Emerson 2011 Annual Report Download - page 33

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INVENTORIES
Inventories are stated at the lower of cost or market. The majority of inventory is valued based on standard costs
that approximate average costs, while the remainder is principally valued on a first-in, first-out basis. Cost standards
are revised at the beginning of each fiscal year. The annual effect of resetting standards plus any operating variances
incurred during each period are allocated between inventories and cost of sales.
PROPERTY, PLANT AND EQUIPMENT
The Company records investments in land, buildings, and machinery and equipment at cost. Depreciation is computed
principally using the straight-line method over estimated service lives, which for principal assets are 30 to 40 years
for buildings and 8 to 12 years for machinery and equipment. Long-lived tangible assets are reviewed for impairment
whenever events or changes in business circumstances indicate the carrying value of the assets may not be recover-
able. Impairment losses are recognized based on fair value if the sum of expected future undiscounted cash flows of the
related assets is less than their carrying values.
GOODWILL AND OTHER INTANGIBLE ASSETS
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded
at their respective fair values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A
reporting unit is an operating segment as defined in ASC 280, Segment Reporting, or a business one level below an
operating segment if discrete financial information for that business unit is prepared and regularly reviewed by the
segment manager. The Company conducts impairment tests of goodwill on an annual basis in the fourth quarter and
between annual tests if events or circumstances indicate the fair value of a reporting unit may be less than its carrying
value. If a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the
extent that recorded goodwill exceeds the implied fair value of that goodwill. Fair values of reporting units are Level 3
measures and are developed under an income approach that discounts estimated future cash flows using risk-adjusted
interest rates.
All of the Company’s identifiable intangible assets are subject to amortization. Identifiable intangibles consist of intel-
lectual property such as patents and trademarks, customer relationships and capitalized software, and are amortized
on a straight-line basis over the estimated useful life. These intangibles are also subject to evaluation for potential
impairment if events or circumstances indicate the carrying amount may not be recoverable. See Note 6.
WARRANTY
Warranties vary by product line and are competitive for the markets in which the Company operates. Warranties gener-
ally extend for a period of one to two years from the date of sale or installation. Provisions for warranty are determined
primarily based on historical warranty cost as a percentage of sales or a fixed amount per unit sold based on failure
rates, adjusted for specific problems that may arise. Product warranty expense is less than one percent of sales.
REVENUE RECOGNITION
The Company recognizes nearly all of its revenues through the sale of manufactured products and records the sale
when products are shipped or delivered, and title passes to the customer with collection reasonably assured. In certain
limited circumstances, revenue is recognized using the percentage-of-completion method, as performance occurs, or
in accordance with ASC 985-605 related to software. Management believes that all relevant criteria and conditions are
considered when recognizing revenue.
Sales arrangements sometimes involve delivering multiple elements, including services such as installation. In these
instances, the revenue assigned to each element is based on 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 probable and
substantially in the Company’s control or the undelivered elements are inconsequential or perfunctory, and there are
no unsatisfied contingencies related to payment. Approximately ten percent of the Company’s revenues arise from
qualifying sales arrangements that include the delivery of multiple elements, principally in the Network Power and
Process Management segments. The vast majority of these deliverables are tangible products, with a small portion
attributable to installation, service and maintenance. Selling prices are primarily determined using vendor-specific
objective evidence. Generally, contract duration is short-term and cancellation, termination or refund provisions apply
only in the event of contract breach and have historically not been invoked.
As of October 1, 2010, certain updates became effective for ASC 605, Revenue Recognition, regarding the allocation of
consideration in multiple deliverables arrangements. Under the updated ASC 605, the allocation of consideration is
now based on vendor-specific objective evidence, third party evidence or management estimates of selling price. The
impact of this change on any period presented was inconsequential.