Interactive 2009 Annual Report (PDF 7.56 MB) - Denbury Resources ...

64 Denbury Resources Inc. 2009 Annual Reportcarryforwards). If recovery is not likely, we must record a valuation allowance against such deferred tax assets for theamount we would not expect to recover, which would result in an increase to our income tax expense. As ofDecember 31, 2009, we believe that all of our deferred tax assets recorded on our Consolidated Balance Sheet willultimately be recovered. If our estimates and judgments change regarding our ability to utilize our deferred tax assets,our tax provision would increase in the period it is determined that recovery is not likely. A 1% increase in our effectivetax rate would have increased our calculated income tax expense (benefit) by approximately $(1.2) million, $6.2 million,and $3.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. See Note 7 to theConsolidated Financial Statements and see “Income Taxes” above for further information concerning our income taxes.Fair Value EstimatesThe FASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fairvalue measurements. It does not require us to make any new fair value measurements, but rather establishes a fairvalue hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. Level 1 inputs are giventhe highest priority in the fair value hierarchy, as they represent observable inputs that reflect unadjusted quotedprices for identical assets or liabilities in active markets as of the reporting date, while Level 3 inputs are given thelowest priority, as they represent unobservable inputs that are not corroborated by market data. Valuation techniquesthat maximize the use of observable inputs are favored. See Note 11 to the Consolidated Financial Statements fordisclosures regarding our recurring fair value measurements.Significant uses of fair value measurements include:• allocation of the purchase price paid to acquire businesses to the assets acquired and liabilities assumed inthose acquisitions,• assessment of impairment of long-lived assets,• assessment of impairment of goodwill, and• recorded value of derivative instruments.AcquisitionsUnder the acquisition method of accounting for business combinations, the purchase price paid to acquire abusiness is allocated to its assets and liabilities based on the estimated fair values of the assets acquired and liabilitiesassumed as of the date of acquisition. FASC “Business Combinations” topic defines the acquisition date as the dateon which the acquirer obtains control of the acquiree, which is usually a date different than the date the economics of theacquisition are established between the acquirer and the acquiree. FASC “Fair Value Measurements and Disclosures”topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (often referred to as the “exit price”). A fair valuemeasurement is based on the assumptions of market participants and not those of the reporting entity. Therefore,entity-specific intentions do not impact the measurement of fair value unless those assumptions are consistent withmarket participant views.The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired isrecorded as goodwill. A significant amount of judgment is involved in estimating the individual fair values involvingproperty, plant and equipment and identifiable intangible assets. This is even more difficult due to the nature of our corebusiness, enhanced oil recovery operations. In order to appropriately apply the FASC standard, we must estimate whatvalue a third party market participant would place on the acquired property. This is extremely difficult as we are oneof few industry entities that perform EOR operations and in our current operating area, the Gulf Coast, we are the onlyentity that we know of that currently has a significant source of CO 2 available to them. Therefore, it is very subjectiveas to what value another entity would place on the potential barrels recoverable with CO 2 , which impacts our allocationof the purchase price to goodwill, unevaluated properties and proved properties. Although we find that this standardis difficult to apply in our circumstance, we use all available information to make these fair value determinations and, forcertain acquisitions, engage third-party consultants for assistance.Form 10-K Part IIManagement’s Discussion and Analysis of Financial Condition and Results of Operations