Baker Hughes 2015 Annual Report Download - page 61

Baker Hughes Incorporated
Notes to Consolidated Financial Statements
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products and services. Costs for research and development of new products and services were $347 million, $430
million and $370 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Cash and Cash Equivalents
Cash equivalents include only those investments with an original maturity of three months or less. We maintain
cash deposits with financial institutions that may exceed federally insured limits. We monitor the credit ratings and
our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on various factors including the payment history and
financial condition of our customers and the economic environment. Provisions for doubtful accounts are recorded
based on the aging status of the customer accounts or when it becomes evident that the customer will not make the
required payments at either contractual due dates or in the future. Provision for doubtful accounts recorded in cost
of sales was $193 million, $102 million and $75 million for the years ended December 31, 2015, 2014 and 2013,
respectively.
Concentration of Credit Risk
We grant credit to our customers who primarily operate in the oil and natural gas industry. Although this
concentration affects our overall exposure to credit risk, our trade receivables are spread over a diverse group of
customers across many countries, which mitigates this risk. We perform periodic credit evaluations of our
customers’ financial condition, including monitoring our customers’ payment history and current credit worthiness to
manage this risk. We do not generally require collateral in support of our trade receivables, but we may require
payment in advance or security in the form of a letter of credit or bank guarantee. During 2015, 2014 and 2013, no
individual customer accounted for more than 10% of our consolidated revenue.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method, and
includes the cost of materials, labor and manufacturing overhead. As necessary, we 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.
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 betterments are capitalized if they extend the useful life of the asset. We manufacture a
substantial portion of our tools and equipment and the cost of these items, which includes direct and indirect
manufacturing costs, is capitalized and carried in inventory until it is completed. When complete, the cost is
reflected in capital expenditures and is classified as machinery, equipment and other in PP&E. Maintenance and
repairs are charged to expense as incurred. Upon sale or other disposition, the applicable amounts of asset cost
and accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from
disposal, is charged or credited to income. The capitalized costs of computer software developed or purchased for
internal use are classified in machinery, equipment and other.
Goodwill, Intangible Assets and Amortization
Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable
intangible assets and liabilities recognized in acquisitions. 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.