Baker Hughes 2004 Annual Report Download - page 93

NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
Note฀1.฀Summary฀of฀Significant฀Accounting฀Policies
Nature฀of฀Operations
Baker฀Hughes฀Incorporated฀(“Baker฀Hughes”)฀is฀engaged฀
in฀the฀oilfield฀services฀industry.฀Baker฀Hughes฀is฀a฀major฀sup-
plier฀of฀wellbore-related฀products฀and฀technology฀services฀and฀
systems฀to฀the฀worldwide฀oil฀and฀natural฀gas฀industry฀and฀pro-
vides฀products฀and฀services฀for฀drilling,฀formation฀evaluation,฀
completion฀and฀production฀of฀oil฀and฀natural฀gas฀wells.
Basis฀of฀Presentation
The฀consolidated฀financial฀statements฀include฀the฀accounts฀
of฀Baker฀Hughes฀and฀all฀majority฀owned฀subsidiaries฀(“we,”฀
“our”฀or฀“us”).฀Investments฀over฀which฀we฀have฀the฀ability฀to฀
exercise฀significant฀influence฀over฀operating฀and฀financial฀poli-
cies,฀but฀do฀not฀hold฀a฀controlling฀interest,฀are฀accounted฀for฀
using฀the฀equity฀method฀of฀accounting.฀All฀significant฀intercom-
pany฀accounts฀and฀transactions฀have฀been฀eliminated฀in฀consoli-
dation.฀In฀the฀Notes฀to฀Consolidated฀Financial฀Statements,฀all฀
dollar฀and฀share฀amounts฀in฀tabulations฀are฀in฀millions฀of฀dollars฀
and฀shares,฀respectively,฀unless฀otherwise฀indicated.
Use฀of฀Estimates
The฀preparation฀of฀financial฀statements฀in฀conformity฀with฀
accounting฀principles฀generally฀accepted฀in฀the฀United฀States฀
of฀America฀requires฀management฀to฀make฀estimates฀and฀judg-
ments฀that฀affect฀the฀reported฀amounts฀of฀assets฀and฀liabili-
ties,฀disclosure฀of฀contingent฀assets฀and฀liabilities฀at฀the฀date฀
of฀the฀financial฀statements฀and฀the฀reported฀amounts฀of฀reve-
nues฀and฀expenses฀during฀the฀reporting฀period.฀We฀base฀our฀
estimates฀and฀judgments฀on฀historical฀experience฀and฀on฀vari-
ous฀other฀assumptions฀and฀information฀that฀are฀believed฀to฀
be฀reasonable฀under฀the฀circumstances.฀Estimates฀and฀
assumptions฀about฀future฀events฀and฀their฀effects฀cannot฀be฀
perceived฀with฀certainty฀and,฀accordingly,฀these฀estimates฀may฀
change฀as฀new฀events฀occur,฀as฀more฀experience฀is฀acquired,฀
as฀additional฀information฀is฀obtained฀and฀as฀our฀operating฀
environment฀changes.฀While฀we฀believe฀that฀the฀estimates฀
and฀assumptions฀used฀in฀the฀preparation฀of฀the฀consolidated฀
financial฀statements฀are฀appropriate,฀actual฀results฀could฀differ฀
from฀those฀estimates.฀Estimates฀are฀used฀for,฀but฀are฀not฀lim-
ited฀to,฀determining฀the฀following:฀allowance฀for฀doubtful฀
accounts฀and฀inventory฀valuation฀reserves,฀recoverability฀of฀
long-lived฀assets,฀useful฀lives฀used฀in฀depreciation฀and฀amorti-
zation,฀income฀taxes฀and฀related฀valuation฀allowances,฀and฀
insurance,฀environmental,฀legal฀and฀pensions฀and฀postretire-
ment฀benefit฀obligations.
