CICA Section 3855 also requires financial and non-financial derivative instruments to be measured at fair value and recorded as either assets or liabilities, with the exception of non-financial derivative contracts that were entered into and continue to be held for the purpose of receipt or delivery of a non-financial item in accordance with NOVA Chemicals’ expected purchase, sale or usage requirements. Certain derivatives embedded in non-derivative contracts must also be measured at fair value. Any changes in the fair value of recognized derivatives are included in net income (loss) in the period in which they arise, unless specific hedge accounting criteria are met, as defined in CICA Section 3865. NOVA Chemicals included an unrealized gain of $20 million ($0.24 per share diluted) in feedstock and operating costs on the Consolidated Statements of Income (Loss) for the year ended Dec. 31, 2007. The same accounting treatment applied to these non-financial derivative contracts prior to the adoption of CICA Section 3855. Fair values for NOVA Chemicals’ recognized commodity-based derivatives are based on the forward prices of the associated market index. No non-financial derivatives have been recognized as a result of the application of this standard, as all of NOVA Chemicals’ non-financial derivative contracts have been designated and documented as meeting NOVA Chemicals’ expected purchase, sale or usage requirements.
As a result of the adoption of CICA Section 3855, NOVA Chemicals has classified at Dec. 31, 2007 and Jan. 1, 2007, its financial instruments as follows: cash and cash equivalents and derivative instruments (included in Accounts receivables, Investments and other assets, Accounts payable and accrued liabilities and Deferred credits and long-term liabilities on the Consolidated Balance Sheets) as held-for-trading; trade accounts receivable, advances receivable from affiliates and other receivables (included in Accounts receivable on the Consolidated Balance Sheets) and Restricted cash and other assets as loans and receivables; investments in non-affiliated entities (included in Investments and other assets on the Consolidated Balance Sheets) as available-for-sale; and trade accounts payable, other accounts payable, certain accrued liabilities (included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets), bank loans (line of credit), long-term liabilities (included in Deferred credits and long-term liabilities on the Consolidated Balance Sheets) and long-term debt as other financial liabilities.
Under CICA Section 3855, long-term debt classified as other financial liability is required to be initially measured at fair value and subsequently measured at amortized cost. As a result, certain deferred debt discount and issuance costs that were previously reported in Restricted cash and other assets and Investments and other assets on the Consolidated Balance Sheets have been reclassified, on a prospective basis, and are now reported as a reduction of the respective debt obligations. In total, $17 million was reclassified on Jan. 1, 2007.
As noted above, certain investments in non-affiliated entities classified as available-for-sale are now measured at fair market value. Previously, these investments were measured at cost. On Jan. 1, 2007, the impact of this change was not material to the Consolidated Financial Statements. During the year ending Dec. 31, 2007, the change in fair value of these investments resulted in a loss of $1 million, net of tax, which was recorded in Other comprehensive income. NOVA Chemicals’ investments in non-affiliated entities that do not have a quoted market price in an active market are measured at cost. As of Dec. 31, 2007, these investments totaled $11 million.
In addition, NOVA Chemicals has early adopted the related disclosure and presentation requirements contained in CICA Section 3862, Financial Instruments’ Disclosure and CICA Section 3863, Financial Instruments’ Presentation as of Dec. 31, 2007. These two standards replace CICA Section 3861, Financial Instruments’ Disclosure and Presentation. The new standards revise and enhance the disclosure requirements and carry forward, substantially unchanged, the presentation requirements. These new standards emphasize the significance of financial instruments for the entity’s financial position and performance, the nature and extent of risks arising from financial instruments, and how these risks are managed. These new standards are applicable to interim and annual periods relating to fiscal years beginning on or after Oct. 1, 2007. NOVA Chemicals has chosen to early adopt these new standards.
Accounting Policy for Transaction Costs (EIC 166). This standard requires an entity to disclose the accounting policy for transaction costs for all financial assets/liabilities other than those classified as held-for-trading. Transaction costs can either be recognized in net income or added to the initial carrying amount of the asset/liability it is directly attributable to. The same accounting policy must be chosen for all similar financial instruments, but a different accounting policy may be chosen for financial instruments that are not similar. EIC 166 should be applied retrospectively to transaction costs accounted for in accordance with CICA Section 3855 in financial statements issued for interim and annual periods ending on or after Sep. 30, 2007. NOVA Chemicals’ accounting policy with respect to transaction costs has been to capitalize all transaction costs for all financial instruments (except for those classified as held-for-trading). This policy did not change as a result of adopting EIC 166.
