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Goodwill,฀Intangible฀Assets฀and฀Amortization
Goodwill,฀including฀goodwill฀associated฀with฀equity฀
method฀investments,฀and฀intangible฀assets฀with฀indefinite฀lives฀
are฀not฀amortized.฀Intangible฀assets฀with฀finite฀useful฀lives฀are฀
amortized฀either฀on฀a฀straight-line฀basis฀over฀the฀asset’s฀esti-
mated฀useful฀life฀or฀on฀a฀basis฀that฀reflects฀the฀pattern฀in฀which฀
the฀economic฀benefits฀of฀the฀intangible฀assets฀are฀realized.฀
Impairment฀of฀Long-Lived฀Assets
We฀review฀property,฀intangible฀assets฀and฀certain฀other฀
assets฀for฀impairment฀whenever฀events฀or฀changes฀in฀circum-
stances฀indicate฀that฀the฀carrying฀amount฀may฀not฀be฀recover-
able.฀The฀determination฀of฀recoverability฀is฀made฀based฀upon฀
the฀estimated฀undiscounted฀future฀net฀cash฀flows,฀excluding฀
interest฀expense.฀The฀amount฀of฀impairment฀loss,฀if฀any,฀is฀
determined฀by฀comparing฀the฀fair฀value,฀as฀determined฀by฀a฀
discounted฀cash฀flows฀analysis,฀with฀the฀carrying฀value฀of฀the฀
related฀assets.
We฀perform฀an฀annual฀impairment฀test฀of฀goodwill฀as฀
of฀October฀1,฀or฀more฀frequently฀if฀circumstances฀indicate฀
that฀impairment฀may฀exist.฀Investments฀in฀affiliates฀are฀also฀
reviewed฀for฀impairment฀whenever฀events฀or฀changes฀in฀cir-
cumstances฀indicate฀that฀impairment฀may฀exist.฀The฀determina-
tion฀of฀impairment฀is฀made฀by฀comparing฀the฀carrying฀amount฀
with฀its฀fair฀value,฀which฀is฀calculated฀using฀a฀combination฀of฀a฀
market฀capitalization฀and฀discounted฀cash฀flows฀approach.
Income฀Taxes
We฀use฀the฀liability฀method฀for฀determining฀our฀income฀
taxes,฀under฀which฀current฀and฀deferred฀tax฀liabilities฀and฀
assets฀are฀recorded฀in฀accordance฀with฀enacted฀tax฀laws฀and฀
rates.฀Under฀this฀method,฀the฀amounts฀of฀deferred฀tax฀liabili-
ties฀and฀assets฀at฀the฀end฀of฀each฀period฀are฀determined฀using฀
the฀tax฀rate฀expected฀to฀be฀in฀effect฀when฀taxes฀are฀actually฀
paid฀or฀recovered.฀Future฀tax฀benefits฀are฀recognized฀to฀the฀
extent฀that฀realization฀of฀such฀benefits฀is฀more฀likely฀than฀not.
Deferred฀income฀taxes฀are฀provided฀for฀the฀estimated฀
income฀tax฀effect฀of฀temporary฀differences฀between฀financial฀
and฀tax฀bases฀in฀assets฀and฀liabilities.฀Deferred฀tax฀assets฀are฀
also฀provided฀for฀certain฀tax฀credit฀carryforwards.฀A฀valuation฀
allowance฀to฀reduce฀deferred฀tax฀assets฀is฀established฀when฀it฀
is฀more฀likely฀than฀not฀that฀some฀portion฀or฀all฀of฀the฀deferred฀
tax฀assets฀will฀not฀be฀realized.
We฀intend฀to฀indefinitely฀reinvest฀certain฀earnings฀of฀our฀
foreign฀subsidiaries฀in฀operations฀outside฀the฀U.S.,฀and฀accord-
ingly,฀we฀have฀not฀provided฀for฀U.S.฀income฀taxes฀on฀such฀
earnings.฀We฀do฀provide฀for฀the฀U.S.฀and฀additional฀non-U.S.฀
taxes฀on฀earnings฀anticipated฀to฀be฀repatriated฀from฀our฀non-
U.S.฀subsidiaries.
