Baker Hughes 2014 Annual Report Download - page 66

41
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures as well as
disclosures about any contingent assets and liabilities. We base these estimates and judgments on historical
experience and other assumptions and information that are believed to be reasonable under the circumstances.
Estimates and assumptions about future events and their effects are subject to uncertainty, and accordingly, these
estimates may change as new events occur, as more experience is acquired, as additional information is obtained
and as the business environment in which we operate changes.
We have defined a critical accounting estimate as one that is both important to the portrayal of either our
financial condition or results of operations and requires us to make difficult, subjective or complex judgments or
estimates about matters that are uncertain. The Audit/Ethics Committee of our Board of Directors has reviewed our
critical accounting estimates and the disclosure presented below. During the past three fiscal years, we have not
made any material changes in the methodology used to establish the critical accounting estimates, and we believe
that the following are the critical accounting estimates used in the preparation of our consolidated financial
statements. There are other items within our consolidated financial statements that require estimation and
judgment but they are not deemed critical as defined above.
Allowance for Doubtful Accounts
The determination of the collectability of amounts due from our customers requires us to make judgments and
estimates regarding our customers’ ability to pay amounts due us in order to determine the amount of valuation
allowances required for doubtful accounts. We monitor our customers’ payment history and current credit
worthiness to determine that collectability is reasonably assured. We also consider the overall business climate in
which our customers operate. Provisions for doubtful accounts are recorded when it becomes evident that the
customer will not make the required payments at either contractual due dates or in the future. At December 31,
2014 and 2013, the allowance for doubtful accounts totaled $224 million, or 4%, and $238 million, or 4%, of total
gross accounts receivable, respectively. We believe that our allowance for doubtful accounts is adequate to cover
potential bad debt losses under current conditions; however, uncertainties regarding changes in the financial
condition of our customers, either adverse or positive, could impact the amount and timing of any additional
provisions for doubtful accounts that may be required. A five percent change in the allowance for doubtful accounts
would have had an impact on income before income taxes of approximately $11 million in 2014.
Inventory Reserves
Inventory is a significant component of current assets and is stated at the lower of cost or market. This requires
us to record provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine these
reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product
demand, market conditions, production requirements and technological developments. These estimates and
forecasts inherently include uncertainties and require us to make judgments regarding potential future outcomes. At
December 31, 2014 and 2013, inventory reserves totaled $319 million, or 7%, and $382 million, or 9%, of gross
inventory, respectively. We believe that our reserves are adequate to properly value potential excess, slow moving
and obsolete inventory under current conditions. Significant or unanticipated changes to our estimates and
forecasts could impact the amount and timing of any additional provisions for excess, slow moving or obsolete
inventory that may be required. A five percent change in this inventory reserve balance would have had an impact
on income before income taxes of approximately $16 million in 2014.
Goodwill and Other Long-Lived Assets
The purchase price of acquired businesses is allocated to its identifiable assets and liabilities based upon
estimated fair values as of the acquisition date. Goodwill is the excess of the purchase price over the fair value of
tangible and identifiable intangible assets and liabilities acquired in a business acquisition. Our goodwill at
December 31, 2014 and 2013, totaled $6.08 billion and $5.97 billion, respectively. We perform an annual test of
goodwill for impairment as of October 1 of each year for each of our reporting units which are the same as our five
reportable segments. We have the option of performing a qualitative or quantitative assessment to determine if an
impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a