Baker Hughes 2009 Annual Report Download - page 117

2009 Form 10-K 43
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 through the
courts. We believe that these assessments may occasionally be
based on erroneous and even arbitrary interpretations of local
tax law. We have received tax assessments from various tax
authorities and are currently at varying stages of appeals and/
or litigation regarding these matters. We have provided for the
amounts we believe will ultimately result from these proceed-
ings. We believe we have substantial defenses to the questions
being raised and will pursue all legal remedies should an unfa-
vorable outcome result. However, resolution of these matters
involves uncertainties and there are no assurances that the
outcomes will be favorable. We provide for uncertain tax posi-
tions pursuant to ASC 740, Income Taxes.
In July 2006, the FASB issued new guidance for account-
ing for uncertain tax positions which provides that a tax benefit
from an uncertain tax position may be recognized when it is
more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. The interpre-
tation also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. We adopted the provisions
effective January 1, 2007, pursuant to which we recognized
a $78 million increase in the gross liability for unrecognized
tax benefits, a $14 million increase in non-current tax receiv-
ables, and a net decrease to beginning retained earnings of
$64 million.
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 histori-
cal product sales data, warranty costs incurred and any other
related information known to us. Our product warranty liabil-
ity was $11 million and $8 million at December 31, 2009 and
2008, respectively.
Environmental Matters
Estimated remediation costs are accrued 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 developed based on internal evaluations and are not dis-
counted. Accruals are recorded when it is probable that we
will be obligated to pay for environmental site evaluation, reme-
diation or related activities, and such costs can be reasonably
estimated. If the obligation can only be estimated within a
range, we accrue the minimum amount in the range. Accruals
are recorded even if significant uncertainties exist over the ulti-
mate cost of the remediation. As additional or more accurate
information becomes available, accruals are adjusted to reflect
current cost estimates. Ongoing environmental compliance
costs, such as obtaining environmental permits, installation of
pollution control equipment and waste disposal, are expensed
as incurred. Where we have been identified as a potentially
responsible party in a United States federal or state “Super-
fund” site, we accrue our share of the estimated remediation
costs of the site. This share is based on the ratio of the esti-
mated volume of waste we contributed to the site to the total
volume of waste disposed at the site.
Foreign Currency
A number of our significant foreign subsidiaries have des-
ignated the local currency as their functional currency and, as
such, gains and losses resulting from balance sheet translation
of foreign operations are included as a separate component
of accumulated other comprehensive loss within stockholders’
equity. Gains and losses from foreign currency transactions,
such as those resulting from the settlement of receivables or
payables in the non-functional currency, are included in MG&A
expenses in the consolidated statements of operations as
incurred. For those foreign subsidiaries that have designated
the U.S. Dollar as the functional currency, gains and losses
resulting from balance sheet remeasurement of foreign opera-
tions are also included in MG&A expense in the consolidated
statements of operations as incurred.
Derivative Financial Instruments
We monitor our exposure to various business risks includ-
ing commodity prices, foreign currency exchange rates and
interest rates and occasionally use derivative financial instru-
ments to manage these risks. Our policies do not permit the
use of derivative financial instruments for speculative purposes.
We use foreign currency forward contracts to hedge certain
firm commitments and transactions denominated in foreign
currencies. We use interest rate swaps to manage interest
rate risk.
At the inception of any new derivative, we designate
the derivative as a hedge as that term is defined in ASC 815,
Derivatives and Hedging or we determine the derivative to be
undesignated as a hedging instrument as the facts dictate. We
document all relationships between the hedging instruments
and the hedged items, as well as our risk management objec-
tives and strategy for undertaking various hedge transactions.
We assess whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash
flows of the hedged item at both the inception of the hedge
and on an ongoing basis.