Revenue฀Recognition
Our฀products฀and฀services฀are฀generally฀sold฀based฀upon฀
purchase฀orders฀or฀contracts฀with฀the฀customer฀that฀include฀
fixed฀or฀determinable฀prices฀and฀that฀do฀not฀include฀right฀of฀
return฀or฀other฀similar฀provisions฀or฀other฀significant฀post-
delivery฀obligations.฀Our฀products฀are฀produced฀in฀a฀standard฀
manufacturing฀operation,฀even฀if฀produced฀to฀our฀customer’s฀
specifications,฀and฀are฀sold฀in฀the฀ordinary฀course฀of฀business฀
through฀our฀regular฀marketing฀channels.฀We฀recognize฀reve-
nue฀for฀these฀products฀upon฀delivery,฀when฀title฀passes฀and฀
when฀collectibility฀is฀reasonably฀assured.฀Provisions฀for฀esti-
mated฀warranty฀returns฀or฀similar฀types฀of฀items฀are฀made฀at฀
the฀time฀the฀related฀revenue฀is฀recognized.฀Revenue฀for฀ser-
vices฀is฀recognized฀as฀the฀services฀are฀rendered฀and฀when฀col-
lectibility฀is฀reasonably฀assured.฀Rates฀for฀services฀are฀typically฀
priced฀on฀a฀per฀day,฀per฀meter,฀per฀man฀hour฀or฀similar฀basis.
Cash฀Equivalents
We฀consider฀all฀highly฀liquid฀investments฀with฀an฀original฀
maturity฀of฀three฀months฀or฀less฀at฀the฀time฀of฀purchase฀to฀be฀
cash฀equivalents.
Inventories
Inventories฀are฀stated฀at฀the฀lower฀of฀cost฀or฀market.฀Cost฀is฀
determined฀using฀the฀first-in,฀first-out฀(“FIFO”)฀method฀or฀the฀
average฀cost฀method,฀which฀approximates฀FIFO,฀and฀includes฀
the฀cost฀of฀materials,฀labor฀and฀manufacturing฀overhead.
Property฀and฀Depreciation
Property฀is฀stated฀at฀cost฀less฀accumulated฀depreciation,฀
which฀is฀generally฀provided฀by฀using฀the฀straight-line฀method฀
over฀the฀estimated฀useful฀lives฀of฀the฀individual฀assets.฀We฀
manufacture฀a฀substantial฀portion฀of฀our฀rental฀tools฀and฀
equipment฀and฀the฀cost฀of฀these฀items,฀which฀includes฀direct฀
and฀indirect฀manufacturing฀costs,฀are฀capitalized฀and฀carried฀in฀
inventory฀until฀the฀tool฀is฀completed.฀Once฀the฀tool฀has฀been฀
completed,฀the฀cost฀of฀the฀tool฀is฀reflected฀in฀capital฀expendi-
tures฀and฀the฀tool฀is฀classified฀as฀rental฀tools฀and฀equipment฀in฀
property.฀Significant฀improvements฀and฀betterments฀are฀capi-
talized฀if฀they฀extend฀the฀useful฀life฀of฀the฀asset.
We฀had฀an฀interest฀in฀an฀oil฀producing฀property฀in฀West฀
Africa฀that฀was฀sold฀effective฀January฀2003฀and฀is฀classified฀as฀
a฀discontinued฀operation.฀We฀used฀the฀full-cost฀method฀of฀
accounting฀for฀this฀property.฀Under฀this฀method,฀we฀capital-
ized฀all฀acquisition,฀exploration฀and฀development฀costs฀
incurred฀for฀the฀purpose฀of฀finding฀oil฀reserves.฀In฀accordance฀
with฀full฀cost฀accounting฀rules,฀we฀performed฀ceiling฀tests฀on฀
the฀carrying฀value฀of฀our฀oil฀properties.฀During฀2002,฀there฀
was฀no฀ceiling฀test฀charge฀recorded.฀Depreciation,฀depletion฀
and฀amortization฀of฀oil฀properties฀were฀computed฀using฀the฀
unit-of-production฀method฀based฀upon฀production฀and฀esti-
mates฀of฀proved฀reserves฀and฀totaled฀$16.6฀million฀in฀2002.฀
No฀costs฀were฀excluded฀from฀the฀full฀cost฀amortization฀pool.฀
At฀December฀31,฀2002,฀our฀only฀cost฀center฀related฀to฀these฀
properties฀was฀in฀West฀Africa.
2004฀Form฀10-K฀฀฀฀฀43