Valero 2015 Annual Report Download - page 71

Table of Contents
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories
Inventories are carried at the lower of cost or market. The cost of refinery feedstocks purchased for processing, refined products, and
grain and ethanol inventories are determined under the last-in, first-out (LIFO) method using the dollar-value LIFO approach, with any
increments valued based on average purchase prices during the year. The cost of feedstocks and products purchased for resale and the
cost of materials and supplies are determined principally under the weighted-average cost method. Market value is determined based on
the net realizable value of the inventories. We compare the market value of inventories to their cost on an aggregate basis, excluding
materials and supplies. If the aggregate market value is less than cost, we record a lower of cost or market inventory valuation
adjustment to reflect our inventories at market value.
Property, Plant, and Equipment
The cost of property, plant, and equipment (property assets) purchased or constructed, including betterments of property assets, is
capitalized. However, the cost of repairs to and normal maintenance of property assets is expensed as incurred. Betterments of property
assets are those that extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safety
of our operations. The cost of property assets constructed includes interest and certain overhead costs allocable to the construction
activities.
Our operations, especially those of our refining segment, are highly capital intensive. Each of our refineries comprises a large base of
property assets, consisting of a series of interconnected, highly integrated and interdependent crude oil processing facilities and
supporting logistical infrastructure (Units), and these Units are continuously improved. Improvements consist of the addition of new
Units and betterments of existing Units. We plan for these improvements by developing a multi-year capital program that is updated
and revised based on changing internal and external factors.
Depreciation of property assets used in our refining segment is recorded on a straight-line basis over the estimated useful lives of these
assets primarily using the composite method of depreciation. We maintain a separate composite group of property assets for each of our
refineries. We estimate the useful life of each group based on an evaluation of the property assets comprising the group, and such
evaluations consist of, but are not limited to, the physical inspection of the assets to determine their condition, consideration of the
manner in which the assets are maintained, assessment of the need to replace assets, and evaluation of the manner in which
improvements impact the useful life of the group. The estimated useful lives of our composite groups range primarily from 25 to
30 years.
Under the composite method of depreciation, the cost of an improvement is added to the composite group to which it relates and is
depreciated over that group’s estimated useful life. We design improvements to our refineries in accordance with engineering
specifications, design standards, and practices accepted in our industry, and these improvements have design lives consistent with our
estimated useful lives. Therefore, we believe the use of the group life to depreciate the cost of improvements made to the group is
reasonable because the estimated useful life of each improvement is consistent with that of the group. It should be noted, however, that
factors such as competition, regulation, or environmental matters could cause us to change our estimates, thus impacting depreciation
expense in the future.
Also under the composite method of depreciation, the historical cost of a minor property asset (net of salvage value) that is retired or
replaced is charged to accumulated depreciation and no gain or loss is recognized in
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