Sunoco 2007 Annual Report Download - page 48

be impaired when the undiscounted estimated net cash
flows expected to be generated by the asset are less than
its carrying amount. The impairment recognized is the
amount by which the carrying amount exceeds the fair
market value of the impaired asset.
Goodwill and Intangible Assets
Goodwill, which represents the excess of the purchase
price over the fair value of net assets acquired, and
indefinite-lived intangible assets are tested for impair-
ment at least annually rather than being amortized.
Sunoco determined during the 2005-2007 period that no
such assets were impaired. Intangible assets with finite
useful lives are amortized over their useful lives in a man-
ner that reflects the pattern in which the economic bene-
fit of the intangible assets is consumed.
Environmental Remediation
Sunoco accrues environmental remediation costs for work
at identified sites where an assessment has indicated that
cleanup costs are probable and reasonably estimable. Such
accruals are undiscounted and are based on currently
available information, estimated timing of remedial actions
and related inflation assumptions, existing technology and
presently enacted laws and regulations. If a range of prob-
able environmental cleanup costs exists for an identified
site, the minimum of the range is accrued unless some
other point in the range is more likely in which case the
most likely amount in the range is accrued.
Maintenance Shutdowns
Maintenance and repair costs in excess of $500 thousand
incurred in connection with major maintenance shut-
downs are capitalized when incurred and amortized over
the period benefited by the maintenance activities.
Derivative Instruments
From time to time, Sunoco uses swaps, options, futures,
forwards and other derivative instruments to hedge a
variety of commodity price risks. Such contracts are
recognized in the consolidated balance sheets at their fair
value. Changes in fair value of derivative contracts that
are not hedges are recognized in income as they occur. If
the derivative contracts are designated as hedges, depend-
ing on their nature, the effective portions of changes in
their fair values are either offset in income against the
changes in the fair values of the items being hedged or
reflected initially as a separate component of share-
holders’ equity and subsequently recognized in income
when the hedged items are recognized in income. The
ineffective portions of changes in the fair values of de-
rivative contracts designated as hedges are immediately
recognized in income. Sunoco does not hold or issue de-
rivative instruments for trading purposes.
Income Taxes
Effective January 1, 2007, the Company adopted FASB
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement
No. 109” (“FASB Interpretation No. 48”). This inter-
pretation clarifies the accounting for uncertainty in in-
come taxes recognized in an entity’s financial statements
in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes,” by
prescribing the minimum recognition threshold and
measurement attribute a tax position taken or expected
to be taken on a tax return is required to meet before be-
ing recognized in the financial statements. As a result of
the implementation of FASB Interpretation No. 48, the
Company recorded a $12 million reduction in retained
earnings at January 1, 2007 to recognize the cumulative
effect of the adoption of this standard. The Company
recognizes interest related to unrecognized tax benefits in
interest cost and debt expense and penalties in income
tax expense in the consolidated statements of income.
Unrecognized tax benefits and accruals for interest and
penalties are included in other deferred credits and li-
abilities in the consolidated balance sheet.
Retirement Benefit Liabilities
At December 31, 2006, prior to the adoption of State-
ment of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans” (“SFAS No. 158”) (see
below), the Company recorded a $160 million favorable
minimum pension liability adjustment to the accumu-
lated other comprehensive loss component of share-
holders’ equity due to improvements in the funded status
of the Company’s defined benefit pension plans. Under
the predecessor accounting rules, a minimum pension li-
ability adjustment was required in shareholders’ equity to
reflect the unfunded accumulated benefit obligation
relating to these plans.
Effective December 31, 2006, the Company adopted
SFAS No. 158, which amended Statement of Financial
Accounting Standards No. 87, “Employers’ Accounting
for Pensions,” and Statement of Financial Accounting
Standards No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions.” SFAS
No. 158, among other things, requires that the funded
status of defined benefit and postretirement benefit plans
be fully recognized on the balance sheet. The funded sta-
tus is determined by the difference between the fair value
of plan assets and the benefit obligation, with the benefit
obligation represented by the projected benefit obligation
for defined benefit plans and the accumulated postretire-
ment benefit obligation for postretirement benefit plans.
Under SFAS No. 158, previously unrecognized actuarial
gains (losses) and prior service costs (benefits) are recog-
nized in the consolidated balance sheets as a reduction in
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