IBM 2009 Annual Report Download - page 88

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
The company initially created a wholly owned subsidiary,
InfoPrint Solutions Company, LLC (InfoPrint), by contributing spe-
cific assets and liabilities from its printer business. The Printing
Systems Division generated approximately $1 billion of revenue
in 2006. The InfoPrint portfolio includes solutions for production
printing for enterprises and commercial printers as well as solu-
tions for office workgroup environments and industrial segments.
On June 1, 2007 (closing date), the company divested 51 per-
cent of its interest in InfoPrint to Ricoh. The company will divest
its remaining 49 percent ownership to Ricoh quarterly over the
next three years from the closing date. At December 31, 2009,
the company’s ownership in InfoPrint was 8.0 percent.
The total consideration the company agreed to on January
24, 2007 (the date the definitive agreement was signed) was
$725 million which was paid in cash to the company on the clos-
ing date. The cash received was consideration for the initial 51
percent acquisition of InfoPrint by Ricoh as well as a prepayment
for the remaining 49 percent to be acquired and certain royalties
and services to be provided by the company to InfoPrint. Final
consideration for this transaction will be determined at the end
of the three-year period based upon the participation in the
profits and losses recorded by the equity partners. The com-
pany concluded that InfoPrint met the requirements of a variable
interest entity, the company is not the primary beneficiary of the
entity and that deconsolidation of the applicable net assets was
appropriate. The company’s investment in InfoPrint is accounted
for under the equity method of accounting.
The company will provide maintenance services for one year,
certain hardware products for three years and other information
technology and business process services to InfoPrint for up to
five years. The company assessed the fair value of these arrange-
ments, and, as a result, deferred $274 million of the proceeds.
This amount will be recorded as revenue, primarily in the com-
pany’s services segments, as services are provided to InfoPrint.
The royalty agreements are related to the use of certain of
the company’s trademarks for up to 10 years. The company
assessed the fair value of these royalty agreements, and, as a
result, deferred $116 million of the proceeds. This amount will
be recognized as intellectual property and custom development
income as it is earned in subsequent periods.
Net assets contributed, transaction-related expenses and
provi sions were $90 million, resulting in an expected total pre-tax
gain of $245 million, of which $81 million was recorded in other
(income) and expense in the Consolidated Statement of Earnings
in the second quarter of 2007.
The deferred pre-tax gain of $164 million at the closing date
was primarily related to: (1) the transfer of the company’s remain-
ing 49 percent interest in InfoPrint to Ricoh, and, (2) the transfer of
certain maintenance services employees to InfoPrint. The com-
pany will recognize this amount over a three-year period as the
remaining ownership interest is divested and the employees are
transferred. The pre-tax gain will be recorded in other (income)
and expense in the Consolidated Statement of Earnings.
Note D.
Fair Value
Financial Assets and Financial Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis
at December 31, 2009 and 2008.
($ in millions)
At December 31, 2009: Level 1 Level 2 Level 3 Netting(1) Total
Assets:
Cash and cash equivalents $2,780 $6,497 $ — $ — $ 9,277
Marketable securities — 1,791 — — 1,791
Derivative assets(2) — 838 — (573) 265
Investments and sundry assets 369 14 — — 383
Total assets $3,149 $9,140 $ — $(573) $11,716
Liabilities:
Derivative liabilities(3) $ — $1,555 $ — $(573) $ 982
Total liabilities $ — $1,555 $ — $(573) $ 982
(1) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(2)
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement
of Financial Position at December 31, 2009 are $273 million and $565 million, respectively.
(3) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position
at December 31, 2009 are $906 million and $649 million, respectively.
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