Hess 2014 Annual Report Download - page 73

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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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 recognizes a liability 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 required conditional asset retirement obligations is recorded if the liability can be
reasonably estimated. The Corporation capitalizes the associated asset retirement costs as part of the carrying amount of the
long-lived assets.
Retirement Plans: The Corporation recognizes the funded status of defined benefit postretirement plans in the Consolidated
Balance Sheet. The funded status is measured as the difference between the fair value of plan assets and the projected benefit
obligation. The Corporation recognizes the net changes in the funded status of these plans in the year in which such changes occur.
Prior service costs and actuarial gains and losses in excess of 10% of the greater of the benefit obligation or the market value of assets
are amortized over the average remaining service period of active employees.
Derivatives: The Corporation utilizes derivative instruments for both financial risk management and trading activities. In risk
management activities, the Corporation may use futures, forwards, options and swaps, individually or in combination, to mitigate its
exposure to fluctuations in prices of crude oil, natural gas, as well as changes in interest and foreign currency exchange rates. The
Corporation, through a consolidated joint venture which is classified as held-for-sale at December 31, 2014, trades energy-related
commodities and derivatives including futures, forwards, options and swaps based on expectations of future market conditions.
All derivative instruments are recorded at fair value in the Corporation’s Consolidated Balance Sheet. The Corporation’s policy for
recognizing the changes in fair value of derivatives varies based on the designation of the derivative. The changes in fair value of
derivatives that are not designated as hedges are recognized currently in earnings. Derivatives may be designated as hedges of
expected future cash flows or forecasted transactions (cash flow hedges) or hedges of firm commitments (fair 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) while the ineffective portion of the changes in fair value is recorded currently in earnings. 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. 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.
Fair value measurements: The Corporation uses various valuation approaches in determining fair value for financial instruments,
including the market and income approaches. The Corporation’s fair value measurements also include non-performance risk and time
value of money considerations. Counterparty credit is considered for receivable balances, and the Corporation’s credit is considered
for accrued liabilities. The Corporation also records certain nonfinancial assets and liabilities at fair value when required by GAAP.
These fair value measurements are recorded in connection with business combinations, qualifying nonmonetary exchanges, the initial
recognition of asset retirement obligations and any impairment of long-lived assets, equity method investments or goodwill. The
Corporation determines fair value in accordance with the fair value measurements accounting standard which established a hierarchy
for the inputs used to measure fair value based on the source of the inputs, which generally range from quoted prices for identical
instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3). Measurements
derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered Level 2. When
Level 1 inputs are available within a particular market, those inputs are selected for determination of fair value over Level 2 or 3
inputs in the same market. To value derivatives that are characterized as Level 2 and 3, the Corporation uses observable inputs for
similar instruments that are available from exchanges, pricing services or broker quotes. These observable inputs may be
supplemented with other methods, including internal extrapolation or interpolation, that result in the most representative prices for
instruments with similar characteristics. Multiple inputs may be used to measure fair value; however, the level of fair value for each
physical derivative and financial asset or liability is based on the lowest significant input level within this fair value hierarchy.
Details on the methods and assumptions used to determine the fair values are as follows:
Fair value measurements based on Level 1 inputs: Measurements that are most observable are based on quoted prices of identical
instruments obtained from the principal markets in which they are traded. Closing prices are both readily available and representative
of fair value. Market transactions occur with sufficient frequency and volume to assure liquidity.
Fair value measurements based on Level 2 inputs: Measurements derived indirectly from observable inputs or from quoted prices
from markets that are less liquid are considered Level 2. Measurements based on Level 2 inputs include over-the-counter derivative
instruments that are priced on an exchange traded curve, but have contractual terms that are not identical to exchange traded contracts.