Hess 2014 Annual Report Download - page 72

57
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
57
project include commitment of project personnel, active negotiations for sale 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. Provisions for
impairment of undeveloped oil and gas leases are based on periodic evaluations and other factors. Depreciation of all other plant and
equipment is determined on the straight-line method based on estimated useful lives.
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.
Impairment of Long-lived Assets: The Corporation reviews long-lived assets, including oil and gas fields, for impairment
whenever events or changes in circumstances indicate that the carrying amounts may not be recovered. If the carrying amounts of
the long-lived assets are not expected to be recovered by estimated undiscounted future net cash flows, the assets are impaired and an
impairment loss is recorded. The amount of impairment is determined based on the estimated fair value of the assets generally
determined by discounting anticipated future net cash flows, an income valuation approach, or by a market-based valuation approach,
which are Level 3 fair value measurements. In the case of oil and gas fields, the present value of future net cash flows is based on
management’s best estimate of future prices, which is determined with reference to recent historical prices and published forward
prices, applied to projected production volumes and discounted at a risk-adjusted rate. The projected production volumes represent
reserves, including probable reserves, expected to be produced based on a projected amount of capital expenditures. The production
volumes, prices and timing of production are consistent with internal projections and other externally reported information. Oil and
gas prices used for determining asset impairments will generally differ from those used in the standardized measure of discounted
future net cash flows, since the standardized measure requires the use of historical twelve month average prices. As a result of the
significant decline in crude oil prices in the fourth quarter of 2014, the Corporation tested its oil and gas properties for impairment and
determined no impairment existed at December 31, 2014.
Impairment of Goodwill: The Corporation’s goodwill is tested for impairment annually on October 1st or when events or
circumstances indicate that the carrying amount of the goodwill may not be recoverable based on a two-step process. The goodwill
test is conducted at a reporting unit level, which is defined in accounting standards as an operating segment or one level below an
operating segment. Following a reorganization of its management structure in 2013, the Corporation concluded that within its E&P
segment it has two reporting units, offshore and onshore. In step one of the impairment test, the fair value of a reporting unit is
compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is
not impaired. If the carrying value of the reporting unit exceeds its fair value, the Corporation performs step two to determine possible
impairment by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less
than its carrying amount, an impairment loss would be recorded. The Corporation performed a separate goodwill impairment test at
December 31, 2014, and determined no impairment existed.
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. Cost is generally determined using average actual costs. At
December 31, 2013, refined petroleum product inventories associated with the now divested downstream businesses were valued at
cost, using principally the last-in, first-out (LIFO) inventory method.
Income Taxes: Deferred income taxes are determined using the liability method. 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. In addition, the Corporation recognizes the financial statement effect of a tax position only 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 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. The Corporation classifies interest and penalties associated with
uncertain tax positions as income tax expense.