Sunoco 2010 Annual Report Download - page 82

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Derivative Instruments
From time to time, Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge
a variety of price risks. Such derivative instruments are used to achieve ratable pricing of crude oil purchases, to
convert certain expected refined product sales to fixed or floating prices, to lock in what Sunoco considers to be
acceptable margins for various refined products and to lock in the price of a portion of the Company’s electricity
and natural gas purchases or sales and transportation costs.
While all of these derivative instruments represent economic hedges, certain of these derivatives are not
designated as hedges for accounting purposes. Such derivatives include certain contracts that were entered into
and closed during the same accounting period and contracts for which there is not sufficient correlation to the
related items being economically hedged.
All of these derivatives are recognized in the consolidated balance sheets at their fair value. Changes in fair
value of derivative instruments that have not been designated as hedges for accounting purposes are recognized
in net income as they occur. If the derivative instruments are designated as hedges for accounting purposes,
depending on their nature, the effective portions of changes in their fair values are either offset in net income
against the changes in the fair values of the items being hedged or reflected initially as a separate component of
equity and subsequently recognized in net income when the hedged items are recognized in net income. The
ineffective portions of changes in the fair values of derivative instruments designated as hedges, if any, are
immediately recognized in net income. The amount of hedge ineffectiveness on derivative contracts during the
2008-2010 period was not material. Sunoco does not hold or issue derivative instruments for speculative
purposes.
Income Tax Uncertainties
The Company recognizes uncertain tax positions in its financial statements when minimum recognition
threshold and measurement attributes are met in accordance with current accounting guidance. Unrecognized tax
benefits and accruals for interest and penalties are included in other deferred credits and liabilities in the
consolidated balance sheets. 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 operations.
Retirement Benefit Liabilities
The funded status of defined benefit and postretirement benefit plans is fully recognized on the balance
sheet. It 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
postretirement benefit obligation for postretirement benefit plans. Actuarial gains (losses) and prior service
benefits (costs) which have not yet been recognized in net income are recognized as a credit (charge) to the
accumulated other comprehensive loss component of equity. The credit (charge) to equity, which is reflected net
of related tax effects, is subsequently recognized in net income when amortized as a component of defined
benefit plans and postretirement benefit plans expense. In addition, the credit (charge) may also be recognized in
net income as a result of a plan curtailment or settlement.
Issuance of Partnership Units
Prior to January 1, 2009, in accordance with accounting guidance in effect at that time, Sunoco elected to
record any increases in the value of its proportionate share of the equity of Sunoco Logistics Partners L.P. (the
“Partnership”) resulting from the Partnership’s issuance of common units to the public as gains in the
consolidated financial statements (Note 17). Effective January 1, 2009, the Company is required to reflect all
changes in noncontrolling interests that do not result in a loss of control of the subsidiary as equity transactions at
the time of the issuance.
Stock-Based Compensation
Stock-based payment transactions are recorded utilizing a fair-value-based method of accounting. In
addition, the Company uses a non-substantive vesting period approach for stock-based payment awards granted
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