IBM 2005 Annual Report Download - page 62
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_61
FINANCING
Financingreceivablesincludesales-typeleases,directfinancing
leases, and loans. Below are the methodologies the company
usestocalculatebothitsspecificanditsunallocatedreserves,
whichareappliedconsistentlytoitsdifferentportfolios.
SPECIFIC –Thecompanyreviewsallfinancingaccountsreceiv-
ables consideredatriskonaquarterlybasis.Thereviewprima-
rilyconsistsofananalysisbaseduponcurrentinformationavail-
ableabouttheclient,suchasfinancialstatements,newsreports
and published credit ratings, as well as the current economic
environment,collateral netof repossession cost and prior col-
lectionhistory. For loansthatarecollateraldependent,impair-
mentismeasuredusingthefairvalueofthecollateralwhenfore-
closureisprobable.Usingthisinformation,thecompanydeter-
minestheexpectedcashflowforthereceivableandcalculates
arecommendedestimateofthepotentiallossandtheprobabil-
ityofloss.Forthoseaccountsinwhichthelossisprobable,the
companyrecordsaspecificreserve.
UNALLOCATED –The company records an unallocated reserve
thatiscalculatedbyapplyingareserveratetoitsdifferentport-
folios,excludingaccountsthathavebeenspecificallyreserved.
This reserve rate is based upon credit rating, probability of
default,term,assetcharacteristics,andlosshistory.
Receivable losses are charged against the allowance
when management believes the uncollectibility of the receiv-
ableisconfirmed.Subsequentrecoveries,ifany,arecredited
totheallowance.
Certainreceivablesforwhichthecompanyrecordedspecific
reservesmayalsobeplacedonnon-accrualstatus.Non-accrual
assetsarethosereceivables(impairedloans ornon-performing
leases)withspecificreservesandotheraccountsforwhichit
is likelythatthecompanywillbeunabletocollect allamounts
dueaccordingtooriginaltermsoftheleaseorloanagreement.
Income recognition is discontinued on these receivables.
Cashcollectionsarefirstappliedasareductiontoprincipalout-
standing. Any cash received in excess of principle payments
outstandingisrecognizedasinterestincome.Receivablesmay
beremovedfromnon-accrualstatus,ifappropriate,basedupon
changesinclientcircumstances.
EstimatedResidualValuesofLeaseAssets
The recorded residual values of the company’s lease assets
areestimatedattheinceptionoftheleasetobetheexpected
fairvalueoftheassetsattheendoftheleaseterm.Thecom-
panyperiodicallyreassessestherealizablevalueof its lease
residual values. Any anticipated increases in specific future
residualvaluesarenot recognizedbeforerealizationthrough
remarketing efforts. Anticipated decreases in specific future
residualvaluesthatareconsideredtobeother-than-temporary
are recognized immediately upon identification and are
recordedasanadjustmenttotheresidualvalueestimate.For
sales-type and direct financing leases, this reduction lowers
the recorded net investment and is recognized as a loss
chargedtofinanceincomeintheperiodinwhichtheestimate
ischanged,aswell asanadjustmenttounearnedincometo
reducefutureperiodfinanceincome.
CommonStock
Commonstockreferstothe$.20parvaluecapitalstockasdes-
ignatedinthe company’sCertificateofIncorporation. Treasury
stock is accounted for using the cost method. When treasury
stockisreissued,thevalueiscomputedandrecordedusinga
weightedaveragebasis.
EarningsperShareofCommon Stock
Earnings per share of common stock basic is computed by
dividingNetincomebytheweightedaveragenumberofcom-
mon shares outstanding for the period. Earnings per share of
commonstock, assumingdilution, reflectsthemaximumpoten-
tial dilution that could occur if securities or other contracts to
issuecommonstockwereexercisedorconvertedintocommon
stockandwouldthenshareinthenetincomeofthecompany.
Seenote S,“EarningsPerShareofCommonStock,” onpage 82
foradditionalinformation.
B.AccountingChanges
NewStandardstobeImplemented
In June 2005, the FASB issued SFAS No. 154, “Accounting
ChangesandErrorCorrections,areplacementofAPBOpinion
No.20andFASBStatementNo.3.” SFASNo.154willbecome
effectiveforaccountingchangesandcorrectionsoferrorsmade
infiscalyear2006 andbeyond.Theeffectofthisstatementon
thecompany’s ConsolidatedFinancial Statements willdepend
on the nature and significance of future accounting changes
subjecttothisstatement.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43, Chapter 4.”
SFASNo.151 requirescertainabnormalexpenditurestoberec-
ognizedasexpensesinthecurrentperiod.Italsorequiresthat
theamountoffixedproductionoverheadallocatedtoinventory
bebasedonthenormalcapacityoftheproductionfacilities.The
standardwillbecomeeffectiveinfiscalyear2006.SFASNo.151
is not expected to have a material effect on the company’s
ConsolidatedFinancialStatements.
StandardsImplemented
As discussed in note A, “Significant Accounting Policies” on
pages 58 and 59, effective January 1, 2005, the company
adoptedtheprovisionsofSFAS123(R).Thecompanyelectedto
adopt the modified retrospective application method provided
by SFAS 123(R) and accordingly, financial statement amounts
fortheperiodspresentedhereinreflectresultsasifthefairvalue
methodofexpensinghadbeenappliedfromtheoriginaleffec-
tivedateofSFAS123.Seenote U,“Stock-BasedCompensation”
onpages 83to85 foradditionalinformation.
InMarch2005,theFASB issuedFASBInterpretation(FIN)
No.47,“AccountingforConditionalAssetRetirementObligations,
an interpretation of FASB Statement No. 143” (FIN 47). FIN 47
clarifies that conditional asset retirement obligations meet the