HP 2012 Annual Report Download - page 97

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Inventory
HP values inventory at the lower of cost or market, with cost computed on a first-in, first-out basis.
Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for
estimated excess, obsolescence or impaired balances.
Property, Plant and Equipment
HP states property, plant and equipment at cost less accumulated depreciation. HP capitalizes
additions and improvements and expenses maintenance and repairs as incurred. Depreciation is
computed using straight-line or accelerated methods over the estimated useful lives of the assets.
Estimated useful lives are five to 40 years for buildings and improvements and three 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. The estimated useful lives of assets used solely to support
a customer services contract generally do not exceed the term of the customer contract. Upon
retirement or disposition, the asset cost and related accumulated depreciation are removed with any
gain or loss recognized in the Consolidated Statements of Earnings.
HP capitalizes certain internal and external costs incurred to acquire or create internal use
software, principally related to software coding, designing system interfaces and installation and testing
of the software. HP amortizes capitalized internal use software costs using the straight-line method over
the estimated useful lives of the software, generally from three to five years.
Software Development Costs
Costs incurred to acquire or develop software for resale are capitalized subsequent to the software
product establishing technological feasibility, if significant. Capitalized software development costs are
amortized using the greater of the straight-line amortization method or the ratio that current gross
revenues for a product bear to the total current and anticipated future gross revenues for that product.
The estimated useful lives for capitalized software for resale are generally three years or less. Software
development costs incurred subsequent to a product establishing technological feasibility are usually not
significant. In those instances, such costs are expensed as incurred.
Business Combinations
HP includes the results of operations of the businesses that it has acquired in HP’s consolidated
results as of the respective dates of acquisition. HP allocates the fair value of the purchase
consideration of its acquisitions to the tangible assets acquired, liabilities assumed and intangible assets
acquired, including in-process research and development (‘‘IPR&D’’), based on their estimated fair
values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. The primary items that generate goodwill include the value
of the synergies between the acquired companies and HP and the acquired assembled workforce,
neither of which qualifies as an amortizable intangible asset. IPR&D is initially capitalized at fair value
as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D
project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over
its estimated useful life. If an IPR&D project is abandoned, HP records a charge for the value of the
related intangible asset to HP’s Consolidated Statement of Earnings in the period it is abandoned.
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