IBM 2009 Annual Report Download - page 72

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Note A.
Signicant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements and foot-
notes thereto of the International Business Machines Corpor ation
(IBM and/or the company) have been prepared in accordance
with accounting principles generally accepted in the United States
of America (GAAP).
On December 31, 2002, 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 2007. There was no activity in 2008 or 2009.
The company evaluated subsequent events through February
23, 2010, which is the date the financial statements were issued.
Within the financial tables presented, certain columns and
rows may not add due to the use of rounded numbers for dis-
closure purposes. Percentages presented are calculated from
the underlying whole-dollar amounts. Certain prior year amounts
have been reclassified to conform to the current year presenta-
tion. This is annotated where applicable.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of
IBM and its controlled subsidiaries, which are generally major-
ity owned. The accounts of variable interest entities (VIEs) 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 securi-
ties is described on page 78 within “Marketable Securities.”
Equity investments in non-publicly traded entities are primarily
accounted for using the cost method. All intercompany transac-
tions and accounts have been eliminated in consolidation.
Use of Estimates
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 other comprehensive income/(loss) 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 cir-
cumstances. As a result, actual results may be different from
these estimates. See pages 52 to 54 for a discussion of the
company’s critical accounting estimates.
Revenue
The company recognizes revenue when it is realized or realiz-
able 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 objec-
tive evidence that the criteria specified in the client acceptance
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 provid-
ers, resellers and distributors (herein referred to as “resellers”)
when the reseller has economic substance apart from the com-
pany, 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 allow-
ances. (See Schedule II, “Valuation and Qualifying Accounts and
Reserves” included in the company’s Annual Report on Form
10-K). Revenue is recognized only if these estimates can be
reasonably and reliably determined. The company bases its esti-
mates on historical results taking into consideration the type of
client, the type of transaction and the specifics of each arrange-
ment. Payments made under cooperative 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 ben-
efit sufficiently separable from the product sale whose fair value
can be reasonably estimated, such payments are recorded as a
reduction of revenue.
Revenue from sales of third-party vendor products or ser-
vices is recorded net of costs when the company is acting as
an agent between the client and vendor and gross when the
company is a principal to the transaction. Several factors are
considered to determine whether the company is an agent or
principal, most notably whether the company is the primary
obligor to the client, or has inventory risk. Consideration is also
given to whether the company adds meaningful value to the
vendor’s product or service, was involved in the selection of the
vendor’s product or service, has latitude in establishing the sales
price or has credit risk.
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