IBM 2005 Annual Report Download - page 60
Download and view the complete annual report
Please find page 60 of the 2005 IBM annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.-
1 -
2
-
3
-
4
-
5
-
6
-
7
-
8
-
9
-
10
-
11
-
12
-
13
-
14
-
15
-
16
-
17
-
18
-
19
-
20
-
21
-
22
-
23
-
24
-
25
-
26
-
27
-
28
-
29
-
30
-
31
-
32
-
33
-
34
-
35
-
36
-
37
-
38
-
39
-
40
-
41
-
42
-
43
-
44
-
45
-
46
-
47
-
48
-
49
-
50 -
51 -
52 -
53 -
54 -
55 -
56 -
57 -
58 -
59 -
60 -
61 -
62 -
63 -
64 -
65 -
66 -
67 -
68 -
69 -
70 -
71
-
72
-
73
-
74
-
75
-
76
-
77
-
78
-
79
-
80
-
81
-
82
-
83
-
84
-
85
-
86
-
87
-
88
-
89
-
90
-
91
-
92
-
93
-
94
-
95
-
96
-
97
-
98
-
99
-
100
-
101
-
102
-
103
-
104
-
105
 |
 |
NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_59
company’s statutory tax rate in the jurisdiction in which it will
receive a deduction. Differences between the deferred tax
assets recognized for financial reporting purposes and the
actual tax deduction reported on the company’s income tax
return are recorded in Additional Paid-In Capital (if the tax
deduction exceeds the deferred tax asset) or in the
Consolidated Statement of Earnings (if the deferred tax asset
exceeds the tax deduction and no additional paid-in capital
existsfrompreviousawards).
Seenote U, “Stock-Based Compensation” onpages 83 to
85 foradditionalinformation.
IncomeTaxes
Income tax expense is based on reported income before
income taxes. Deferred income taxes reflect the tax effect of
temporarydifferencesbetweenassetandliabilityamountsthat
are recognized for financial reporting purposes and the
amounts that are recognized for income tax purposes. These
deferredtaxesaremeasuredbyapplyingcurrentlyenactedtax
laws. Valuation allowances are recognized to reduce deferred
taxassetstotheamountthatwillmorelikelythannotberealized.
Inassessingthe needforavaluationallowance,management
considers all available evidence including past operating
results,estimatesoffuturetaxableincomeandthefeasibilityof
ongoing tax planning strategies. When the company changes
its determination as to the amount of deferred tax assets that
canberealized,thevaluationallowanceisadjustedwithacor-
respondingimpacttoincometaxexpenseintheperiodinwhich
suchdeterminationismade.
Thecompanyrecognizestaxliabilitiesbasedonestimates
ofwhetheradditionaltaxeswillbedue.Thesetaxliabilitiesare
recognizedwhen,despitethecompany’s beliefthatitstaxreturn
positions are supportable, the company believes that certain
positionsarelikely tobechallengedandmaynot befullysus-
tained upon review by tax authorities. These liabilities are
included as a current liability in Taxes in the Consolidated
Statement of Financial Position. To the extent that the final tax
outcomeofthesemattersisdifferentthantheamounts recorded,
such differences impact income tax expense in the period in
whichsuchdeterminationismade.Interestandpenalties, ifany,
related to accrued liabilities for potential tax assessments are
includedinincometaxexpense.
TranslationofNon-U.S.CurrencyAmounts
Assetsand liabilitiesofnon-U.S.subsidiariesthathavealocal
functional currency are translated to U.S. dollars at year-end
exchange rates. Income and expense items are translated at
weighted-averageratesofexchangeprevailingduringtheyear.
TranslationadjustmentsarerecordedinAccumulatedgainsand
(losses) not affecting retained earnings in the Consolidated
StatementofStockholders’ Equity.
Inventories,plant,rentalmachinesandotherproperty-net,
andother non-monetaryassetsand liabilities of non-U.S.sub-
sidiaries 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
acquiredtheassetsorliabilities.All other assetsandliabilities
are translated at year-end exchange rates. Cost of sales and
depreciation are translated at historical exchange rates. All
otherincomeandexpenseitemsaretranslatedattheweighted
average rates of exchange prevailing during the year. These
translation gainsandlossesareincludedinnetincomeforthe
periodinwhichexchangerateschange.
Derivatives
AllderivativesarerecognizedintheConsolidatedStatementof
Financial Position at fair value and are reported in Prepaid
expenses and other current assets, Investments and sundry
assets,Other accrued expenses and liabilitiesor Other liabili-
ties.Classificationofeachderivativeascurrentornon-currentis
baseduponwhetherthematurityoftheinstrumentislessthan
or greater than12 months. To qualify for hedge accounting in
accordance with SFAS No. 133, “Accounting for Derivative
InstrumentsandHedgingActivities,” asamendedbySFASNo.
138,“AccountingforCertainDerivativeInstrumentsandCertain
Hedging Activities,” and SFAS No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities,” (collectively,“SFASNo.133”),thecompanyrequires
thattheinstruments be effectiveinreducingtheriskexposure
thattheyaredesignatedtohedge.Forinstrumentsthathedge
cash flows, hedge effectiveness criteria also require that it be
probablethattheunderlyingtransactionwilloccur.Instruments
that meet established accounting criteria are formally desig-
natedashedges.Thesecriteriademonstratethatthederivative
is expected to be highly effective at offsetting changes in fair
valueorcashflowsoftheunderlyingexposurebothatinception
of the hedging relationship and on an ongoing basis. The
method of assessing hedge effectiveness and measuring
hedgeineffectivenessisformallydocumentedathedgeincep-
tion. Thecompanyassesseshedgeeffectivenessandmeasures
hedge ineffectiveness at least quarterly throughout the desig-
natedhedgeperiod.
The company applies hedge accounting in accordance
with SFAS No. 133, whereby the company designates each
derivativeasahedgeof:(1)thefairvalueofarecognizedfinan-
cial asset or liability or of an unrecognized firm commitment
(“fairvalue” hedge);(2)thevariabilityofanticipatedcashflows
ofaforecastedtransactionorthecashflowstobereceivedor
paid related to a recognized financial asset or liability (“cash
flow” hedge); or (3) a hedge of a long-term investment (“net
investment” hedge) in a foreign operation. From time to time,
however, thecompanymayenterintoderivativecontractsthat
economically hedge certain of its risks, even though hedge
accountingdoesnotapplyorthecompanyelectsnottoapply
hedge accounting under SFAS No.133. In these cases, there
existsanaturalhedgingrelationshipinwhichchangesinthefair
value of the derivative, which are recognized currently in net
income,actasaneconomicoffsettochangesinthefairvalueof
theunderlyinghedgeditem(s).
Changesinthefairvalueofaderivativethatisdesignatedas
afairvaluehedge,alongwithoffsettingchangesinthefairvalue
of the underlying hedged exposure, are recorded in earnings