Chevron 2004 Annual Report Download - page 45
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Please find page 45 of the 2004 Chevron annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 43
Managementmakesmanyestimatesandassumptionsinthe
applicationofgenerallyacceptedaccountingprinciples(GAAP)
thatmayhaveamaterialimpactonthecompany’sconsolidated
financialstatementsandrelateddisclosuresandonthecompa-
rabilityofsuchinformationoverdifferentreportingperiods.
Allsuchestimatesandassumptionsaffectreportedamountsof
assets,liabilities,revenuesandexpenses,aswellasdisclosuresof
contingentassetsandliabilities.Estimatesandassumptionsare
basedonmanagement’sexperienceandotherinformationavail-
ablepriortotheissuanceofthefinancialstatements.Materially
differentresultscanoccurascircumstanceschangeandaddi-
tionalinformationbecomesknown.
Thediscussioninthissectionof“critical”accountingesti-
matesorassumptionsisaccordingtothedisclosureguidelines
oftheSecuritiesandExchangeCommission(SEC),wherein:
1. thenatureoftheestimatesorassumptionsismaterialdueto
thelevelsofsubjectivityandjudgmentnecessarytoaccount
forhighlyuncertainmattersorthesusceptibilityofsuch
matterstochange;
2. theimpactoftheestimatesandassumptionsonthe
company’sfinancialconditionoroperatingperformance
ismaterial.
Besidesthosemeetingthese“critical”criteria,thecompany
makesmanyotheraccountingestimatesandassumptionsinpre-
paringitsfinancialstatementsandrelateddisclosures.Although
notassociatedwith“highlyuncertainmatters,”theseestimates
andassumptionsarealsosubjecttorevisionascircumstances
warrant,andmateriallydifferentresultsmaysometimesoccur.
Forexample,therecordingofdeferredtaxassetsrequiresan
assessmentundertheaccountingrulesthatthefuturerealization
oftheassociatedtaxbenefitsbe“morelikelythannot.”Another
exampleistheestimationofoilandgasreservesunderSECrules
thatrequire“...geologicalandengineeringdata(that)demon-
stratewithreasonablecertainty(reserves)toberecoverablein
futureyearsfromknownreservoirsunderexistingeconomic
andoperatingconditions,i.e.,pricesandcostsasofthedatethe
estimateismade.”RefertoTableV,“ReserveQuantityInforma-
tion,”beginningonpage87forthechangesintheseestimates
forthethreeyearsendingDecember31,2004,andtoTableVII,
“ChangesintheStandardizedMeasureofDiscountedFuture
NetCashFlowsFromProvedReserves,”onpage92forestimates
ofproved-reservevaluesforeachyear-end2002through2004,
whichwerebasedonyear-endpricesatthetime.Note1tothe
ConsolidatedFinancialStatementsincludesadescriptionofthe
“successfulefforts”methodofaccountingforoilandgasexplo-
rationandproductionactivities.Theestimatesofcrudeoiland
naturalgasreservesareimportanttothetimingofexpenserec-
ognitionforcostsincurred.
Thediscussionofthecriticalaccountingpolicyfor“Impair-
mentofProperty,PlantandEquipmentandInvestmentsin
Affiliates”onpage44includesreferencetoconditionsunder
whichdownwardrevisionsofprovedreservequantitiescould
resultinimpairmentsofoilandgasproperties.Thiscommen-
taryshouldbereadinconjunctionwithdisclosureselsewherein
thisdiscussionandintheNotestotheConsolidatedFinancial
Statementsrelatedtoestimates,uncertainties,contingenciesand
newaccountingstandards.Significantaccountingpoliciesare
discussedinNote1totheConsolidatedFinancialStatementson
page54.Thedevelopmentandselectionofaccountingestimates
andassumptions,includingthosedeemed“critical,”andthe
associateddisclosuresinthisdiscussionhavebeendiscussedby
managementwiththeauditcommitteeoftheBoardofDirectors.
Theareasofaccountingandtheassociated“critical”esti-
matesandassumptionsmadebythecompanyareasfollows:
PensionandOtherPostretirementBenefitPlans Thedetermi-
nationofpensionplanexpenseisbasedonanumberofactuarial
assumptions.Twocriticalassumptionsaretheexpectedlong-
termrateofreturnonplanassetsandthediscountrateapplied
topensionplanobligations.Forotherpostretirementemployee
benefit(OPEB)plans,whichprovideforcertainhealthcare
andlifeinsurancebenefitsforqualifyingretiredemployeesand
whicharenotfunded,criticalassumptionsindeterminingOPEB
expensearethediscountrateappliedtobenefitobligationsand
theassumedhealthcarecost-trendratesusedinthecalculation
ofbenefitobligations.
Note22totheConsolidatedFinancialStatements,beginning
onpage70,includesinformationforthethreeyearsendingDecem-
ber31,2004,onthecomponentsofpensionandOPEBexpenseand
theunderlyingassumptionsaswellasonthefundedstatusforthe
company’spensionplansattheendof2004and2003.
Toestimatethelong-termrateofreturnonpensionassets,
thecompanyemploysarigorousprocessthatincorporatesactual
historicalasset-classreturnsandanassessmentofexpected
futureperformanceandtakesintoconsiderationexternalactu-
arialadviceandasset-classfactors.Assetallocationsareregularly
updatedusingpensionplanasset/liabilitystudies,andthedeter-
minationofthecompany’sestimatesoflong-termratesofreturn
areconsistentwiththesestudies.Forexample,theexpectedlong-
termrateofreturnonUnitedStatespensionplanassets,which
accountforabout70percentofthecompany’spensionplan
assets,hasremainedat7.8percentsince2002.
Theyear-endmarket-relatedvalueofU.S.pensionplanassets
usedinthedeterminationofpensionexpensewasbasedonthe
marketvalueintheprecedingthreemonthsasopposedtothe
maximumallowableperiodoffiveyearsunderU.S.accounting
rules.Managementconsidersthethree-monthperiodlongenough
tominimizetheeffectsofdistortionsfromday-to-daymarket
volatilityandstillbecontemporaneoustotheendoftheyear.For
plansoutsidetheUnitedStates,marketvalueofassetsasofthe
measurementdateisusedincalculatingthepensionexpense.
Thediscountrateassumptionsusedtodeterminepension
andpostretirementbenefitplanobligationsandexpensereflect
theprevailingratesavailableonhigh-quality,fixed-incomedebt
instruments.AtDecember31,2004,thecompanycalculatedthe
U.S.pensionobligationusinga5.8percentdiscountrate.The
discountratesusedattheendof2003and2002were6percent
and6.8percent,respectively.
Anincreaseintheexpectedlong-termreturnonplanassets
orthediscountratewouldreducepensionplanexpense,andvice
versa.Totalpensionexpensefor2004was$564million.Asan
indicationofthesensitivityofpensionexpensetothelong-term
rateofreturnassumption,a1percentincreaseintheexpected
rateofreturnonassetsofthecompany’sprimaryU.S.pension
plan,whichaccountedforabout60percentofthecompany-
widepensionobligation,wouldhavereducedtotalpensionplan
expensefor2004byapproximately$45million.A1percent
increaseinthediscountrateforthissameplanwouldhave
reducedtotalbenefitplanexpensefor2004byapproximately
$115million.Theactualratesofreturnonplanassetsanddis-
countratesmayvarysignificantlyfromestimatesbecauseof
unanticipatedchangesintheworld’sfinancialmarkets.
In2004,thecompany’spensionplancontributionstotaled
$1.6billion(approximately$1.3billiontotheU.S.plans).In