HP 2006 Annual Report Download - page 84

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Taxes on Earnings
HP recognizes deferred tax assets and liabilities for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported amounts using enacted tax
rates in effect for the year the differences are expected to reverse. HP records a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be realized.
Cash and Cash Equivalents
HP classifies investments as cash equivalents if the maturity of an investment is three months or
less from the purchase date. Interest income was approximately $623 million in fiscal 2006, $424 million
in fiscal 2005 and $238 million in fiscal 2004.
Allowance for Doubtful Accounts
HP establishes an allowance for doubtful accounts to ensure trade and financing receivables are
not overstated due to uncollectibility. HP maintains bad debt reserves based on a variety of factors,
including the length of time receivables are past due, trends in overall weighted average risk rating of
the total portfolio, macroeconomic conditions, significant one-time events, historical experience and the
use of third-party credit risk models that generate quantitative measures of default probabilities based
on market factors and the financial condition of customers. HP records a specific reserve for individual
accounts when HP becomes aware of a customer’s inability to meet its financial obligations, such as in
the case of bankruptcy filings or deterioration in the customer’s operating results or financial position.
If circumstances related to customers change, HP would further adjust estimates of the recoverability of
receivables.
Inventory
HP values inventory at the lower of cost or market, with cost computed on a first-in, first-out basis.
Property, Plant and Equipment
HP states property, plant and equipment at cost less accumulated depreciation. HP capitalizes
additions, improvements and major renewals. HP expenses maintenance, repairs and minor renewals as
incurred. HP provides depreciation using straight-line or accelerated methods over the estimated useful
lives of the assets. Estimated useful lives are 5 to 40 years for buildings and improvements and 3 to
15 years for machinery and equipment. HP depreciates leasehold improvements over the life of the
lease or the asset, whichever is shorter. HP depreciates equipment held for lease over the initial term
of the lease to the equipment’s estimated residual value.
Goodwill and Indefinite-Lived Purchased Intangible Assets
Statement of Financial Accounting Standards (‘‘SFAS’’) No. 142, ‘‘Goodwill and Other Intangible
Assets’’ (‘‘SFAS 142’’), prohibits the amortization of goodwill and purchased intangible assets with
indefinite useful lives. HP reviews goodwill and purchased intangible assets with indefinite lives for
impairment annually at the beginning of its fourth fiscal quarter and whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable in accordance with
SFAS 142. For goodwill, HP performs a two-step impairment test. In the first step, HP compares the
fair value of each reporting unit to its carrying value. HP determines the fair value of its reporting
units based on a weighting of income and market approaches. Under the income approach, HP
calculates the fair value of a reporting unit based on the present value of estimated future cash flows.
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