Baker Hughes 2010 Annual Report Download - page 121

2 0 1 0 F o r m 1 0 - K 39
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 devel-
oped or purchased for internal use are classified in machinery
and equipment in PP&E.
Goodwill, Intangible Assets and Amortization
Goodwill and intangible assets with indefinite lives are
not amortized. Intangible assets with finite useful lives are
amortized 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 Goodwill and Other 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 esti-
mated 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 that an impairment may exist. Our
reporting units are based on our organizational and reporting
structure. Corporate and other assets and liabilities are allo-
cated to the reporting units to the extent that they relate to
the operations of those reporting units in determining their
carrying 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, comparable
transaction 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 80 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.
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.
In addition to the aforementioned assessments that have
been received from various tax authorities, we also provide
for taxes for uncertain tax positions where formal assessments
have not been received. We believe such tax reserves are ade-
quate in relation to the potential for additional assessments.
We classify interest and penalties related to uncertain tax posi-
tions as income taxes in our financial statements.
Environmental Matters
Estimated remediation costs are accrued using currently
available facts, existing environmental permits, technology and
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.
Accruals are recorded when it is probable that we will be obli-
gated to pay for environmental site evaluation, remediation or
related activities, and such costs can be reasonably estimated.
Accruals are recorded even if significant uncertainties exist
over the ultimate cost of the remediation. As additional or
more accurate information becomes available, accruals are
adjusted to reflect current cost estimates. Ongoing environ-
mental compliance costs, such as obtaining environmental
permits, installation of pollution control equipment and waste
disposal, are expensed as incurred. Where we have been identi-
fied as a potentially responsible party in a United States federal