IBM 2008 Annual Report Download - page 74

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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 ..................................................................................................................... 10 2
approximates  years and varies for participants in non-U.S. plans.
Net periodic cost/(income) is recorded in cost, SG&A and RD&E in
the Consolidated Statement of Earnings based on the employees’
respective function.
(Gains)/losses and prior service costs/(credits) not recognized as
a component of net periodic cost/(income) in the Consolidated
Statement of Earnings as they arise are recognized as a component of
gains and
(l osses) not affecting retained earnings in the Consolidated
Statement of Stockholders’ Equity, net of tax. Those (gains)/losses
and prior service costs/(credits) are subsequently recognized as a com-
ponent of net periodic cost/(income) pursuant to the recognition and
amortization provisions of applicable accounting standards. (Gains)/
losses arise as a result of differences between actual experience and
assumptions or as a result of changes in actuarial assumptions. Prior
service costs/(credits) represent the cost of benefit improvements
attributable to prior service granted in plan amendments.
The measurement of benefit obligations and net periodic cost/
(income) is based on estimates and assumptions approved by the
company’s management. These valuations reflect the terms of the
plans and use participant-specific information such as compensation,
age and years of service, as well as certain assumptions, including
estimates of discount rates, expected return on plan assets, rate of
compensation increases, interest crediting rates and mortality rates.
  
The company records expense for defined contribution plans for the
company’s contribution when the employee renders service to the
company, essentially coinciding with the cash contributions to the
plans. The expense is recorded in cost, SG&A and RD&E in the
Consolidated Statement of Earnings based on the employees’ respec-
tive function.
- 
Stock-based compensation represents the cost related to stock-based
awards granted to employees. The company measures stock-based
compensation cost at grant date, based on the estimated fair value of
the award and recognizes the cost on a straight-line basis (net of
estimated forfeitures) over the employee requisite service period.
The company estimates the fair value of stock options using a Black-
Scholes valuation model. The cost is recorded in cost, SG&A, and
RD&E in the Consolidated Statement of Earnings based on the
employees’ respective function.
The company records deferred tax assets for awards that result in
deductions on the company’s income tax returns, based on the
amount of compensation cost recognized and the statutory tax rate in
the jurisdiction in which it will receive a deduction. Differences
between the deferred tax assets recognized for financial reporting
purposes and the actual tax deduction reported on the income tax
return are recorded in additional paid-in capital (if the tax deduction
exceeds the deferred tax asset) or in the Consolidated Statement of
Earnings (if the deferred tax asset exceeds the tax deduction and no
additional paid-in capital exists from previous awards).
See note T, “Stock-Based Compensation,” on pages  to  for
additional information.
 
Income tax expense is based on reported income before income
taxes. Deferred income taxes reflect the tax effect of temporary dif-
ferences between asset and liability amounts that are recognized for
financial reporting purposes and the amounts that are recognized for
income tax purposes. These deferred taxes are measured by applying
currently enacted tax laws. Valuation allowances are recognized to
reduce deferred tax assets to the amount that will more likely than
not be realized. In assessing the need for a valuation allowance,
management considers all available evidence for each jurisdiction
including past operating results, estimates of future taxable income
and the feasibility of ongoing tax planning strategies. When the com-
pany changes its determination as to the amount of deferred tax
assets that can be realized, the valuation allowance is adjusted with a
corresponding impact to income tax expense in the period in which
such determination is made.
The company recognizes tax liabilities when, despite the compa-
ny’s belief that its tax return positions are supportable, the company
believes that certain positions may not be fully sustained upon review
by tax authorities. Benefits from tax positions are measured at the
largest amount of benefit that is greater than  percent likely of
being realized upon settlement. The current portion of tax liabilities
is included in taxes and the noncurrent portion of tax liabilities is
included in other liabilities in the Consolidated Statement of Financial
Position. To the extent that the final tax outcome of these matters is
different than the amounts recorded, such differences impact income
tax expense in the period in which such determination is made.
Interest and penalties, if any, related to accrued liabilities for poten-
tial tax assessments are included in income tax expense.
  -..  
Assets and liabilities of non-U.S. subsidiaries that have a local func-
tional currency are translated to U.S. dollars at year-end exchange
rates. Translation adjustments are recorded in accumulated gains and
(l osses) not affecting retained earnings in the Consolidated Statement
of Stockholders’ Equity. Income and expense items are translated at
weighted-average rates of exchange prevailing during the year.