IBM 2006 Annual Report Download - page 68

SHIPPING AND HANDLING
Costs related to shipping and handling are included in Cost in the
Consolidated Statement of Earnings.
EXPENSE AND OTHER INCOME
Selling, General and Administrative
Selling, general and administrative (SG&A) expense is charged to
income as incurred. Expenses of promoting and selling products and
services are classified as selling expense and include such items as
advertising, sales commissions and travel. General and administrative
expense includes such items as compensation, office supplies, non-
income taxes, insurance and office rental. In addition, general and
administrative expense includes other operating items such as a pro-
vision for doubtful accounts, workforce accruals for contractually
obligated payments to employees terminated in the ongoing course of
business, amortization of certain intangible assets and environmental
remediation costs. Certain special actions discussed in note R, “2005
Actions,” on pages 93 and 94 are also included in SG&A.
Advertising and Promotional Expense
The company expenses advertising and promotional costs when
incurred. Cooperative advertising reimbursements from vendors are
recorded net of advertising and promotional expense in the period the
related advertising and promotional expense is incurred. Advertising
and promotional expense, which includes media, agency and promo-
tional expense, was $1,195 million, $1,284 million and $1,335 million
in 2006, 2005 and 2004, respectively, and is recorded in SG&A expense
in the Consolidated Statement of Earnings.
Research, Development and Engineering
Research, development and engineering (RD&E) costs are expensed
as incurred.
Intellectual Property and Custom
Development Income
As part of the company’s business model and as a result of the compa-
ny’s ongoing investment in research and development, the company
licenses and sells the rights to certain of its intellectual property (IP)
including internally developed patents, trade secrets and technologi-
cal know-how. Certain transfers of IP to third parties are licensing/
royalty-based and other transfers are transaction-based sales and other
transfers. Licensing/royalty-based fees involve transfers in which the
company earns the income over time, or the amount of income is not
fixed or determinable until the licensee sells future related products
(i.e., variable royalty, based upon licensee’s revenue). Sales and other
transfers typically include transfers of IP whereby the company has
fulfilled its obligations and the fee received is fixed or determinable at
the transfer date. The company also enters into cross-licensing arrange-
ments of patents, and income from these arrangements is recorded only
to the extent cash is received. Furthermore, the company earns income
from certain custom development projects for strategic technology
partners and specific clients. The company records the income from
these projects when the fee is realized or realizable and earned, is not
refundable and is not dependent upon the success of the project.
Other (Income) and Expense
Other (income) and expense includes interest income (other than
from the company’s Global Financing external business transactions),
gains and losses on certain derivative instruments, gains and losses
from securities and other investments, gains and losses from certain
real estate activity, foreign currency transaction gains and losses, gains
and losses from the sale of businesses and amounts related to accre-
tion of asset retirement obligations. Certain special actions discussed
in note R, “2005 Actions,” on pages 93 and 94 are also included in
Other (income) and expense.
BUSINESS COMBINATIONS AND INTANGIBLE
ASSETS INCLUDING GOODWILL
The company accounts for business combinations using the
purchase method of accounting and accordingly, the assets and
liabilities of the acquired entities are recorded at their estimated fair
values at the date of acquisition. Goodwill represents the excess of the
purchase price over the fair value of net assets, including the amount
assigned to identifiable intangible assets. The company does not amor-
tize the goodwill balance. Substantially all of the company’s goodwill is
not deductible for tax purposes. The primary drivers that generate
goodwill are the value of synergies between the acquired entities and
the company and the acquired assembled workforce, neither of which
qualifies as an identifiable intangible asset. Identifiable intangible
assets with finite lives are amortized over their useful lives. See note C,
“Acquisition/Divestitures,” on pages 73 to 78 and note I, “Intangible
Assets Including Goodwill,” on pages 80 and 81, for additional infor-
mation. The results of operations of the acquired businesses were
included in the company’s Consolidated Financial Statements from the
respective dates of acquisition.
IMPAIRMENT
Assets, other than goodwill, are tested for impairment based on
undiscounted cash flows and, if impaired, written down to fair value
based on either discounted cash flows or appraised values. Goodwill
is tested annually for impairment, or sooner when circumstances
indicate an impairment may exist, using a fair-value approach at the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
66 2006 Annual Report
Consolidated Statements ......................................................... 
Notes .....................................................................................
A-G ......................................................................................... 62
A. Significant Accounting Policies ....................................... 62
B. Accounting Changes........................................................ 71
C. Acquisitions/Divestitures ................................................. 73
D. Financial Instruments (excluding derivatives) ................ 78
E. Inventories ....................................................................... 79
F. Financing Receivables ...................................................... 79
G. Plant, Rental Machines and Other Property ................... 79
H-M ......................................................................................... 80
N-S .......................................................................................... 88
T-X .......................................................................................... 96
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