Baker Hughes 2010 Annual Report Download - page 120

38 B a k e r H u g h e s I n c o r p o r a t e d
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
Baker Hughes Incorporated (“Baker Hughes”) is engaged
in the oilfield services industry. We are a leading supplier of
wellbore-related products and technology services and systems
and provide products and services for drilling, pressure pump-
ing, formation evaluation, completion and production, and
reservoir technology and consulting to the worldwide oil and
natural gas industry. We also provide products and services to
the downstream refining, and process and pipeline industries.
Basis of Presentation
The consolidated financial statements include the accounts
of Baker Hughes and all majority owned subsidiaries (“Com-
pany,” “we,” “our” or “us”). Investments over which we have
the ability to exercise significant influence over operating and
financial policies, but do not hold a controlling interest, are
accounted for using the equity method of accounting. All sig-
nificant intercompany accounts and transactions have been
eliminated in consolidation. In the Notes to Consolidated
Financial Statements, all dollar and share amounts in tabula-
tions 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 assump-
tions 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 addi-
tional information is obtained and as our operating environ-
ment changes. While we believe that the estimates and
assumptions used in the preparation of the consolidated finan-
cial statements are appropriate, actual results could differ from
those estimates. Estimates are used for, but are not limited to,
determining the following: allowance for doubtful accounts
and inventory valuation reserves, recoverability of long-lived
assets, useful lives used in depreciation and amortization,
income taxes and related valuation allowances and insurance,
environmental, legal, pensions and postretirement benefit obli-
gations, stock-based compensation and fair value of assets
acquired and liabilities assumed in acquisitions.
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, when
collectability is reasonably assured and there are no further sig-
nificant obligations for future performance. 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-
lectability is reasonably assured. Rates for services are typically
priced on a per day, per meter, per man hour or similar basis.
In certain situations, revenue is generated from transactions
that may include multiple products and services under one
contract or agreement and which may be delivered to the
customer over an extended period of time. Revenue from
these arrangements is recognized in accordance with the
above criteria and as each item or service is delivered based
on their relative fair value.
Research and Engineering
Research and engineering expenses include costs associ-
ated with the research and development of new products and
services and costs associated with sustaining engineering of
existing products and services. These costs are expensed as
incurred and include research and development costs for
new products and services of $283 million, $231 million
and $263 million for the year ended December 31, 2010,
2009 and 2008, respectively.
Cash Equivalents
All highly liquid investments with an original maturity of
three months or less at the time of purchase are reported as
cash equivalents.
Short-Term Investments
Short-term investments have an original maturity of
greater than three months. As of December 31, 2010, we
held $250 million of short-term investments consisting of U.S.
Treasury Bills, which will mature in May of 2011. These invest-
ments are classified as available-for-sale and are recorded at
fair value, which approximates cost.
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