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Author: TMFSandman Big red star, 1000 posts Feste Award Nominee! Old School Fool Coverage Fool CAPS All Star Answer Team Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2229  
Subject: Re: Help me understand Impairment in layman's te Date: 12/15/2010 11:50 PM
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Thought I'd throw out an impairment of a different flavor.

In 2009 the price of oil and natural gas cratered. GAAP accounting standards require exploration and production (e&p) companies to write down oil and gas reserves that are no longer economically worth drilling for at the current price. This rule resulted in some pretty huge non-cash impairment charges to earnings in 2009. Take a look at the income statement on page 80 of Chesapeake Energy's 10-K:


You'll see under Operating Costs an $11.1 billion charge for "Impairment of natural gas and oil properties and other assets." Go one page further down to the cash flow statement and you'll see this non-cash charge added back in.

So if you look at pretty much any e&p's financial statements for 2009 you not only get reduced income due to the lower sales price of oil and natural gas, but you get a second whammy from the non-cash impairment charge.

Though this impairment is GAAP-approved I wouldn't put it in the same category as the permanent asset impairment example I made up about the pharma company. That is, unless you believed that the price of oil was going to stay at $25.00 a barrel and natural gas at $2.00/mcf.

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