Cobalt Annual Report 2015 - page 104

Cobalt International Energy, Inc.
Notes to Consolidated Financial Statements (Continued)
F-12
1. Summary of Significant Accounting Policies (Continued)
conducted, lease terms and management’s future exploration plans. The cost of impairment is charged to expense in the period in
which it occurs. Costs incurred for exploration dry holes, geological and geophysical work (including the cost of seismic data), and
delay rentals are charged to expense as incurred. Costs of other property and equipment are depreciated on a straight-line basis based
on their respective useful lives.
Asset Retirement Obligations
The Company expects to have significant obligations under its lease agreements and federal regulation to remove its equipment
and restore land or seabed at the end of oil and natural gas production operations. These asset retirement obligations (“ARO”) are
primarily associated with plugging and abandoning wells and removing and disposing of offshore oil and natural gas platforms.
Estimating the future restoration and removal cost is difficult and requires the Company to make estimates and judgments because
most of the removal obligations are many years in the future and contracts and regulation often have vague descriptions of what
constitutes removal. Asset removal technologies and cost are constantly changing, as are regulatory, political, environmental, safety
and public relations considerations. The Company records a separate liability for the estimated fair value of its asset retirement
obligations, with an offsetting increase to the related oil and natural gas properties. The cost of the related oil and natural gas asset,
including the asset retirement cost, is depreciated over the useful life of the asset. The estimated fair value of asset retirement
obligations is measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at
the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liability is accreted
to its expected settlement value.
Inherent to the present value calculation are numerous estimates, assumptions and judgments, including the ultimate settlement
amounts, inflation factors, credit adjusted risk-free rates, timing of settlement and changes in the legal, regulatory, environmental and
political environments. To the extent future revisions to these assumptions impact the present value of the abandonment liability, the
Company will make corresponding adjustments to both the asset retirement obligation and the related oil and natural gas property
asset balance. Increases in the discounted abandonment liability resulting from the passage of time will be reflected as additional
accretion in the consolidated statements of operations.
During the quarterly period ended September 30, 2015, the Company recognized a retirement obligation for its Heidelberg field.
The following summarizes the changes in the asset retirement obligation for the year ended December 31, 2015:
December 31,
2015
($ in thousands)
Beginning of period......................................................................
Liabilities incurred .......................................................................
3,068
Accretion......................................................................................
99
End of period................................................................................ $
3,167
Inventory
Inventories consist of various tubular products that are used in the Company’s drilling programs. The products are stated at the
average cost. Cost is determined using a weighted average method comprised of the purchase price and other directly attributable
costs.
Income Taxes
The Company applies the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are determined by applying tax rates in effect at the end of a reporting period to the cumulative temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial statements. Since the Company currently has no production
activities and there can be no assurance that the Company will generate any earnings or any specific level of earnings in future years,
the Company has established a valuation allowance that equals its net deferred tax assets.
See Note 16 – Income Taxes.
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