IBM 2010 Annual Report Download - page 70

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies68
Note A.
Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements and foot-
notes of the International Business Machines Corpor ation (IBM or
the company) have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
Within the financial statements and 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 reclassified to conform to the current year
presentation. This is annotated where applicable.
Noncontrolling interest amounts in income of $9 million, $5
million and $14 million, net of tax, for the years ended December
31, 2010, 2009 and 2008, respectively, are not presented separately
in the Consolidated Statement of Earnings due to immateriality, but
are reflected within the other (income) and expense line item.
Additionally, changes to noncontrolling interests in the Consolidated
Statement of Changes in Equity were $8 million, $(1) million and
$(26) million for the years ended December 31, 2010, 2009 and
2008, respectively. A separate roll forward is not presented due
to immateriality.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of
IBM and its controlled subsidiaries, which are generally majority
owned. Any noncontrolling interest in the equity of a subsidiary is
reported in Equity in the Consolidated Statement of Financial
Position. Net income and losses attributable to the noncontrolling
interest is reported as described above in the Consolidated
Statement of Earnings. 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 securities is
described on page 77 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.
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
Consolidated 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 50
to 53 for a discussion of the company’s critical accounting estimates.
Revenue
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 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 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 com-
pany 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 10-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
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 benefit 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 services
is recorded net of costs when the company is acting as an agent
between the client and the 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.
The company reports revenue net of any revenue-based taxes
assessed by governmental authorities that are imposed on and
concurrent with specific revenue-producing transactions. In addi-
tion to the aforementioned general policies, the following are the
specific revenue recognition policies for multiple-deliverable
arrangements and for each major category of revenue.