IBM 2007 Annual Report Download - page 98

96
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Management Discussion ..................................14
Consolidated Statements ..................................58
Notes ........................................................... 64
A-F ...................................................................64
G-M ..................................................................84
N-S ............................................................. 94
N. Contingencies and Commitments ........ 94
O. Taxes ...................................................... 97
P. Research, Development
and Engineering ..........................................99
Q. 2005 Actions ................................................99
R. Earnings Per Share of Common Stock ....101
S. Rental Expense and
Lease Commitments .................................101
T-W ................................................................102
The company is also subject to ongoing tax examinations and
governmental assessments in various jurisdictions. Along with many
other U.S. companies doing business in Brazil, the company is
involved in various challenges with Brazilian authorities regarding
non-income tax assessments and non-income tax litigation matters.
These matters principally relate to claims for taxes on the importation
of computer software. The total amounts related to these matters are
approximately $2.1 billion, including amounts currently in litigation
and other amounts. In addition, the company has received an income
tax assessment from Mexican authorities relating to the deductibility
of certain warranty payments. In response, the company has filed
an appeal in the Mexican Federal Fiscal court. The total potential
amount related to this matter for all applicable years is approximately
$500 million. The company believes it will prevail on these matters
and that these amounts are not meaningful indicators of liability.
In accordance with SFAS No. 5, “Accounting for Contingencies,”
(SFAS No. 5), the company records a provision with respect to a claim,
suit, investigation or proceeding when it is probable that a liability
has been incurred and the amount of the loss can be reasonably esti-
mated. Claims and proceedings are reviewed at least quarterly and
provisions are taken or adjusted to reflect the impact and status of
settlements, rulings, advice of counsel and other information perti-
nent to a particular matter. Any recorded liabilities for the previously
discussed items, including any changes to such liabilities for the year
ended December 31, 2007, were not material to the Consolidated
Financial Statements. Based on its experience, the company believes
that the damage amounts claimed in the matters previously referred
to are not a meaningful indicator of the potential liability. Claims,
suits, investigations and proceedings are inherently uncertain and
it is not possible to predict the ultimate outcome of the matters
previously discussed. While the company will continue to defend
itself vigorously in all such matters, it is possible that the company’s
business, financial condition, results of operations or cash flows could
be affected in any particular period by the resolution of one or more
of these matters.
Whether any losses, damages or remedies finally determined in any
such claim, suit, investigation or proceeding could reasonably have a
material effect on the company’s business, financial condition, results of
operations or cash flows will depend on a number of variables, includ-
ing the timing and amount of such losses or damages; the structure
and type of any such remedies; the significance of the impact any such
losses, damages or remedies may have on the Consolidated Financial
Statements; and the unique facts and circumstances of the particular
matter which may give rise to additional factors.
Commitments
The company’s extended lines of credit to third-party entities include
unused amounts of $3,702 million and $2,895 million at December
31, 2007 and 2006, respectively. A portion of these amounts was
available to the company’s business partners to support their working
capital needs. In addition, the company has committed to provide
future financing to its clients in connection with client purchase
agreements for approximately $3,654 million and $2,496 million at
December 31, 2007 and 2006, respectively. The change over the
prior year is due to increased signings of long-term IT infrastructure
arrangements in which financing is committed by the company to
fund a client’s future purchases from the company.
The company has applied the provisions of FIN 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others,” to its agreements that con-
tain guarantee or indemnification clauses. These provisions expand
those required by SFAS No. 5, by requiring a guarantor to recognize
and disclose certain types of guarantees, even if the likelihood of
requiring the guarantor’s performance is remote. The following is a
description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to
which it may be obligated to indemnify the other party with respect
to certain matters. Typically, these obligations arise in the context of
contracts entered into by the company, under which the company
customarily agrees to hold the other party harmless against losses
arising from a breach of representations and covenants related to
such matters as title to assets sold, certain IP rights, specified environ-
mental matters, third-party performance of non-financial contractual
obligations and certain income taxes. In each of these circumstances,
payment by the company is conditioned on the other party making a
claim pursuant to the procedures specified in the particular contract,
which procedures typically allow the company to challenge the other
party’s claims. Further, the company’s obligations under these agree-
ments may be limited in terms of time and/or amount, and in some
instances, the company may have recourse against third parties for
certain payments made by the company.
It is not possible to predict the maximum potential amount of
future payments under these or similar agreements due to the condi-
tional nature of the company’s obligations and the unique facts and
circumstances involved in each particular agreement. Historically,
payments made by the company under these agreements have not
had a material effect on the company’s business, financial condition
or results of operations.
In addition, the company guarantees certain loans and financial
commitments. The maximum potential future payment under these
financial guarantees was $23 million and $32 million at December 31,
2007 and 2006, respectively. The fair value of the guarantees recognized
in the Consolidated Statement of Financial Position is not material.