IBM 2005 Annual Report Download - page 58
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_57
fromfuture revenue. Costs to support or servicelicensed pro-
gramsarechargedtosoftwarecostasincurred.
Thecompanycapitalizescertaincoststhatareincurredto
purchase or to create and implement internal-use computer
software, which includes software coding, installation, testing
and certain data conversion. Capitalized costs are amortized
on a straight-line basis over two years and are recorded in
Selling, general and administrative expense. See note I,
“IntangibleAssets IncludingGoodwill” onpage 68 and 69.
ProductWarranties
The company offers warranties for its hardware products that
rangeuptofouryears,withthemajoritybeingeitheroneorthree
years. Estimated costs from warranty terms standard to the
deliverable are recognized when revenue is recorded for the
relateddeliverable. Thecompany estimates itswarranty costs
standardtothe deliverable based onhistoricalwarranty claim
experienceandappliesthisestimatetotherevenuestreamfor
productsunderwarranty.Futurecostsforwarrantiesapplicable
torevenuerecognizedinthecurrentperiodarechargedtocost
ofrevenue.Thewarrantyaccrualisreviewedquarterlytoverify
that it properly reflects the remaining obligation based on the
anticipated expenditures over the balance of the obligation
period. Adjustments are made when actual warranty claim
experience differs from estimates. Costs from fixed-price sup-
port or maintenance contracts, including extended warranty
contracts, are recognized asincurred.
Changes in the company’s warranty liability balance are
presented inthefollowingtable:
(Dollarsinmillions)
ATDECEMBER31: 2005 2004
BalanceatJanuary1 $«944 $«780
Current period accruals 622 924
Accrual adjustmentsto reflect
actual experience 19 42
Charges incurred (831) (802)
BalanceatDecember31 $«754 $«944
Thedecreaseinthebalancewasprimarilydrivenby the divesti-
tureofthecompany’sPersonalComputing business toLenovo
GroupLimited(Lenovo) inApril2005.
ShippingandHandling
Costsrelatedtoshippingandhandlingareincludedin Cost in
theConsolidatedStatementofEarnings.
ExpenseandOtherIncome
SELLING,GENERAL AND ADMINISTRATIVE
Selling,generalandadministrative(SG&A)expenseischarged
toincomeasincurred.Expensesofpromotingandsellingprod-
uctsandservicesareclassifiedassellingexpenseandinclude
such items as advertising, sales commissions and travel.
Generalandadministrativeexpenseincludessuchitemsasoffi-
cers’ salaries,officesupplies,non-incometaxes,insuranceand
office rental. In addition, general and administrative expense
includesotheroperatingitemssuchasaprovisionfordoubtful
accounts, workforce accruals for contractually obligated pay-
ments to employees terminated in the ongoing course of busi-
ness,amortizationofcertainintangibleassetsandenvironmental
remediationcosts.Certainspecialactionsdiscussedinnote R,
“2005Actions,” onpages 80 and 81 arealsoincludedinSG&A.
ADVERTISING AND PROMOTIONAL EXPENSE
The company expenses advertising and promotional costs
when incurred. Cooperative advertising reimbursements from
vendors are recorded net of advertising and promotional
expensein the periodthe relatedadvertising and promotional
expense is incurred. Advertising and promotional expense,
whichincludes media, agency and promotionalexpense, was
$1,284 million, $1,335 million and $1,406 million in 2005, 2004
and2003,respectively,andisrecordedinSG&Aexpenseinthe
ConsolidatedStatementofEarnings.
RESEARCH,DEVELOPMENT AND ENGINEERING
Research, development and engineering (RD&E) costs are
expensedasincurred.
INTELLECTUAL PROPERTY AND CUSTOM
DEVELOPMENT INCOME
Aspartofthecompany’sbusinessmodelandasaresultofthe
company’s ongoing investment in research and development,
thecompanylicensesandsellstherightstocertainofitsintel-
lectual property (IP) including internally developed patents,
tradesecretsandtechnologicalknow-how.Certaintransfersof
IPtothirdpartiesarelicensing/royalty-basedandothertransfers
aretransaction-basedsalesandothertransfers.Licensing/roy-
alty-based fees involve transfers in which the company earns
the income over time, or the amount of income is not fixed or
determinableuntilthelicenseesellsfuturerelatedproducts(i.e.,
variable royalty, based upon licensee’s revenue). Sales and
othertransferstypicallyincludetransfersofIPwherebythecom-
panyhasfulfilleditsobligationsandthefeereceivedisfixedor
determinable. The company also enters into cross-licensing
arrangementsofpatents,andincomefromthesearrangements
isrecordedonlytotheextentcashisreceived.Furthermore,the
companyearnsincomefromcertaincustomdevelopmentproj-
ectsforstrategictechnologypartnersandspecificclients.The
companyrecordstheincomefromtheseprojectswhenthefee
is realizedorrealizableand earned,isnotrefundable,andisnot
dependentuponthesuccessoftheproject.
OTHER (INCOME)AND EXPENSE
Other (income) and expense includes interest income (other
than from the company’s Global Financing external business
transactions), gains and losses on certain derivative instru-
ments,gainsandlossesfromsecuritiesandotherinvestments,
gains and losses from certain real estate activity, foreign cur-
rencytransaction gainsandlosses,gainsandlossesfromthe
sale of businesses, and amounts related to accretion of asset
retirementobligations.Certainspecialactionsdiscussedinnote
R,“2005Actions” onpages 80 and 81 arealsoincludedinOther
(income)andexpense.