Cobalt International Energy, Inc.
Notes to Consolidated Financial Statements (Continued)
F-11
1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and funds invested in highly liquid instruments with maturities of three
months or less from the date of purchase. Demand deposits typically exceed federally insured limits; however, the Company
periodically assesses the financial condition of the institutions where these funds are held as well as the credit ratings of the issuers of
the highly liquid instruments and believes that the credit risk is minimal.
Investments
The Company’s investments consist entirely of debt securities. The Company considers all highly liquid interest-earning
investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments with original maturities
of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with
maturities beyond one year are classified as long-term investments. The debt securities are carried at amortized cost and classified as
held-to-maturity securities as the Company has the positive intent and ability to hold them until they mature. The net carrying value of
held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the
securities. Held-to-maturity securities are stated at amortized cost, which approximates fair market value as of December 31, 2015 and
2014. Income related to these securities is reported as a component of interest income in the Company’s consolidated statement of
operations.
See Note 6—Investments
.
Investments are considered to be impaired when a decline in fair value is determined to be other-than-temporary. The Company
conducts a regular assessment of its debt securities with unrealized losses to determine whether securities have other-than-temporary
impairment (“OTTI”). This assessment considers, among other factors, the nature of the securities, credit rating or financial condition
of the issuer, the extent and duration of the unrealized loss, market conditions and whether the Company intends to sell or whether it is
more likely than not that the Company will be required to sell the debt securities. As of December 31, 2015 and 2014, the Company
has no OTTI in its debt securities.
Capitalized Interest
For exploration and development projects that have not commenced production, interest is capitalized as part of the historical
cost of developing and constructing assets. Capitalized interest is determined by multiplying the Company’s weighted-average
borrowing cost on debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is
completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment.
See Note 8—
Property, Plant, and Equipment and Note 10—Long-term Debt
.
Joint Interest and Other Receivables
Joint interest and other receivables result primarily from billing shared costs under the respective operating agreements to the
Company’s partners. These receivables are usually settled within 30 days of the invoice date.
Property, Plant, and Equipment
The Company uses the “successful efforts” method of accounting for its oil and gas properties. Acquisition costs for unproved
leasehold properties and costs of drilling exploration wells are capitalized pending determination of whether proved reserves can be
attributed to the areas as a result of drilling those wells. Under the successful efforts method of accounting, proved leasehold costs are
capitalized and amortized over the proved developed and undeveloped reserves on a units-of-production basis. Successful drilling
costs, costs of development and developmental dry holes are capitalized and amortized over the proved developed reserves on a units-
of-production basis. When circumstances indicate that proved oil and gas properties may be impaired, the Company compares
expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the unamortized capitalized cost
of the asset. If the expected undiscounted future cash flows, based on the Company's estimate of future crude oil and natural gas
prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized
capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach described in
the Fair Value Measurement Topic of the ASC. Significant unproved leasehold costs are capitalized and are not amortized, pending an
evaluation of their exploration potential. Unproved leasehold costs are assessed periodically to determine if an impairment of the cost
of individual properties has occurred. Factors taken into account for impairment analysis include results of the technical studies
