Financial Instruments - Credit Losses

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

Financial Instruments - Credit Losses

Financial Instruments - Credit Losses

Chevron adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses, and its related amendments at the effective date of January 1, 2020. The standard replaces the “incurred loss model” and requires an estimate of expected credit losses, measured over the contractual life of a financial instrument, that considers forecast of future economic conditions in addition to information about past events and current conditions. The cumulative-effect adjustment to the opening retained earnings at January 1, 2020 is a reduction of $25 million, representing a decrease to the net accounts and notes receivable balances shown on the company’s consolidated balance sheet on page 5. As of March 31, 2020, Chevron’s expected credit loss allowance balance was $918 million with a majority of the allowance relating to non-trade receivable balances. While the company has always regularly assessed customers for credit risk and reviewed past due receivable balances for probable loss, the new standard requires recognizing an expected credit loss for all receivable balances which has resulted in the adjustment noted.

The majority of the company’s receivable balance is concentrated in trade receivables, with a balance of $8.6 billion as of March 31, 2020, which reflects the company’s diversified sources of revenues and is dispersed across the company’s broad worldwide customer base. As a result, the company believes the concentration of

credit risk is limited. The company routinely assesses the financial strength of its customers. When the financial strength of a customer is not considered sufficient, alternative risk mitigation measures may be deployed, including requiring pre-payments, letters of credit or other acceptable forms of collateral. Once credit is extended and a receivable balance exists, the company applies a quantitative calculation to current trade receivable balances that reflects credit risk predictive analysis, including probability of default, loss given default and exposure of default which takes into consideration current and forward-looking market data as well as the company’s historical loss data. This statistical approach becomes the basis of the company’s expected credit loss allowance for current trade receivables with payment terms that are typically short-term in nature, with most due in less than 90 days. A comprehensive review of credit risk was completed in the first quarter of 2020 in response to the COVID-19 pandemic and the significant reduction in crude prices resulting from decreased demand associated with government-mandated travel restrictions. Following the first quarter review, existing allowances were deemed appropriate.

Chevron's non-trade receivable balance was $3.7 billion as of March 31, 2020, which includes receivables from certain governments in their capacity as joint venture partners. Joint venture partner balances that are paid as per contract terms or not yet due are subject to the statistical analysis described above while past due balances are subject to additional qualitative management quarterly review. This management review includes review of reasonable and supportable repayment forecasts. Non-trade receivables also include employee and tax receivables that are deemed immaterial and low risk. Equity affiliate loans are also considered non-trade and balances are reviewed quarterly.