Correction of Errors in Previously Reported Consolidated Financial Statements

9 Months Ended

Sep. 30, 2012

Correction of Errors in Previously Reported Consolidated Financial Statements

Correction of Errors in Previously Reported Consolidated Financial Statements

Note 4—Correction of Errors in Previously Reported Consolidated Financial Statements

We perform assessments of our contingencies and corresponding assets for insurance recoveries on an ongoing basis to evaluate the appropriateness of our balances and disclosures for such contingencies and insurance recoveries.  We establish liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the probable loss can be reasonably estimated.  We recognize corresponding assets for those loss contingencies that we believe are probable of being recovered through insurance.  In performing these assessments in the three months ended June 30, 2012, we identified an error in our previously issued financial statements for the year ended December 31, 2011 and the three months ended March 31, 2012 related to the recognition of assets for insurance recoveries related to legal and other costs totaling $67 million and $37 million, respectively, which we have concluded should not have been recorded because they were not probable of recovery.

We assessed the materiality of this error in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), using both the rollover method and the iron curtain method, as defined in SAB 108, and concluded the error, inclusive of other adjustments discussed below, was immaterial to prior years but could be material to the current year.  Under SAB 108, if the prior year error, if corrected in the current year, would be material to the current year, the prior year financial statements should be corrected, even though such correction previously was immaterial to the prior year financial statements.  Correcting prior year financial statements for immaterial errors does not require our previously filed reports to be amended, but rather these corrections will be made the next time we file the prior period consolidated financial statements.

In addition to the adjustments in 2011 and 2012 related to the assets for insurance recoveries, we recorded other adjustments related to the years ended December 31, 2011 and 2010 and the three months ended March 31, 2012 to correct for immaterial errors for repair and maintenance costs, income taxes, discontinued operations, and the allocation of net income attributable to noncontrolling interest.  These other adjustments were not previously recorded in the appropriate periods, as we concluded that they were immaterial to our previously issued consolidated financial statements.

For the three and nine month periods ended September 30, 2011, correction of these errors increased income from continuing operations by $35 million and $1 million, respectively, and net income attributable to controlling interest by $39 million and $17 million, respectively.  The summary of adjustments for increases and (decreases) to net income (loss) from continuing operations and net income (loss) attributable to controlling interest for the applicable periods were as follows (in millions):

	Three months ended September 30, 2011			Nine months ended September 30, 2011
Legal and other costs	$	(19	)	$	(49	)
Repair and maintenance costs	59			11
Income tax benefit	5			25
Other immaterial adjustments, net	(10		)	14
Net adjustment to income from continuing operations	35			1
Net adjustment to income from discontinued operations, net of tax	4			—
Net adjustment to net income attributable to noncontrolling interest	—			(16		)
Net adjustment to net income attributable to controlling interest	$	39		$	17

The effects of the corrections of the errors on our consolidated statements of operations for the three and nine months ended September 30, 2011 are presented in the tables below.  Previously reported amounts include reclassifications for discontinued operations (see Note 9—Discontinued Operations).  The corrections of the errors had no effect on our consolidated statements of comprehensive income (loss) other than the effect of the changes to net income (loss) for each period.  The corrections of the errors had no effect on the previously reported amounts of operating, investing, and financing cash flows in our consolidated statements of cash flows.

	Three months ended September 30, 2011									Nine months ended September 30, 2011
	Previously reported			Adjustments			As adjusted			Previously reported			Adjustments			As adjusted
Operating revenues
Contract drilling revenues	$	1,830		$	(3	)	$	1,827		$	5,399		$	(3	)	$	5,396
Other revenues	164			—			164			576			—			576
	1,994			(3		)	1,991			5,975			(3		)	5,972
Costs and expenses
Operating and maintenance	1,377			(33		)	1,344			3,894			21			3,915
Depreciation and amortization	281			—			281			821			—			821
General and administrative	67			—			67			200			—			200
	1,725			(33		)	1,692			4,915			21			4,936
Loss on impairment	—			—			—			—			—			—
Gain (loss) on disposal of assets, net	(1		)	—			(1		)	(1		)	—			(1		)
Operating income	268			30			298			1,059			(24		)	1,035
Other income (expense), net
Interest income	7			—			7			27			—			27
Interest expense, net of amounts capitalized	(151		)	—			(151		)	(443		)	—			(443		)
Other, net	(77		)	—			(77		)	(79		)	—			(79		)
	(221		)	—			(221		)	(495		)	—			(495		)
Income from continuing operations before income tax expense	47			30			77			564			(24		)	540
Income tax expense	98			(5		)	93			236			(25		)	211
Income (loss) from continuing operations	(51		)	35			(16		)	328			1			329
Income (loss) from discontinued operations, net of tax	(9		)	4			(5		)	116			—			116
Net income (loss)	(60		)	39			(21		)	444			1			445
Net income (loss) attributable to noncontrolling interest	11			—			11			50			(16		)	34
Net income (loss) attributable to controlling interest	$	(71	)	$	39		$	(32	)	$	394		$	17		$	411
Earnings (loss) per share-basic
Earnings (loss) from continuing operations	$	(0.19	)	$	0.11		$	(0.08	)	$	0.86		$	0.06		$	0.92
Earnings (loss) from discontinued operations	(0.03		)	0.01			(0.02		)	0.36			—			0.36
Earnings (loss) per share	$	(0.22	)	$	0.12		$	(0.10	)	$	1.22		$	0.06		$	1.28
Earnings (loss) per share-diluted
Earnings (loss) from continuing operations	$	(0.19	)	$	0.11		$	(0.08	)	$	0.86		$	0.06		$	0.92
Earnings (loss) from discontinued operations	(0.03		)	0.01			(0.02		)	0.36			—			0.36
Earnings (loss) per share	$	(0.22	)	$	0.12		$	(0.10	)	$	1.22		$	0.06		$	1.28