IBM 2008 Annual Report Download - page 68

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Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
Management Discussion ............................................................................................. 18
Consolidated Statements ............................................................................................ 60
Notes ............................................................................................................................... 66
A – E ........................................................................................................................66
A. SIGNIFICANT ACCOUNTING POLICIES ..........................................................66
B. ACCOUNTING CHANGES .................................................................................76
C. ACQUISITIONS/DIVESTITURES ........................................................................78
D. FAIR VALUE ......................................................................................................84
E. FINANCIAL INSTRUMENTS (EXCLUDING DERIVATIVES) .................................85
F – J ........................................................................................................................86
K– Q .......................................................................................................................88
R –W ..................................................................................................................... 102
Note A.
Significant Accounting Policies
  
The accompanying Consolidated Financial Statements and foot-
notes
thereto of the International Business Machines Corporation
(IBM and/
or the company) have been prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP).
On December , , the company sold its hard disk drive
(HDD) business to Hitachi, Ltd. (Hitachi). The HDD business was
accounted for as a discontinued operation and therefore, the HDD
results of operations and cash flows have been removed from the
company’s results of continuing operations and cash flows for all
periods presented in this document except , in which there was
no activity. For , income from discontinued operations, net of
tax, was related to tax benefits from tax audit settlements.
Within the financial tables presented, certain columns and rows
may not add due to the use of rounded numbers for disclosure
purposes. Percentages presented are calculated from the underlying
whole-dollar amounts. Certain prior year amounts have been reclas-
sified to conform to the current year presentation. This is annotated
where applicable.
  
The Consolidated Financial Statements include the accounts of
IBM and its controlled subsidiaries, which are generally majority
owned. The accounts of variable interest entities (VIEs) as defined
by Financial Accounting Standards Board (FASB) Interpretation
No. (R), “Accounting for Variable Interest Entities,” (FIN (R)),
are included in the Consolidated Financial Statements, if required.
Investments in business entities in which the company does not
have control, but has the ability to exercise significant influence
over operating and financial policies, are accounted for using the
equity method and the company’s proportionate share of income
or loss is recorded in other (income) and expense. The accounting
policy for other investments in equity securities is described on
page  within “Marketable Securities.” Equity investments in non-
publicly traded entities are primarily accounted for using the cost
method. All intercompany transactions and accounts have been
eliminated in consolidation.
  
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts of assets, liabilities, revenue, costs, expenses and gains and
losses not affecting retained earnings that are reported in the Consol-
idated Financial Statements and accompanying disclosures. These
estimates are based on management’s best knowledge of current
events, historical experience, actions that the company may undertake
in the future and on various other assumptions that are believed to be
reasonable under the circumstances. As a result, actual results may be
different from these estimates. See pages  to  for a discussion of
the company’s critical accounting estimates.

The company recognizes revenue when it is realized or realizable and
earned. The company considers revenue realized or realizable and
earned when it has persuasive evidence of an arrangement, delivery
has occurred, the sales price is fixed or determinable and collectibility
is reasonably assured. Delivery does not occur until products have
been shipped or services have been provided to the client, risk of loss
has transferred to the client, and either client acceptance has been
obtained, client acceptance provisions have lapsed, or the company
has objective evidence that the criteria specified in the client accep-
tance provisions have been satisfied. The sales price is not considered
to be fixed or determinable until all contingencies related to the sale
have been resolved.
The company recognizes revenue on sales to solution providers,
resellers and distributors (herein referred to as “resellers”) when the
reseller has economic substance apart from the company, credit risk,
title and risk of loss to the inventory, the fee to the company is not
contingent upon resale or payment by the end user, the company has
no further obligations related to bringing about resale or delivery and
all other revenue recognition criteria have been met.
The company reduces revenue for estimated client returns, stock
rotation, price protection, rebates and other similar allowances. (See
Schedule II, “Valuation and Qualifying Accounts and Reserves”
included in the company’s Annual Report on Form -K). Revenue is
recognized only if these estimates can be reasonably and reliably
determined. The company bases its estimates on historical results
taking into consideration the type of client, the type of transaction
and the specifics of each arrangement. Payments made under coop-
erative marketing programs are recognized as an expense only if the
company receives from the client an identifiable benefit sufficiently
separable from the product sale whose fair value can be reasonably
and reliably estimated. If the company does not receive an identifiable