Emerson 2011 Annual Report Download - page 25

Annual Report | 23
method, as performance occurs, or in accordance
with ASC 985-605 related to software. Sales arrange-
ments sometimes involve delivering multiple elements,
including services such as installation. In these instances,
the revenue assigned to each element is based on its
vendor-specific objective evidence, third-party evidence
or management estimate of the relative selling price, with
revenue recognized individually for delivered elements
only if they have value to the customer on a stand-alone
basis, the performance of the undelivered items is prob-
able and substantially in the Company’s control or the
undelivered elements are inconsequential or perfunctory,
and there are no unsatisfied contingencies related to
payment. Management believes that all relevant criteria
and conditions are considered when recognizing revenue.
INVENTORIES
Inventories are stated at the lower of cost or market. The
majority of inventory values are based on standard costs,
which approximate average costs, while the remainder
are principally valued on a first-in, first-out basis. Cost
standards are revised at the beginning of each year. The
annual effect of resetting standards plus any operating
variances incurred during each period are allocated
between inventories and cost of sales. The Company’s
businesses review inventory for obsolescence, make
appropriate provisions and dispose of obsolete inven-
tory on a regular basis. Various factors are considered in
these reviews, including sales history and recent trends,
industry conditions and general economic conditions.
LONG-LIVED ASSETS
Long-lived assets, which include property, plant and
equipment, goodwill and identifiable intangible assets are
reviewed for impairment whenever events or changes in
business circumstances indicate impairment may exist.
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. Reporting units are also reviewed for possible
goodwill impairment at least annually, in the fourth
quarter, by comparing the fair value of each unit to its
carrying value. Fair value is generally measured based on
a discounted future cash flow method using a discount
rate judged by management to be commensurate with
the applicable risk. Estimates of future sales, operating
results, cash flows and discount rates are subject to
changes in the economic environment, including such
factors as the general level of market interest rates,
expected equity market returns and volatility of markets
served, particularly when recessionary economic
circumstances continue for an extended period of time.
Management believes the estimates of future cash flows
and fair values are reasonable; however, changes in esti-
mates due to variance from assumptions could materially
affect the evaluations.
At the end of 2011, Emerson’s total market value based
on its exchange-traded stock price was approximately
$31 billion and common stockholders’ equity was
$10 billion. The carrying value of the Industrial Automa-
tion wind turbine pitch control business was reduced by
a $19 million charge to earnings. The Company’s fourth
quarter goodwill impairment testing determined the
carrying value exceeded the fair value, reflecting a slow-
down in investment for alternative energy in the current
economic environment. In the Process Management
segment, there is a unit recently acquired in 2009
with $216 million of goodwill for which the estimated
fair value exceeds the carrying value by approximately
5 percent. The fair value of this unit assumes successful
execution of plans to expand and integrate the business,
and recovery in the demand for energy; in particular, the
subsea extraction of oil and gas. There are two units in the
Network Power segment with $367 million of goodwill
where estimated fair value exceeds the carrying value by
approximately 10 percent. Assumptions used in deter-
mining fair value include continued successful execution
of business plans and growth in served markets, primarily
network communications and connectivity. There are two
units in the Tools and Storage segment with $250 million
of goodwill, where estimated fair value exceeds carrying
value by more than 25 percent and assumes execution
of business plans and recovery in the residential and
construction-related markets.
RETIREMENT PLANS
While the Company continues to focus on a prudent long-
term investment strategy for its pension-related assets,
the calculations of defined benefit plan expense and obli-
gations are dependent on assumptions made regarding
the expected annual return on plan assets, the discount
rate and rate of annual compensation increases. In accor-
dance with U.S. generally accepted accounting principles
(U.S. GAAP), actual results that differ from the assump-
tions are accumulated as deferred actuarial losses and
amortized in future periods. Management believes that
the assumptions used are appropriate; however, differ-
ences versus actual experience or changes in assumptions
may affect the Company’s retirement plan obligations
and future expense. As of September 30, 2011, combined
U.S. and non-U.S. pension plans were underfunded by
$732 million. Funded status decreased for the U.S. plans,
which were underfunded by $462 million, and improved
slightly for non-U.S. plans, which were underfunded by
$270 million. The Company contributed $142 million to
defined benefit plans in 2011 and expects to contribute
approximately $150 million in 2012. The discount rate
for U.S. plans was reduced to 4.75 percent in 2011
compared with 5.0 percent in 2010. The Company