IBM 2005 Annual Report Download - page 63
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
62_ NotestoConsolidatedFinancialStatements
definitionofliabilitiesandshouldberecognizedwhenincurred
iftheirfairvaluescanbereasonablyestimated.Thecompany
implementedFIN47atDecember31,2005andrecordedcon-
ditional AROs ofapproximately$85million.Theseconditional
AROs relate to the company’s contractual obligations to
remove leasehold improvements in certain non-U.S. locations
thereby restoring leased space to its original condition. Upon
implementationof FIN47,thecompanyrecordeda$36million
charge (net of income tax benefit of $21 million) which is
reported as a cumulative effect of change in accounting
principlein the2005Consolidated StatementofEarnings.The
company’saccountingpolicyforAROsisdescribedinnote A,
“SignificantAccountingPolicies,” onpage 58.
ProformaeffectsofretroactivelyapplyingFIN47(asifithad
beenappliedduringallyearsreported)areasfollows:
(Dollarsinmillionsexceptpershareamounts)
FORTHEYEARENDEDDECEMBER31: 2005 2004 2003
Proformaamounts
assumingaccountingchange
isappliedretroactively:
Proformanetincome $«7,964 $«7,474 $«6,554
Proformaearnings
pershareofcommonstock—
assuming dilution $«««4.89 $«««4.38 $«««3.74
Proformaearnings
pershareofcommonstock—
basic $«««4.98 $«««4.46 $«««3.81
AROliabilitiesatDecember31,
2005andproformaARO
liabilitiesatDecember31,
2004and2003 $««««««85 $««««««74 $««««««69
AsofDecember31,2005,thecompanywasunabletoestimate
the range of settlement dates and the related probabilities for
certainasbestosremediationAROs.TheseconditionalAROsare
primarilyrelatedtotheencapsulatedstructuralfireproofingthat
isnotsubjecttoabatementunlessthebuildingsaredemolished
andnon-encapsulatedasbestosthatthecompanywouldremedi-
ateonlyifitperformedmajorrenovationsofcertainexistingbuild-
ings. Because these conditional obligations have indeterminate
settlementdates,the company couldnotdevelop a reasonable
estimate of their fair values. The company will continue to
assessitsabilitytoestimatefairvaluesateachfuturereporting
date. The related liability will be recognized once sufficient
additionalinformationbecomesavailable.
In June 2005, the FASB issued FASB Staff Position (FSP)
No. FAS 143-1, “Accounting for Electronic Equipment Waste
Obligations,” (FSP FAS143-1) that provides guidance on how
commercial users and producers of electronic equipment
should recognize and measure asset retirement obligations
associated with the European Directive 2002/96/EC on Waste
Electrical and Electronic Equipment (the “Directive”). In 2005,
thecompanyadoptedFSPFAS143-1 inthoseEuropeanUnion
(EU)membercountriesthattransposedtheDirectiveintocoun-
try-specificlaws. Itsadoptiondidnothaveamaterialeffecton
thecompany’sConsolidatedFinancialStatements.Theeffectof
applyingFSPFAS143-1 intheremainingcountriesinfutureperi-
odsisnotexpectedtohaveamaterialeffectonthecompany’s
ConsolidatedFinancialStatements.
In the third quarter of 2005, the company adopted SFAS
No.153,“ExchangesofNonmonetaryAssets,anamendmentof
APBOpinionNo.29.” SFASNo.153requiresthatexchangesof
productive assets be accounted for at fair value unless fair
value cannot be reasonably determined or the transaction
lackscommercialsubstance.TheadoptionofSFASNo.153did
not have a material effect on the company’s Consolidated
FinancialStatements.
TheAmerican Jobs CreationAct of2004 (the “Act”)intro-
duced a temporary incentive for the company to repatriate
earningsaccumulatedoutsidetheU.S.Inthefourthquarterof
2004,thecompanyadoptedtheprovisionsofFSPNo.FAS109-
2, “Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
CreationActof2004.” AccordingtoFSPFAS109-2,thecompany
wasallowedtimebeyondthefinancialreportingperiodofenact-
menttoevaluatetheeffectsoftheActonitsplanforrepatriation
of foreign earnings for purposes of applying SFAS No. 109,
“AccountingforIncomeTaxes.” Accordingly,asofDecember31,
2004, the company did not adjust its income tax expense or
deferredtaxliabilitytoreflectthepossibleeffectofthenewrepa-
triationprovision.In2005,thecompanyrepatriated$9.5billion
offoreignearningsandrecordedincometax expenseof$525
millionassociatedwiththisrepatriation.See note P, “Taxes” on
pages 79 and 80 foradditionalinformation.
In December 2003, the FASB revised SFAS No. 132,
“Employers’ Disclosures about Pensions and Other Postretire-
ment Benefits, an amendment of FASB Statements No. 87, 88
and106.” SFASNo.132(R)retainedallofthedisclosurerequire-
ments of SFAS No. 132, however, it also required additional
annualdisclosuresdescribingtypesofplanassets,investment
strategy, measurement date(s), expected employer contribu-
tions, plan obligations, and expected benefit payments of
definedbenefitpensionplansandotherdefinedbenefitpostre-
tirement plans. In accordance with the transition provisions of
SFASNo.132(R),note V,“Retirement-RelatedBenefits,” onpages
85 to 95 has been expanded to include the new disclosures
requiredasofDecember31,2003.
In January 2003, the FASB issued FASB Interpretation No.
46 (FIN 46), “Consolidation of Variable Interest Entities,” and
amendeditbyissuing FIN 46(R)inDecember2003.FIN46(R)
addresses consolidation by business enterprises of variable
interestentities(VIEs)thateither:(1)donothavesufficientequity
investmentatrisktopermittheentitytofinanceitsactivitieswith-
outadditionalsubordinatedfinancialsupport,or(2)haveequity
investors that lack an essential characteristic of a controlling
financialinterest.AsofDecember 31,2003and in accordance
withthetransitionrequirementsofFIN46(R),thecompanychose