their asso ciated undiscounted, future net before-tax cash
ows. Events that can trigger assessments for possible impair-
ments include write-downs of proved reserves based on eld
performance, signicant decreases in the market value of
an asset, signi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 signi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 ows. For proved
crude oil and natural gas properties in the United States,
the company generally performs the impairment review on
an individual eld basis. Outside the United States, reviews
are performed on a country, concession, development area
or eld basis, as appropriate. In Downstream, impairment
reviews are performed on the basis of a renery, a plant, a
marketing/lubricants area or distribution area, as appropriate.
Impairment amounts are recorded as incremental “Deprecia-
tion, depletion and amortization” 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. Refer to Note 9,
beginning on page 42, relating to fair value measurements.
e 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 25, on page 66,
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-produc-
tion method, generally by individual 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 eld as
the related proved reserves are produced. Periodic valuation
provisions for impairment of capitalized costs of unproved
mineral interests are expensed.
e 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 is generally used to depreciate interna-
tional 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 resulting from a business combination
is not subject to amortization. As required by accounting
standards for goodwill (ASC 350), 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 the reporting unit below its carrying amount.
Environmental Expenditures Environmental expenditures that
relate to ongoing operations or to conditions caused by past
operations are expensed. Expenditures that create future ben-
e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 ARO is made
in accordance with accounting standards for asset retirement
and environmental obligations. Refer to Note 25, on
page 66, for adiscussion of the company’s AROs.
Note 1 Summary of Significant Accounting Policies – Continued