IBM 2010 Annual Report Download - page 74

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies72
Revenue from separately priced extended warranty contracts
is recorded as deferred income and subsequently recognized
on a straight-line basis over the delivery period. Changes in the
company’s deferred income for extended warranty contracts and
warranty liability for standard warranties, which are included in
other accrued expenses and liabilities and other liabilities in the
Consolidated Statement of Financial Position, are presented in the
following tables:
Standard Warranty Liability
($ in millions)
2010 2009
Balance at January 1 $ 316 $ 358
Current period accruals 407 374
Accrual adjustments to reflect actual experience 69 (11)
Charges incurred (418) (406)
Balance at December 31 $ 375 $ 316
Extended Warranty Liability
($ in millions)
2010 2009
Aggregate deferred revenue at January 1 $ 665 $ 589
Revenue deferred for new extended
warranty contracts 329 283
Amortization of deferred revenue (301) (226)
Other* (22) 18
Balance at December 31 $ 670 $ 665
Current portion $ 315 $ 310
Noncurrent portion 355 355
Balance at December 31 $ 670 $ 665
* Other consists primarily of foreign currency translation adjustments.
Shipping and Handling
Costs related to shipping and handling are recognized as incurred
and included in cost in the Consolidated Statement of Earnings.
Expense and Other Income
Selling, General and Administrative
Selling, general and administrative (SG&A) expense is charged to
income as incurred. Expenses of promoting and selling products
and services are classified as selling expense and include such
items as compensation, advertising, sales commissions and travel.
General and administrative expense includes such items as com-
pensation, office supplies, non-income taxes, insurance and office
rental. In addition, general and administrative expense includes other
operating items such as an allowance for credit losses, workforce
accruals for contractually obligated payments to employees termi-
nated in the ongoing course of business, acquisition costs related
to business combinations, amortization of certain intangible assets
and environmental remediation costs.
Advertising and Promotional Expense
The company expenses advertising and promotional costs when
incurred. Cooperative advertising reimbursements from vendors
are recorded net of advertising and promotional expense in the
period in which the related advertising and promotional expense
is incurred. Advertising and promotional expense, which includes
media, agency and promotional expense, was $1,337 million,
$1,255 million and $1,259 million in 2010, 2009 and 2008, respec-
tively, and is recorded in SG&A expense in the Consolidated
Statement of Earnings.
Research, Development and Engineering
Research, development and engineering (RD&E) costs are
expensed as incurred. Software costs that are incurred to produce
the finished product after technological feasibility has been
established are capitalized as an intangible asset. See “Software
Costs” on page 71.
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intel-
lectual property (IP) including internally developed patents, trade
secrets and technological know-how. Certain IP transactions to
third parties are licensing/royalty-based and others are transaction-
based sales and other transfers. Licensing/royalty-based fees
involve transfers in which the company earns the income over time,
or the amount of income is not fixed or determinable until the
licensee sells future related products (i.e., variable royalty, based
upon licensee’s revenue). Sales and other transfers typically include
transfers of IP whereby the company has fulfilled its obligations
and the fee received is fixed or determinable at the transfer date.
The company also enters into cross-licensing arrangements of
patents, and income from these arrangements is recorded only to
the extent cash is received. Furthermore, the company earns
income from certain custom development projects for strategic
technology partners and specific clients. The company records
the income from these projects when the fee is realized or realiz-
able and earned, is not refundable and is not dependent upon the
success of the project.
Other (Income) and Expense
Other (income) and expense includes interest income (other than
from Global Financing external business transactions), gains and
losses on certain derivative instruments, gains and losses from
securities and other investments, gains and losses from certain
real estate transactions, foreign currency transaction gains and
losses, gains and losses from the sale of businesses and amounts
related to accretion of asset retirement obligations.