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value hedges). The effective portion of changes in fair value of derivatives that are designated as cash flow hedges is
recorded as a component of other comprehensive income (loss). Amounts included in accumulated other
comprehensive income (loss) for cash flow hedges are reclassified into earnings in the same period that the
hedged item is recognized in earnings. The ineffective portion of changes in fair value of derivatives designated as
cash flow hedges is recorded currently in earnings. Changes in fair value of derivatives designated as fair value
hedges are recognized currently in earnings. The change in fair value of the related hedged commitment is recorded
as an adjustment to its carrying amount and recognized currently in earnings.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments, which are readily
convertible into cash and have maturities of three months or less when acquired.
Inventories: Inventories are valued at the lower of cost or market. For refined product inventories valued at
cost, the Corporation uses principally the last-in, first-out (LIFO) inventory method. For the remaining inventories,
cost is generally determined using average actual costs.
Exploration and Development Costs: Exploration and production activities are accounted for using the
successful efforts method. Costs of acquiring unproved and proved oil and gas leasehold acreage, including lease
bonuses, brokers’ fees and other related costs, are capitalized. Annual lease rentals, exploration expenses and
exploratory dry hole costs are expensed as incurred. Costs of drilling and equipping productive wells, including
development dry holes, and related production facilities are capitalized.
The costs of exploratory wells that find oil and gas reserves are capitalized pending determination of whether
proved reserves have been found. In accordance with Financial Accounting Standards Board (FASB) Staff
Position 19-1, Accounting for Suspended Well Costs, which amended FAS 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies (FAS 19), exploratory drilling costs remain capitalized after
drilling is completed if (1) the well has found a sufficient quantity of reserves to justify completion as a producing
well and (2) sufficient progress is being made in assessing the reserves and the economic and operating viability of
the project. If either of those criteria is not met, or if there is substantial doubt about the economic or operational
viability of a project, the capitalized well costs are charged to expense. Indicators of sufficient progress in assessing
reserves and the economic and operating viability of a project include commitment of project personnel, active
negotiations for sales contracts with customers, negotiations with governments, operators and contractors, firm
plans for additional drilling and other factors.
Depreciation, Depletion and Amortization: The Corporation records depletion expense for acquisition costs
of proved properties using the units of production method over proved oil and gas reserves. Depreciation and
depletion expense for oil and gas production equipment and wells is calculated using the units of production method
over proved developed oil and gas reserves. Depreciation of all other plant and equipment is determined on the
straight-line method based on estimated useful lives. Retail gas stations and equipment related to a leased property,
are depreciated over the estimated useful lives not to exceed the remaining lease period. Provisions for impairment
of undeveloped oil and gas leases are based on periodic evaluations and other factors.
Capitalized Interest: Interest from external borrowings is capitalized on material projects using the weighted
average cost of outstanding borrowings until the project is substantially complete and ready for its intended use,
which for oil and gas assets is at first production from the field. Capitalized interest is depreciated over the useful
lives of the assets in the same manner as the depreciation of the underlying assets.
Asset Retirement Obligations: The Corporation has material legal obligations to remove and dismantle
long-lived assets and to restore land or seabed at certain exploration and production locations. The Corporation
accounts for asset retirement obligations as required by FAS 143, Accounting for Asset Retirement Obligations and
FASB Interpretation 47, Accounting for Conditional Asset Retirement Obligations. Under these standards, a
liability is recognized for the fair value of legally required asset retirement obligations associated with long-lived
assets in the period in which the retirement obligations are incurred. In addition, the fair value of any legally
51
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)