IBM 2003 Annual Report Download - page 87

MARKETABLE SECURITIES
Marketable securities included in Current assets represent
securities with a maturity of less than one year. The company
also has Marketable securities, including non-equity method
alliance investments, with a maturity of more than one year.
These non-current investments are included in Investments
and sundry assets. The company’s Marketable securities,
including certain non-equity method alliance investments, are
considered available for sale and are reported at fair value with
changes in unrealized gains and losses, net of applicable taxes,
recorded in Accumulated gains and (losses) not affecting
retained earnings within Stockholders’ equity. Realized gains
and losses are calculated based on the specific identification
method. Other-than-temporary declines in market value from
original cost are charged to Other (income) and expense in the
period in which the loss occurs. In determining whether an
other-than-temporary decline in the market value has
occurred, the company considers the duration that, and
extent to which, market value is below original cost. Realized
gains and losses and other than temporary declines in market
value from original cost are included in Other (income) and
expense in the Consolidated Statement of Earnings. All
other investment securities not described above or in
“Principles of Consolidation” on page 80, primarily non-
publicly traded equity securities, are accounted for using the
cost method.
INVENTORIES
Raw materials, work in process and finished goods are stated
at the lower of average cost or net realizable value.
ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES
Trade
An allowance for uncollectible trade receivables is recorded
based on a combination of write-off history, aging analysis,
and any specific known troubled accounts.
Financing
Financing receivables include sales-type leases, direct financing
leases, and loans. Below are the methodologies the company
uses to calculate both its specific and its unallocated reserves,
which are applied consistently to its different portfolios.
Specific – The company reviews all accounts receivable consid-
ered at risk on a quarterly basis. The review primarily consists
of an analysis based upon current information available about
the client, such as financial statements, news reports and
published credit ratings, as well as the current economic
environment, collateral net of repossession cost and prior
history. For loans that are collateral dependent, impairment
is measured using the fair value of the collateral when fore-
closure is probable. Using this information, the company
determines the expected cash flow for the receivable and
calculates a recommended estimate of the potential loss and
the probability of loss. For those accounts where the loss is
probable, the company records a specific reserve.
Unallocated – The company records an unallocated reserve
that is calculated by applying a reserve rate to its different
portfolios, excluding accounts that have been specifically
reserved. This reserve rate is based upon credit rating, proba-
bility of default, term, asset characteristics, and loss history.
Receivable losses are charged against the allowance when
management believes the uncollectibility of the receivable
is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
Certain receivables for which the company recorded
specific reserves may also be placed on nonaccrual status.
Nonaccrual assets are those receivables (impaired loans or
nonperforming leases) with specific reserves and other
accounts for which it is likely that the company will be unable
to collect all amounts due according to original terms of the
lease or loan agreement. Income recognition is discontinued
on these receivables. Receivables may be removed from
nonaccrual status, if appropriate, based upon changes in
client circumstances.
ESTIMATED RESIDUAL VALUES OF LEASE ASSETS
The recorded residual values of the company’s lease assets
are estimated at the inception of the lease to be the expected
fair market value of the assets at the end of the lease term.
The company reassesses the realizable value of its lease
residual values. Any anticipated increases in specific future
residual values are not recognized before realization through
remarketing efforts. Anticipated decreases in specific future
residual values that are considered to be other than temporary
are recognized immediately upon identification and are
recorded as an adjustment to the residual value estimate. For
sale type and direct financing leases, this reduction lowers
the recorded net investment and is recognized as a loss
charged to finance income in the period in which the estimate
is changed, as well as an adjustment to unearned income to
reduce future period finance income.
SOFTWARE COSTS
Costs that are related to the conceptual formulation and
design of licensed programs are expensed as R&D. Also for
licensed programs, the company capitalizes costs that are
incurred to produce the finished product after technological
feasibility is established. The annual amortization of the
capitalized amounts is performed using the straight-line
method, and is applied over periods ranging up to three
years. The company performs periodic reviews to ensure that
unamortized program costs remain recoverable from future
revenue. Costs to support or service licensed programs are
expensed as the costs are incurred.
The company capitalizes certain costs that are incurred
to purchase or to create and implement internal-use com-
puter software, which includes software coding, installation,
testing and data conversion. Capitalized costs are amortized
on a straight-line basis over 2 years.
Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
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