IBM 2005 Annual Report Download - page 55
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
54_ NotestoConsolidatedFinancialStatements
A.SignificantAccountingPolicies
BasisofPresentation
On December 31, 2002, the International Business Machines
Corporation(IBMand/orthecompany)sold itsharddiskdrive
(HDD) business to Hitachi, Ltd. (Hitachi). The HDD business
was part of the company’s Systems and Technology Group
reportingsegment.TheHDDbusinesswasaccountedforasa
discontinued operation under accounting principles generally
acceptedintheUnitedStatesofAmerica(GAAP)andtherefore,
the HDD results of operations and cash flows have been
removed from the company’s results of continuing operations
and cash flows for all periods presented in this document. In
2005,thecompanyhasseparatelydisclosedtheoperating and
investing portionsofthecashflowsattributedtoitsdiscontinued
operations,whichinpriorperiods were reportedonacombined
basisasasingleamount.
For the years 2005, 2004 and 2003, the financial results
reported as discontinued operations are primarily additional
costs associated with parts warranty as agreed upon by the
companyandHitachi.
PrinciplesofConsolidation
TheConsolidatedFinancialStatementsincludetheaccountsof
IBManditscontrolledsubsidiaries,whichare generally majority
owned. The accounts of variable interest entities (VIEs) as
defined by the Financial Accounting Standards Board (FASB)
Interpretation No. 46(R) (FIN 46(R)), are included in the
ConsolidatedFinancialStatements,ifapplicable.Investmentsin
business entities in which the company does not have control,
buthastheabilitytoexercisesignificantinfluenceoveroperating
andfinancialpolicies,areaccountedforusingtheequitymethod
and the company’s proportionate share of income or loss is
recordedinOther (income) and expense.Theaccountingpolicy
forotherinvestmentsinequitysecuritiesisdescribedonpage 60
within“MarketableSecurities.” Equityinvestmentsinnon-publicly
traded entities are accounted for using the cost method.
Intercompanytransactionsandaccountshavebeeneliminated.
UseofEstimates
The preparation of Consolidated Financial Statements in con-
formitywithGAAPrequiresmanagementtomakeestimatesand
assumptionsthataffecttheamountsofassets,liabilities,revenue
and expenses that are reported in the Consolidated Financial
Statementsandaccompanyingdisclosures,includingthedisclo-
sure of contingent assets and liabilities. These estimates are
basedonmanagement’sbestknowledgeofcurrentevents,his-
toricalexperience, actions thatthecompany may undertake in
thefuture,andonvariousotherassumptionsthatarebelievedto
be reasonable under the circumstances. As a result, actual
resultsmaybedifferentfromtheseestimates.Seepages 40 to42
foradiscussionofthecompany’scriticalaccountingestimates.
Revenue
Thecompanyrecognizesrevenuewhen itisrealizedorrealiz-
ableandearned. The companyconsidersrevenuerealizedor
realizable and earned when it has persuasive evidence of an
arrangement,deliveryhasoccurred,thesalespriceisfixedor
determinable,andcollectibilityisreasonablyassured.Delivery
does not occur until products have been shipped or services
havebeenprovidedtotheclient,riskoflosshastransferredto
the client and client acceptance has been obtained, client
acceptanceprovisionshavelapsed,orthecompanyhasobjec-
tiveevidencethatthecriteriaspecifiedintheclientacceptance
provisions have been satisfied. The sales price is not consid-
eredtobefixedordeterminableuntilallcontingenciesrelatedto
thesalehavebeenresolved.
The company recognizes revenue on sales to solution
providers, resellers and distributors (herein referred to as
“resellers”) when the reseller has economic substance apart
fromthecompany,creditrisk,titleandriskoflosstotheinven-
tory, the fee to the company is not contingent upon resale or
payment by theend user, the company has no further obliga-
tionsrelatedtobringingabout resaleor delivery,andall other
revenue recognitioncriteriahavebeenmet.
Thecompanyreducesrevenueforestimatedclientreturns,
stock rotation, price protection, rebates and other similar
allowances. (SeeScheduleII,“ValuationandQualifyingAccounts
andReserves” includedinthecompany’sAnnualReportonForm
10-K).Revenueisrecognizedonlyiftheseestimatescanbereli-
ablydetermined.Thecompanybasesitsestimatesonhistorical
results taking into consideration the type of client, the type of
transaction and the specifics of each arrangement. Payments
madeundercooperativemarketingprogramsarerecognizedas
anexpenseonlyifthecompanyreceivesfromtheclientaniden-
tifiablebenefitsufficientlyseparablefromtheproductsalewhose
fairvaluecanbereasonablyestimated.Ifthecompanydoesnot
receive an identifiable benefit sufficiently separable from the
product salewhosefairvaluecanbereasonablyestimated,such
paymentsarerecordedasareductionofrevenue.
Revenuefromsalesofthird-partyvendorproductsorserv-
ices is recorded net of costs when the company is acting as
an agent between the client and vendor and gross when the
company is a principal to the transaction. Several factors are
considered to determine whether the company is an agent or
principal, most notably whether the company is the primary
obligortotheclient,hasinventoryriskoraddsmeaningfulvalue
tothevendor’sproductorservice. Considerationisalsogivento
whetherthecompanywasinvolvedintheselectionoftheven-
dor’s product or service, has latitude in establishing the sales
price,orhascreditrisk.
Inaddition totheaforementionedgeneralpolicies,thefol-
lowingarethespecificrevenuerecognitionpoliciesformultiple-
elementarrangementsandforeachmajorcategoryofrevenue.
MULTIPLE-ELEMENT ARRANGEMENTS
The company enters into multiple-element revenue arrange-
ments,whichmayincludeanycombinationofservices,software,
hardwareand/orfinancing.Totheextentthata deliverable in a
multiple-element arrangement is subject to specific guidance
(likesoftwarethatissubjecttotheAmericanInstituteofCertified
Public Accountants (AICPA) Statement of Position (SOP) No.
97-2,“SoftwareRevenue Recognition,” see “Software” onpage