The purpose of this assignment is to analyze long-term assets in the financial statements and to interpret financial statement footnotes related to long-term assets.

Complete Problem 10.6 from the textbook and make it into an excel sheet.

10.6 Interpreting Disclosures for Property, Plant, and Equipment

Petrobras, which operates in the energy sector, is Brazil's largest company. Its shares trade on several of the world's leading stock exchanges. A portion of Petrobras' balance sheet, its income statement, and extracts from a note on PP&E are presented in Exhibit 10.1.

Exhibit 10-1 Petrobras Disclosures

Statements of Income

December 31, 2008 and 2007

(In thousands of reais, except net income per share)

Consolidated

Statements of Income Note 2008 2007

Gross operating revenues

Selling expenses

Products 266,217,208 218,050,202

Services, mainly freight 276,872 203,972

266,494,080 218,254,174

Sales charges (51,375,544) (47,676,449)

Net operating revenues 215,118,536 170,577,725

Cost of products and services sold (141,623,359) (104,398,043)

Gross profit 73,495,177 66,179,682

Operating income (expenses)

Selling expenses (7,162,264) (6,059,734)

Financial

Expenses 18 (4,193,135) (3,292,002)

Revenues 18 3,494,430 2,417,659

Exchange and monetary variations, net 18 3,827,489 (3,146,547)

Administrative and general expenses

Management and board of directors remuneration (35,792) (29,259)

Administrative (7,211,566) (6,398,633)

Taxes (862,766) (1,255,511)

Cost of research and technological development (1,705,572) (1,712,338)

Loss of recovery of assets (933,088) (446,129)

Exploratory costs for the extraction of crude oil and gas (3,494,258) (2,569,724)

Healthcare and pension plans 21 (1,427,395) (2,494,510)

Other operating income and expenses, net 18 (4,712,243) (5,188,393)

(24,416,160) (30,175,121)

Equity in income of subsidiaries and associated companies

Equity in earnings (losses) of investments 13 (874,218) (465,274)

Income from operations before income and social contribution taxes, employee and management profit sharing and minority interest 48,204,799 35,539,287

Social contribution 20,5 (4,169,529) (2,876,775)

Income tax 20,5 (11,792,449) (8,395,983)

Income before employees' and directors' profitsharing and minority interest 32,242,821 24,266,529

Employees' and directors' profitsharing 22 (1,344,526) (1,011,914)

Income before minority interest 30,898,295 23,254,615

Minority interest 2,089,497 (1,742,826)

Net income for the year 32,987,792 21,511,789

Net income per share at the end of the year R$ 3,76 4,90

See the accompanying notes to the financial statements.

Balance Sheets

December 31, 2008 and 2007

(In thousands of reais)

Consolidated

Assets Note 2008 2007

Current assets

Cash and cash equivalents

5

15,888,596 13,070,849

Marketable securities

10

288,751 589,788

Trade accounts receivable, net

6

14,903,732 11,328,967

Dividends receivable

7.1

20,101 80,596

Inventories

8

19,977,171 17,599,001

Taxes and contributions 20.1 9,641,247 7,781,536

Prepaid expenses 1,393,879 1,429,829

Other current assets 1,461,801 1,493,200

63,575,278 53,373,766

Noncurrent assets

Longterm receivables

Trade accounts receivable, net

6

1,326,522 2,901,902

Petroleum and alcohol account STN

9

809,673 797,851

Marketable securities

10

4,066,280 3,922,370

Project financing 11.2

Deposits in court

12

1,853,092 1,693,495

Prepaid expenses 1,400,072 1,514,301

Advance for pension plan

21

1,296,810

Deferred income and social contribution taxes 20.3 10,238,308 8,333,490

Inventories

8

303,929 236,753

Other longterm receivables 1,256,96 1,325,865

Investments

13

5,106,495 7,822,074

Property, plant, and equipment

14

190,754,167 139,940,726

Intangible assets

15

8,003,213 5,532,053

Deferred charges 3,469,846 2,536,344

228,588,564 177,854,034

292,163,842 231,227,800

See the accompanying notes to the financial statements.

Property, Plant, and Equipment By Type of Asset

Consolidated

2008

2007

Estimated Useful Life in Years

Cost

Accumulated Depreciation

Net

Net

Buildings and improvements 25 to 40 9,382,619 (3,115,564) 6,267,055 3,800,350

Equipment and other assets 3 to 30 119,999,208 (55,854,051) 64,145,157 49,414,524

Land 1,138,720 1,138,720 854,848

Material 6,034,143 6,034,143 4,247,098

Advances to suppliers 5,189,735 5,189,735 2,624,093

Expansion projects 59,238,898 59,238,898 39,964,366

Oil and gas exploration and production development costs (E&P) 83,883,258 (35,142,799) 48,740,459 39,035,447

284,866,581 (94,112,414) 190,754,167 139,940,726

Required

Based on the information provided, answer the following questions:

What portion of Petrobras' Equipment and other assets had been used up by the end of fiscal 2008?

How many years are left in the lives of Petrobras' Equipment and other assets, on average? State clearly any assumptions that you make in arriving at your estimate.

Suppose that Petrobras assumes a zero salvage value for their Equipment and other assets. For each $100 in new asset investments, what is the annual amount of depreciation expense charged to the income statement?

Suppose that other leading energy companies charge $12 in depreciation expense for each $100 invested in new equipment. Are Petrobras' depreciation policy assumptions materially different from those of their competitors? Support your answer.

What line item on Petrobras' income statement is most affected by their depreciation policy? Explain why.

Aside from comparing Petrobras' depreciation policy assumptions to those of their competitors, what other red flags might one look for in order to assess whether Petrobras is overly conservative or overly aggressive in taking depreciation expenses? Is there any evidence of these issues on Petrobras' financial statements?