Baker Hughes 2009 Annual Report Download - page 116

42 Baker Hughes Incorporated
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, Plant and Equipment
and Accumulated Depreciation
Property, plant and equipment (“PP&E”) 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. Significant improvements and better-
ments are capitalized if they extend the useful life of the asset.
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 PP&E. Maintenance and repairs are charged to expense as
incurred. The capitalized costs of computer software developed
or purchased for internal use are classified in machinery and
equipment in PP&E.
In 2006, the Financial Accounting Standards Board (“FASB”)
issued an update to Accounting Standards Codification (“ASC”)
360, Property, Plant and Equipment, which prohibits the use of
the accrue-in-advance method of accounting for planned major
maintenance and repair activities. We adopted this update
on January 1, 2007, to change our method of accounting for
repairs and maintenance activities on certain rental tools from
the accrue-in-advance method to the direct expense method.
The adoption resulted in an increase of $25 million to begin-
ning retained earnings as of January 1, 2007.
Asset Retirement Obligations
Legal obligations associated with the retirement of long-
lived assets are to be recognized at their fair value at the time
that the obligations are incurred. Upon initial recognition of a
liability, that cost is capitalized as part of the related long-lived
asset and depreciated on a straight-line basis over the remain-
ing estimated useful life of the related asset. Accretion expense
in connection with the discounted liability is also recognized
over the remaining useful life of the related asset. Asset retire-
ment obligations were $18 million and $17 million at Decem-
ber 31, 2009 and 2008, respectively.
Goodwill, Intangible Assets and Amortization
Goodwill and intangible assets with indefinite lives are not
amortized. Intangible assets with finite useful lives are amor-
tized on a basis that reflects the pattern in which the economic
benefits of the intangible assets are realized, which is generally
on a straight-line basis over the asset’s estimated useful life.
Impairment of Long-Lived Assets
We review PP&E, intangible assets and certain other assets
for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
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 flow analysis, with the carrying value of the
related assets.
We perform an annual impairment test of goodwill for
each of our reporting units as of October 1, or more frequently
if circumstances indicate an impairment may exist. Our report-
ing units are based on our organizational and reporting struc-
ture. Corporate and other assets and liabilities are allocated
to the reporting units to the extent that they relate to the
operations of those reporting units in determining their carry-
ing amount. The determination of impairment is made by
comparing the carrying amount with its fair value, which is
calculated using a combination of a market and discounted
cash flow 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
operations 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 tax jurisdiction could have an impact
upon the amount of income taxes that we provide during any
given year.