IBM 2005 Annual Report Download - page 61
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
60_ NotestoConsolidatedFinancialStatements
each period. For hedges of interest rate risk, the fair value
adjustments are recorded as adjustments to Interest expense
andCostofGlobalFinancingintheConsolidatedStatementof
Earnings.Forhedgesofcurrencyriskassociatedwithrecorded
financial assets or liabilities, derivative fair value adjustments
are recognized in Other (income) and expense in the
ConsolidatedStatementofEarnings.Changesinthefairvalue
of a derivative that is designated as a cash flow hedge are
recorded,netofapplicabletaxes,intheAccumulatedgainsand
(losses) not affecting retained earnings, a component of
Stockholders’ equity. When netincomeisaffectedbythevari-
ability of the underlying cash flow, the applicable offsetting
amountofthegainorlossfromthederivativethatisdeferredin
Stockholders’ equityisreleasedtonetincomeandreportedin
Interestexpense, Cost, SG&A expenseor Other(income)and
expense in the Consolidated Statement of Earnings based on
thenatureoftheunderlyingcashflowhedged.Effectivenessfor
net investment hedging derivatives is measured on a spot-to-
spotbasis.Theeffectiveportionofchangesinthefairvalueof
netinvestmenthedgingderivativesandothernon-derivativerisk
managementinstrumentsdesignatedasnetinvestmenthedges
arerecordedasforeigncurrencytranslationadjustments,netof
applicable taxes, in the Accumulated gains and (losses) not
affecting retained earnings section of the Consolidated
StatementofStockholders’ Equity.Changesinthefairvalueof
theportionofanetinvestmenthedgingderivativeexcludedfrom
theeffectivenessassessmentarerecordedinInterestexpense.
When the underlying hedged item ceases to exist, all
changes in the fair value of the derivative are included in net
income each period until the instrument matures. When the
derivativetransactionceasestoexist,ahedgedassetorliability
is no longer adjusted for changes in its fair value except as
requiredunderotherrelevantaccountingstandards.Derivatives
thatarenotdesignatedashedges,aswellaschangesinthefair
valueofderivativesthatdonoteffectivelyoffsetchangesinthe
fair value of the underlying hedged item throughout the desig-
natedhedgeperiod(collectively,“ineffectiveness”),arerecorded
innetincome eachperiodandarereportedinOther(income)
andexpense.
The company reports cash flows arising from the com-
pany’sderivativefinancialinstrumentsconsistentwiththeclas-
sification of cash flows from the underlying hedged items that
the derivatives are hedging. Accordingly, the majority of cash
flows associated with the company’s derivative programs are
classified in Cash flows from operating activities in the
Consolidated Statement of Cash Flows. For currency swaps
designated as hedges of foreign currency denominated debt
(includedinthecompany’sdebtriskmanagementprogramas
addressedinnote L,“DerivativesandHedgingTransactions” on
pages 71 to 74),cashflowsdirectlyassociatedwiththesettle-
ment of the principal element of these swaps are reported in
PaymentstosettledebtintheCashflowfromfinancingactivities
sectionoftheConsolidatedStatementofCashFlows.
FinancialInstruments
In determining fair value of its financial instruments, the com-
panyusesavarietyofmethodsandassumptionsthatarebased
onmarket conditionsandrisksexistingat eachbalancesheet
date. For the majority of financial instruments, including most
derivatives, long-term investments and long-term debt, stan-
dard market conventions and techniques such as discounted
cashflowanalysis,optionpricingmodels,replacementcostand
terminationcostareusedtodeterminefairvalue.Dealerquotes
areusedfortheremainingfinancialinstruments.Allmethodsof
assessingfairvalueresultinageneralapproximationofvalue,
andsuchvaluemayneveractuallyberealized.
Cash Equivalents
Allhighlyliquidinvestmentswithmaturitiesofthreemonthsorless
atthedateofpurchaseare consideredtobecashequivalents.
Marketable Securities
Debtsecurities includedinCurrentassetsrepresentsecurities
thatareexpectedtoberealizedincashwithinoneyearofthe
balance sheet date. Long-term debt securities that are not
expected to be realized in cash within one year and alliance
equity securities that are within the scope of SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities,” are included in Investments and sundry assets.
Those securities are considered available for sale and are
reported at fair value with unrealized gains and losses, net of
applicabletaxes,recordedinAccumulatedgainsand(losses)
not affecting retained earnings within Stockholders’ equity.
Realizedgainsandlossesarecalculatedbasedonthespecific
identificationmethod.Other-than-temporarydeclinesinmarket
value from original cost are charged to Other (income) and
expenseintheperiodinwhichthelossoccurs.Indetermining
whether an other-than-temporary decline in the market value
has occurred, the company considers the duration that, and
extent to which, fair value of the investment is below its cost.
RealizedgainsandlossesalsoareincludedinOther(income)
andexpenseintheConsolidatedStatementofEarnings.
Inventories
Rawmaterials,workinprocessandfinishedgoodsarestatedat
thelower of averagecostormarket. InaccordancewithSFAS
No. 95, “StatementofCashFlows,” cashflowsrelatedtothesale
ofthecompany’sinventories arereflectedin Netcashfromoper-
ating activities from continuing operations in the Consolidated
StatementofCashFlows.
AllowanceforUncollectibleReceivables
TRADE
An allowance for uncollectible trade receivables is estimated
basedonacombinationofwrite-offhistory,aginganalysis,and
anyspecific,knowntroubledaccounts.