Hess 2014 Annual Report Download - page 56

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As there are significant differences in the way long-lived assets and goodwill are evaluated and measured for impairment
testing, there may be impairments of individual assets that would not cause an impairment of the goodwill assigned at the
reporting unit level or there could be an impairment of goodwill without a corresponding impairment of an underlying asset.
Crude oil prices declined significantly following the date of the Corporation’s annual goodwill impairment test on October
1, 2014. In addition, the Corporation’s stock price decreased to a level at December 31, 2014 that resulted in the
Corporation’s book value exceeding its market capitalization by 6%. As a result of these potential indicators of impairment,
the Corporation performed a separate goodwill impairment test at December 31, 2014. The offshore and onshore reporting
units, which have allocated goodwill of $1,098 million and $760 million, respectively at December 31, 2014, each passed
step one of the impairment test. However, the onshore reporting unit’s fair value exceeded its carrying value by 5%. While
not required, the Corporation performed a hypothetical step two test for the onshore reporting unit and estimated that the
implied fair value of goodwill exceeded its carrying value. Accordingly, the Corporation expects that the benefits of its
goodwill totaling $1,858 million will be recovered through the operations of each of its reporting units based on market
conditions at December 31, 2014.
Income Taxes: Judgments are required in the determination and recognition of income tax assets and liabilities in the
financial statements. These judgments include the requirement to only recognize the financial statement effect of a tax
position when management believes that it is more likely than not, that based on the technical merits, the position will be
sustained upon examination.
The Corporation has net operating loss carryforwards or credit carryforwards in multiple jurisdictions and has recorded
deferred tax assets for those losses and credits. Additionally, the Corporation has deferred tax assets due to temporary
differences between the book basis and tax basis of certain assets and liabilities. Regular assessments are made as to the
likelihood of those deferred tax assets being realized. If it is more likely than not that some or all of the deferred tax assets
will not be realized, a valuation allowance is recorded to reduce the deferred tax assets to the amount that is expected to be
realized. In evaluating the realizability of deferred tax assets, the Corporation considers the reversal of temporary
differences, the expected utilization of net operating losses and credit carryforwards during available carryforward periods,
the availability of tax planning strategies, the existence of appreciated assets and estimates of future taxable income and other
factors. Estimates of future taxable income are based on assumptions of oil and gas reserves and selling prices that are
consistent with the Corporation’s internal business forecasts. The Corporation does not provide for deferred U.S. income
taxes for that portion of undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations.
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. In accordance with generally accepted
accounting principles, the Corporation recognizes a liability for the fair value of required asset retirement obligations. In
addition, the fair value of any legally required conditional asset retirement obligations is recorded if the liability can be
reasonably estimated. The Corporation capitalizes such costs as a component of the carrying amount of the underlying assets
in the period in which the liability is incurred. In order to measure these obligations, the Corporation estimates the fair value
of the obligations by discounting the future payments that will be required to satisfy the obligations. In determining these
estimates, the Corporation is required to make several assumptions and judgments related to the scope of dismantlement,
timing of settlement, interpretation of legal requirements, inflationary factors and discount rate. In addition, there are other
external factors which could significantly affect the ultimate settlement costs for these obligations including changes in
environmental regulations and other statutory requirements, fluctuations in industry costs and foreign currency exchange
rates and advances in technology. As a result, the Corporation’s estimates of asset retirement obligations are subject to
revision due to the factors described above. Changes in estimates prior to settlement result in adjustments to both the liability
and related asset values.
Retirement Plans: The Corporation has funded non-contributory defined benefit pension plans, an unfunded supplemental
pension plan and an unfunded post-retirement medical plan. The Corporation recognizes in the Consolidated Balance Sheet
the net change in the funded status of the projected benefit obligation for these plans.
The determination of the obligations and expenses related to these plans are based on several actuarial assumptions, the
most significant of which relate to the discount rate for measuring the present value of future plan obligations; expected
long-term rates of return on plan assets; the rate of future increases in compensation levels, and participant mortality
assumptions. These assumptions represent estimates made by the Corporation, some of which can be affected by external
factors. For example, the discount rate used to estimate the Corporation’s projected benefit obligation is based on a portfolio
of high-quality, fixed income debt instruments with maturities that approximate the expected payment of plan obligations,