IBM 2007 Annual Report Download - page 71

69
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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 Global Financing external business transactions), gains and
losses on certain derivative instruments, gains and losses from securi-
ties and other investments, gains and losses from certain real estate
transactions, foreign currency transaction gains and losses, gains and
losses from the sale of businesses and amounts related to accretion of
asset retirement obligations. Certain special actions discussed in note
Q, “2005 Actions,” on pages 99 and 100 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
acquisition date. 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 amortize the
goodwill balance. Substantially all of the 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,
“Acquisitions/Divestitures,” on pages 76 to 82 and note I, “Intangible
Assets Including Goodwill,” on pages 84 and 85, for additional infor-
mation. The results of operations of acquired businesses are included
in the Consolidated Financial Statements from the acquisition date.
Impairment
Long-lived 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 circum-
stances indicate an impairment may exist, using a fair-value approach
at the reporting unit level. A reporting unit is the operating segment,
or a business, which is one level below that operating segment (the
“component” level) if discrete financial information is prepared and
regularly reviewed by management at the segment level. Components
are aggregated as a single reporting unit if they have similar eco-
nomic characteristics.
Depreciation and Amortization
Plant, rental machines and other property are carried at cost and
depreciated over their estimated useful lives using the straight-line
method. The estimated useful lives of certain depreciable assets are
as follows: buildings, 50 years; building equipment, 10 to 20 years;
land improvements, 20 years; plant, laboratory and office equipment,
two to 15 years; and computer equipment, 1.5 to five years. Leasehold
improvements are amortized over the shorter of their estimated useful
lives or the related lease term, rarely exceeding 25 years.
Capitalized software costs incurred or acquired after technologi-
cal feasibility has been established are amortized over periods up to
seven years. Capitalized costs for internal-use software are amortized
on a straight-line basis over periods up to two years. (See “Software
Costs” on page 67 for additional information). Other intangible
assets are amortized over periods between three and seven years.
Environmental
The cost of internal environmental protection programs that are pre-
ventative in nature are expensed as incurred. When a cleanup program
becomes likely, and it is probable that the company will incur cleanup
costs and those costs can be reasonably estimated, the company
accrues remediation costs for known environmental liabilities. The
company’s maximum exposure for all environmental liabilities cannot
be estimated and no amounts are recorded for environmental liabili-
ties that are not probable or estimable.
Asset Retirement Obligations
Asset retirement obligations (ARO) are legal obligations associated
with the retirement of long-lived assets. These liabilities are initially
recorded at fair value and the related asset retirement costs are capi-
talized by increasing the carrying amount of the related assets by the
same amount as the liability. Asset retirement costs are subsequently
depreciated over the useful lives of the related assets. Subsequent to
initial recognition, the company records period-to-period changes in
the ARO liability resulting from the passage of time in Interest
expense and revisions to either the timing or the amount of the
original expected cash flows to the related assets.
Defined Benefit Pension and
Nonpension Postretirement Benefit Plans
The funded status of the company’s defined benefit pension plans
and nonpension postretirement benefit plans (retirement-related
benefit plans) is recognized in the Consolidated Statement of
Financial Position. The funded status is measured as the difference
between the fair value of plan assets and the benefit obligation at
December 31, the measurement date. For defined benefit pension
plans, the benefit obligation is the projected benefit obligation
(PBO), which represents the actuarial present value of benefits