Emerson 2006 Annual Report Download - page 35

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                  
The Company recognizes nearly all of its revenues through the
sale of manufactured products and records the sale when prod-
ucts are shipped and title passes to the customer and collection
is reasonably assured. In certain instances, revenue is recognized
on the percentage-of-completion method, when services are
rendered, or in accordance with AICPA Statement of Position
No. 97-2, “Software Revenue Recognition.” Sales sometimes
include multiple items including services such as installation. In
such instances, revenue assigned to each item is based on that
item’s objectively determined fair value, and revenue is recog-
nized individually for delivered items only if the delivered items
have value to the customer on a standalone basis, performance
of the undelivered items is probable and substantially in the
Company’s control and the undelivered items are inconsequen-
tial or perfunctory. Management believes that all relevant criteria
and conditions are considered when recognizing sales.
          
Inventories are stated at the lower of cost or market. The
majority of inventory values are based upon standard costs which
approximate average costs, while the remainder are principally
valued on a rst-in, rst-out basis. Standard costs are revised
at the beginning of each scal year. The effects of resetting
standards and operating variances incurred during each period
are allocated between inventories and cost of sales. Manage-
ment regularly reviews inventory for obsolescence to determine
whether a write-down is necessary. Various factors are consid-
ered in making this determination, including recent sales history
and predicted trends, industry market conditions and general
economic conditions. See Note 1.
                
Long-lived assets, which include primarily goodwill and prop-
erty, plant and equipment, are reviewed for impairment
whenever events or changes in business circumstances indicate
the carrying value of the assets may not be recoverable. If the
Company determines that the carrying value of the long-lived
asset may not be recoverable, a permanent impairment charge is
recorded for the amount by which the carrying value of the long-
lived asset exceeds its fair value. Fair value is generally measured
based on a discounted cash ow method using a discount rate
determined by management to be commensurate with the risk
inherent in the Company’s current business model. The esti-
mates of cash ows and discount rate are subject to change due
to the economic environment, including such factors as interest
rates, expected market returns and volatility of markets served.
Management believes that the estimates of future cash ows and
fair value are reasonable; however, changes in estimates could
materially affect the evaluations. See Notes 1, 3 and 6.
                                
Strong cash flow performance in 2006 increased the ratio of operating
cash flow to total debt to 62 percent.
               
Dened benet plan expense and obligations are dependent on
assumptions used in calculating such amounts. These assump-
tions include discount rate, rate of compensation increases and
expected return on plan assets. In accordance with U.S. generally
accepted accounting principles, actual results that differ from
the assumptions are accumulated and amortized over future
periods. While management believes that the assumptions used
are appropriate, differences in actual experience or changes in
assumptions may affect the Company’s retirement plan obliga-
tions and future expense. Effective for 2007, the discount rate
for the U.S. retirement plans was adjusted to 6.5 percent based
on the changes in market interest rates. Dened benet pension
plan expense is expected to decrease approximately $20 million
in 2007. The Company is analyzing the impact of adopting State-
ment of Financial Accounting Standards No. 158, “Employers’
Accounting for Dened Benet Pension and Other Postretire-
ment Plans – an amendment of FASB Statements No. 87, 88,
106 and 132(R)” (FAS 158), and estimates that if the provisions
of FAS 158 were applied as of September 30, 2006, an after-tax
charge to equity of approximately $500 million ($800 million
pretax) would have been reported. See further discussion of FAS
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