This excerpt taken from the CHK 8-K filed Jul 9, 2008.
Note 13 - Divestitures, page 110
Response: Based on the VPP buyers assumption of significant production and reserve risks and substantially all price risk, Chesapeake concluded that the production payment should be accounted for as a sale of a volumetric production payment. Below is a more detailed analysis of the conclusions reached with respect to the accounting for this transaction.
Chesapeake follows the full-cost method of accounting under which all costs associated with oil and natural gas property acquisition, exploration and development activities are capitalized. Pursuant to Regulation S-X Rule 4-10(c)(6)(i), proceeds from the sale of oil and natural gas properties are accounted for as reductions of capitalized costs unless such sales involve a significant change in the relationship between costs and the value of proved reserves or the underlying value of unproved properties, in which case a gain or loss is recognized.
To determine the appropriate accounting for the VPP production payment, we examined the substance of the transaction to identify which party had the risks of ownership following the transaction, including price and production and reserve risks. We were guided by the principles included in the following table, which is adapted from Petroleum Accounting Principles, Procedures, & Issues, PricewaterhouseCoopers LLP and Professional Development Institute of the University of North Texas, 6th ed. We believe this publication provides an important and relevant source of industry practice for the accounting for volumetric production payments.
Securities and Exchange Commission
June 13, 2008
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