Fair Value
. Fair value is the amount that would be received from the sale of an asset or paid for
the transfer of a liability in an orderly transaction between market participants. The authoritative
guidance characterizes inputs used in determining fair value according to a hierarchy that prioritizes
inputs based upon the degree to which they are observable. The three levels of the fair value hierarchy
are as follows:
• Level 1 – Valuations utilizing quoted, unadjusted prices for assets or liabilities in active markets
for identical assets or liabilities as of the reporting date. This is the most reliable evidence of
fair value and does not require a significant amount of judgment.
• Level 2 – Valuations utilizing market-based inputs that are directly or indirectly observable but
not considered Level 1 quoted prices, including quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in markets that are not active; or
valuation techniques whose inputs are observable. If the asset or liability has a specified
contractual term, the Level 2 input must be observable for substantially the full term of the
asset or liability.
• Level 3 – Valuations utilizing techniques whose significant inputs are unobservable. This
provides the least objective evidence of fair value and requires a significant degree of
judgment.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input
that is significant to the fair value measurement. We estimate the fair values of our derivative
instruments and investment and determine their placement within the fair value hierarchy levels as
described above. See Note 8 – Fair Value Measurements of Assets and Liabilities.
Goodwill.
In a purchase transaction, goodwill represents the excess of the purchase price plus the
liabilities assumed (including deferred income taxes recorded in connection with the transaction) over
the fair value of the net assets acquired. At December 31, 2011, goodwill totaled $535 million and
represented approximately 5% of our total assets.
Goodwill is not amortized; instead it is tested at least annually for impairment at a level of reporting
referred to as a reporting unit. Impairment occurs when the carrying amount of goodwill exceeds its
implied fair value. A two-step impairment test is used to identify potential goodwill impairment and
measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill
impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not to be impaired, thus the second step of the impairment test is unnecessary.
The second step of the goodwill impairment test, used to measure the amount of impairment loss,
compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. If the carrying amount of that reporting unit’s goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. The loss recognized
cannot exceed the carrying amount of goodwill.
We follow the full cost method of accounting for oil and gas activities and all of our producing
properties are located in the United States. We have determined that for the purpose of performing an
impairment test, we have one reporting unit.
In September 2011, the Financial Accounting Standards Board, or FASB, issued authoritative
guidance which amends the rules for testing goodwill for impairment. Under the new rules, companies
are permitted to make a qualitative assessment of a reporting unit’s fair value prior to performing the
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