IBM 2005 Annual Report Download - page 68
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_67
Lenovoequitywasvaluedat$542millionattheclosingdateand
isrecordedinInvestmentsandsundryassetsintheConsolidated
Statement of Financial Position. In addition, the company
recordedanequitydeferral of $112million to reflectthevalueof
the lock-up provisions. This deferral was recorded as a contra-
investmentinInvestmentsandsundryassets.
AspartoftheagreementswithLenovo,thecompanywillpro-
videcertainservices. Theseservicesincludemarketingsupport,
information technology, human resourcessupport and learning
services. Theseservicearrangementsareprimarilyforperiodsof
threeyearsorlessandcanbeterminatedearlierbyLenovo. The
company estimatedthefairvalueoftheseservicearrangements,
and,asaresult,hasdeferred$262millionofthetransactiongain.
Thisamountwillberecordedasrevenue,primarilyinthecom-
pany’s Global Services segment, as services are provided to
Lenovo.Thedeferredamountwasrecordedindeferredincomein
OtherliabilitiesintheConsolidatedStatementofFinancialPosition.
Thecompanyalsorecordeddirectandincrementalexpenses
andrelatedprovisionsof$254millionassociatedwiththedivesti-
ture,consistingof$74millionforcertainindemnities;$64millionfor
employee-relatedcharges;$40millioninrealestateandinforma-
tiontechnologycosts;$20millionintransactionexpenses;$22mil-
lionofgoodwill;and$34millioninotherexpenses.Thecompany,
aspartoftheagreement,retainedtherightandwillbegivenapref-
erencetoprovidemaintenance,warrantyandfinancingservicesto
Lenovo. ThecompanyretainedthewarrantyliabilityforallPersonal
Computing business products sold prior to the closing date.
LenovowillhavetherighttousecertainIBMTrademarksundera
TrademarkLicenseAgreementforatermoffiveyears. Inaddition,
thecompanyenteredintoanarm’s-lengthsupplyagreementwith
Lenovoforatermoffiveyears,designedtoprovidethecompany
withcomputersforitsinternaluse.
Inthethirdquarterof2005,asaresultofthethird-party invest-
mentsdescribedabove, Lenovo was requiredtorepurchasethe
first equity tranche at a specified share price. The equity repur-
chaseresultedinthereceiptof$152millionofcashandapre-tax
gainof$17 million. As a resultof this transaction,the company’s
equity inLenovo atSeptember30,2005represented9.9percent
ofordinaryvotingsharesand14.88percentoftotalownership.
Also,inthe secondhalfoftheyear,thecompanyreceived
anadditional$23 millionofcashfromLenovorelatedtoworking
capitaladjustments,netofexpensesrelatedtoemployeemat-
ters. These transactions were consistent with the company’s
previousestimates. Overall, includingthegainontheequitysale
recorded in the third quarter, the company recorded an addi-
tionalnetpre-taxgainof$11 million;theresultingnetpre-taxgain
forthe year ending December31,2005is$1,108 million.
Inaddition,atDecember31,2005,thedeferred income bal-
ancerelatedtotheservicesarrangementsdiscussedaboveis
$169million.
D. FinancialInstruments(excluding derivatives)
FairValueofFinancialInstruments
Cashandcashequivalents,marketablesecurities andderivative
financialinstrumentsarerecognizedandmeasuredatfairvalue
inthecompany’sfinancialstatements.Notesandotheraccounts
receivable andotherinvestmentsarefinancialassetswithcarry-
ingvaluesthatapproximatefairvalue.Accountspayable,other
accrued expenses and short-term debt are financial liabilities
with carrying values that approximate fair value. The carrying
amountoflong-termdebtisapproximately$15.4billionand$14.8
billionandtheestimatedfairvalueis$16.7 billionand$15.7billion
atDecember31,2005and2004,respectively.
Intheabsenceofquotedpricesinactivemarkets,consider-
ablejudgmentisrequiredindevelopingestimatesoffairvalue.
Estimatesarenotnecessarilyindicativeoftheamountsthe com-
panycouldrealizeinacurrentmarkettransaction.Thefollowing
methodsandassumptionswereusedtoestimatefairvalues:
LOANS AND FINANCING RECEIVABLES
Estimatesoffairvaluearebasedondiscountedfuturecashflows
usingcurrentinterestratesofferedforsimilarloansto clients with
similarcreditratingsforthesameremainingmaturities.
RESTRICTED SECURITIES
Thefairvalueofrestrictedsecuritieswasestimatedbasedona
quoted price for an identical unrestricted security, adjusted to
reflecttheeffectoftherestriction.
LONG-TERM DEBT
For publicly-traded debt, estimates of fair value are based on
marketprices.Forotherdebt,fairvalueisestimatedbasedon
rates currently available to the company for debt with similar
termsandremainingmaturities.
MarketableSecurities*
The following table summarizes the company’s marketable
securities, all of which are considered available-for-sale, and
allianceinvestments.
(Dollarsinmillions)
FAIRVALUE
ATDECEMBER31: 2005 2004
Marketablesecurities—current:
Auctionratesecurities
andotherobligations $«1,118 $«517
Marketablesecurities—non-current:**
Timedeposits andotherobligations $««««««««2 $«««36
Non-U.S.governmentsecuritiesand
otherfixed-termobligations 13 22
Total $««««««15 $«««58
Non-equitymethodallianceinvestments** $««««558 $«309
* Grossunrealizedgains(beforetaxes)onmarketablesecurities were$110 million
and$85million at December31,2005and2004,respectively.Grossunrealized
losses(beforetaxes)onmarketablesecurities were immaterialtothe Consolidated
FinancialStatements at December31,2005and2004. Grossunrealizedgainsand
losses(beforetaxes)onallianceinvestmentswereimmaterialtotheConsolidated
FinancialStatements atDecember31,2005and2004. Seenote N,“Stockholders’
EquityActivity,”onpages 75 and 76 fornetchangeinunrealizedgainsandlosses
onmarketablesecurities.
**IncludedwithinInvestmentsandsundryassetsintheConsolidatedStatementof
FinancialPosition.Seenote H,“InvestmentsandSundryAssets,”onpage 68.