Chevron’s derivatives are not material to its financial position. In 2012, Chevron recognized a total income in derivative of $3 million from a $20 million of net gain on hedge transaction, a net loss from reclassification of $14 million and a payment of $3 million on derivative income taxes. Chevron’s major derivative activities are commodity instruments that intend to manage financial risk posed by physical transactions.
Chevron first discussed its financial and derivative instruments in FS-14 of its Management’s Discussion and Analysis of Financial Condition and Results of Operations. ASC 815-10-50 qualitative disclosure that an entity should disclose an entity’s objective and strategies for using derivatives, Chevron started by explaining the reason that it had derivatives in its investment portfolio.
Then chevron introduced how it controlled the risks associated with these derivatives and it accounted the fair values of the derivatives in its consolidated balance sheet and gains and losses in its income statement. After this, Chevron stated that it used the Value-at-Risk model to estimate potential daily losses with 95 percent confidence level and tabled three primary risk exposures in derivative instruments for the years of 2012 and 2011. In addition, Chevron disclosed that the company might enter foreign currency and interest rates derivatives to manage its foreign currency and interest rate risks. But the company did not have them in 2012.
Chevron also disclosed its derivative in Note 9 Financial and Derivative Instruments. In accordance with ASC 815-10-50, Chevron explained why it used derivatives. Chevron did not only introduce the types of financial instruments that the company had, it also illustrated the derivative instruments and their classification on the consolidated balances sheet and consolidated income statement. As it was required in ASC 815-10-50, an entity should disclose the relationship between the derivatives to its financial performance and cash flows.
Furthermore, Chevron disclosed fair value of derivatives that are not designated for hedging and the effect of those derivatives for 2012 and 2011. In the end, this note included that Chevron’s investment policies limit its exposure both to credit risk and to concentrations of credit risk. Although a company can use derivatives instruments to manage its potential risks in commodity investment, foreign currency, interest rate etc., it can decrease its risk profile in the way that derivatives are not readily identifiable from the corporate balance sheet.
An adequate disclosure of derivative instruments will alert investors and creditors in analyzing a company’s future performance. Moreover, sufficient information on derivative instruments will reduce surprises for financial analysts when they see large losses in a company’s financial position. A true and fair measurement and classification of financial derivatives will give analysts and investors information for accurate valuation of a company. In the derivative footnote, Chevron properly stated the characteristic and measurement of financial derivatives in a timely manner. The disclosure meets the ASC requirements on financial derivatives.