Cobalt Annual Report 2015 - page 102

Cobalt International Energy, Inc.
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
In November 2015, the FASB issued ASU 2015-17, "Income Taxes" (ASU 2015-17), which requires that deferred tax liabilities
and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all
entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-
paying component of an entity be offset and presented as a single amount is not affected by the amendments. For public business
entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual
reporting period. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all
periods presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period
of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively
adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of
change the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting
change on prior periods. The Company early adopted ASU Subtopic 2015-17 beginning December 31, 2015 and will apply this
update prospectively.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”)
requires the Company to make estimates and assumptions that affect the reported amounts of assets including proved reserves and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates the Company makes include (a) accruals related to expenses,
(b) assumptions used in estimating fair value of equity based awards and the fair value of the liability component of the convertible
senior notes and (c) assumptions used in impairment testing. Although the Company believes these estimates are reasonable, actual
results could differ from these estimates.
Fair Value Measurements
The fair values of the Company’s cash and cash equivalents, joint interest and other receivables, restricted funds and
investments approximate their carrying amounts due to their short-term duration. The hierarchy below lists three levels of fair value
based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its
fair value measurements as applicable to one of these three levels based on the lowest level input that is significant to the fair value
measurement in its entirety. The levels are:
Level 1—Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
This category includes the Company’s cash and money market funds.
Level 2—Quoted prices in non-active markets or in active markets for similar assets or liabilities, and inputs other than
quoted prices that are observable, for the asset or liability, either directly or indirectly for substantially the full contractual term
of the asset or liability being measured. This category includes the Company’s U.S. Treasury bills, U.S. Treasury notes, U.S.
Government agency securities, commercial paper, corporate bonds and certificates of deposits.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market
participants would use in pricing the asset or liability. The Company does not currently have any financial instruments
categorized as Level 3.
Revenue Recognition
The Company will follow the “sales” (or cash) method of accounting for oil and gas revenues. Under this method, the Company
will recognize revenues on the volumes sold. The volumes sold may be more or less than the volumes to which the Company is
entitled based on its ownership interest in the property. These differences result in a condition known in the industry as a production
imbalance. For the years ended December 31, 2015, 2014 and 2013, no revenues have been recognized in these consolidated financial
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