HP 2014 Annual Report Download - page 104

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
HP obtains a significant number of components from single source suppliers due to technology,
availability, price, quality or other considerations. The loss of a single source supplier, the deterioration
of HP’s relationship with a single source supplier, or any unilateral modification to the contractual
terms under which HP is supplied components by a single source supplier could adversely affect HP’s
revenue and gross margins.
Inventory
HP values inventory at the lower of cost or market. Cost is computed using standard cost which
approximates actual cost 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, obsolete 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 expense
is recognized on a straight-line basis 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. On retirement or disposition, the
asset cost and related accumulated depreciation are removed from the Consolidated Balance Sheets
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
HP capitalizes costs incurred to acquire or develop software for resale subsequent to establishing
technological feasibility for the software, if significant. HP amortizes capitalized software development
costs 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 life for capitalized software for resale is generally three years or less. Software
development costs incurred subsequent to establishing technological feasibility are generally not
significant.
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