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Subject:  Re: Help me understand Impairment in layman's te Date:  12/15/2010  11:50 PM
Author:  TMFSandman Number:  2137 of 2244

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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