We฀operate฀in฀more฀than฀90฀countries฀under฀many฀legal฀
forms.฀As฀a฀result,฀we฀are฀subject฀to฀the฀jurisdiction฀of฀numer-
ous฀domestic฀and฀foreign฀tax฀authorities,฀as฀well฀as฀to฀tax฀
agreements฀and฀treaties฀among฀these฀governments.฀Our฀oper-
ations฀in฀these฀different฀jurisdictions฀are฀taxed฀on฀various฀
bases:฀฀actual฀income฀before฀taxes,฀deemed฀profits฀(which฀are฀
generally฀determined฀using฀a฀percentage฀of฀revenues฀rather฀
than฀profits)฀and฀withholding฀taxes฀based฀on฀revenue.฀Deter-
mination฀of฀taxable฀income฀in฀any฀jurisdiction฀requires฀the฀
interpretation฀of฀the฀related฀tax฀laws฀and฀regulations฀and฀the฀
use฀of฀estimates฀and฀assumptions฀regarding฀significant฀future฀
events,฀such฀as฀the฀amount,฀timing฀and฀character฀of฀deduc-
tions,฀permissible฀revenue฀recognition฀methods฀under฀the฀tax฀
law฀and฀the฀sources฀and฀character฀of฀income฀and฀tax฀credits.฀
Changes฀in฀tax฀laws,฀regulations,฀agreements฀and฀treaties,฀for-
eign฀currency฀exchange฀restrictions฀or฀our฀level฀of฀operations฀
or฀profitability฀in฀each฀taxing฀jurisdiction฀could฀have฀an฀impact฀
upon฀the฀amount฀of฀income฀taxes฀that฀we฀provide฀during฀any฀
given฀year.
Our฀tax฀filings฀for฀various฀periods฀are฀subjected฀to฀audit฀by฀
tax฀authorities฀in฀most฀jurisdictions฀where฀we฀conduct฀busi-
ness.฀These฀audits฀may฀result฀in฀assessments฀of฀additional฀
taxes฀that฀are฀resolved฀with฀the฀authorities฀or฀potentially฀
through฀the฀courts.฀We฀believe฀that฀these฀assessments฀may฀
occasionally฀be฀based฀on฀erroneous฀and฀even฀arbitrary฀inter-
pretations฀of฀local฀tax฀law.฀We฀have฀received฀tax฀assessments฀
from฀various฀taxing฀authorities฀and฀are฀currently฀at฀varying฀
stages฀of฀appeals฀and/or฀litigation฀regarding฀these฀matters.฀
We฀have฀provided฀for฀the฀amounts฀we฀believe฀will฀ulti-
mately฀result฀from฀these฀proceedings.฀We฀believe฀we฀have฀
substantial฀defenses฀to฀the฀questions฀being฀raised฀and฀will฀
pursue฀all฀legal฀remedies฀should฀an฀unfavorable฀outcome฀
result.฀However,฀resolution฀of฀these฀matters฀involves฀uncer-
tainties฀and฀there฀are฀no฀assurances฀that฀the฀outcomes฀will฀
be฀favorable.
Product฀Warranties
We฀sell฀certain฀products฀with฀a฀product฀warranty฀that฀pro-
vides฀that฀customers฀can฀return฀a฀defective฀product฀during฀a฀
specified฀warranty฀period฀following฀the฀purchase฀in฀exchange฀
for฀a฀replacement฀product,฀repair฀at฀no฀cost฀to฀the฀customer฀
or฀the฀issuance฀of฀a฀credit฀to฀the฀customer.฀We฀accrue฀
amounts฀for฀estimated฀warranty฀claims฀based฀upon฀current฀
and฀historical฀product฀sales฀data,฀warranty฀costs฀incurred฀and฀
any฀other฀related฀information฀known฀to฀us.
Environmental฀Matters
Remediation฀costs฀are฀accrued฀based฀on฀estimates฀of฀prob-
able฀environmental฀exposure฀using฀currently฀available฀facts,฀
existing฀environmental฀permits,฀technology฀and฀presently฀
enacted฀laws฀and฀regulations.฀For฀sites฀where฀we฀are฀primarily฀
responsible฀for฀the฀remediation,฀our฀cost฀estimates฀are฀devel-
oped฀based฀on฀internal฀evaluations฀and฀are฀not฀discounted.฀
Such฀accruals฀are฀recorded฀when฀it฀is฀probable฀that฀we฀will฀
be฀obligated฀to฀pay฀amounts฀for฀environmental฀site฀evaluation,฀
remediation฀or฀related฀activities,฀and฀such฀amounts฀can฀be฀rea-
sonably฀estimated.฀If฀the฀obligation฀can฀only฀be฀estimated฀
within฀a฀range,฀we฀accrue฀the฀minimum฀amount฀in฀the฀range.฀
Such฀accruals฀are฀recorded฀even฀if฀significant฀uncertainties฀
exist฀over฀the฀ultimate฀cost฀of฀the฀remediation.฀As฀additional฀
or฀more฀accurate฀information฀becomes฀available,฀we฀adjust฀
such฀accruals฀to฀reflect฀current฀cost฀estimates.฀Ongoing฀envi-
ronmental฀compliance฀costs,฀such฀as฀obtaining฀environmental฀
44฀฀฀฀฀Baker฀Hughes฀Incorporated