IBM 2003 Annual Report Download - page 85

Accumulated gains and (losses) not affecting retained earnings
within Stockholders’ equity.
Inventories, Plant, rental machines and other property-
net, and other non-monetary assets and liabilities of non-U. S.
subsidiaries and branches that operate in U.S. dollars, or
whose economic environment is highly inflationary, are
translated at approximate exchange rates prevailing when
the company acquired the assets or liabilities. All other assets
and liabilities are translated at year-end exchange rates. Cost
of sales and depreciation are translated at historical
exchange rates. All other income and expense items are
translated at the weighted-average rates of exchange pre-
vailing during the year. Gains and losses that result from
translation are included in net income.
DERIVATIVES
All derivatives are recognized in the Consolidated Statement
of Financial Position at fair value and are reported in Prepaid
expenses and other current assets, Investments and sundry
assets, Other accrued expenses and liabilities or Other lia-
bilities in the Consolidated Statement of Financial Position.
Classification of each derivative as current or non-current is
based upon whether the maturity of each instrument is less
than or greater than 12 months. To qualify for hedge account-
ing in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended
by SFAS No. 138, “Accounting for Certain Derivative Instru-
ments and Certain Hedging Activities,” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments
and Hedging Activities,” (SFAS No. 133), the company requires
that the instruments are effective in reducing the risk
exposure that they are designated to hedge. For instruments
that are associated with the hedge of cash flows, hedge effec-
tiveness criteria also require that it be probable that the
underlying transaction will occur. Instruments that meet
established accounting criteria are formally designated as
(dollars in millions except per share amounts)
FOR THE YEAR ENDED DECEMBER 31: 2003 2002 2001
Net income applicable to common stockholders, as reported $«7,583 $«3,579 $«7,713
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 76 112 104
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects 1,101 1,315 1,343
Pro forma net income applicable to common stockholders $«6,558 $«2,376 $«6,474
Earnings per share of common stock:
Basic—as reported $«««4.40 $«««2.10 $«««4.45
Basic—pro forma $«««3.81 $«««1.40 $«««3.74
Assuming dilution—as reported $«««4.32 $«««2.06 $«««4.35
Assuming dilution—pro forma $«««3.74 $«««1.39 $«««3.69
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect the portion of the estimated fair value of
awards that was earned for the years ended December 31, 2003, 2002 and 2001.
The fair value of stock option grants is estimated using
the Black-Scholes option-pricing model with the following
assumptions:
FOR THE YEAR ENDED DECEMBER 31: 2003 2002 2001
Option term (years)*554/5
Volatility** 39.9% 40.4% 37.7%
Risk-free interest rate
(zero coupon
U.S. treasury note) 2.9% 2.8% 4.4%
Dividend yield 0.7% 0.7% 0.5%
Weighted-average fair value
per option $«««30 $«««28 $«««42
*The Option term is the number of years that the company estimates, based upon history,
that options will be outstanding prior to exercise or forfeiture. The Option term is 5
years for non-tax incentive options granted in 2001 through 2003. The Option term is
4 years for tax incentive options granted in 2001. There were no tax incentive options
granted in 2003 or 2002.
** To determine volatility, the company measured the daily price changes of the stock
over the respective term for tax incentive options and non-tax incentive options.
INCOME TAXES
Income tax expense is based on reported income before
income taxes. Deferred income taxes reflect the effect of
temporary differences between asset and liability amounts
that are recognized for financial reporting purposes and the
amounts that are recognized for income tax purposes. These
deferred taxes are measured by applying currently enacted
tax laws. Valuation allowances are recognized to reduce the
deferred tax assets to the amount that is more likely than not
to be realized. In assessing the likelihood of realization,
management considers estimates of future taxable income.
TRANSLATION OF NON-U.S. CURRENCY AMOUNTS
Assets and liabilities of non-U.S. subsidiaries that operate in
a local currency environment are translated to U. S. dollars at
year-end exchange rates. Income and expense items are
translated at weighted-average rates of exchange prevailing
during the year. Translation adjustments are recorded in
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
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