IBM 2010 Annual Report Download - page 75

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies 73
Business Combinations and
Intangible Assets Including Goodwill
The company accounts for business combinations using the
acquisition method and accordingly, the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest
in the acquiree are recorded at their acquisition date fair values.
Goodwill represents the excess of the purchase price over the fair
value of net assets, including the amount assigned to identifiable
intangible assets. The primary drivers that generate goodwill
are the value of synergies between the acquired entities and the
company and the acquired assembled workforce, neither of which
qualifies as an identifiable intangible asset. Identifiable intangible
assets with finite lives are amortized over their useful lives.
Amortization of completed technology is recorded in cost and
amortization of all other intangible assets is recorded in SG&A
expense. See note C, “Acquisitions/Divestitures,” on pages 81 to
86 and note J, “Intangible Assets Including Goodwill,” on pages
93 and 94, for additional information. Acquisition-related costs,
including advisory, legal, accounting, valuation and other costs,
are expensed in the periods in which the costs are incurred. The
results of operations of acquired businesses are included in the
Consolidated Financial Statements from the acquisition date.
Impairment
Long-lived assets, other than goodwill, are tested for impairment
based on undiscounted cash flows and, if impaired, written down
to fair value based on either discounted cash flows or appraised
values. Goodwill is tested annually, in the fourth quarter, for impair-
ment, or sooner when circumstances indicate an impairment
may exist, using a fair-value approach at the reporting unit level.
A reporting unit is the operating segment, or a business, which is
one level below that operating segment (the “component” level) if
discrete financial information is prepared and regularly reviewed by
management at the segment level. Components are aggregated as
a single reporting unit if they have similar economic characteristics.
Depreciation and Amortization
Plant, rental machines and other property are carried at cost and
depreciated over their estimated useful lives using the straight-line
method. The estimated useful lives of certain depreciable assets
are as follows: buildings, 30 to 50 years; building equipment, 10 to
20 years; land improvements, 20 years; plant, laboratory and office
equipment, 2 to 20 years; and computer equipment, 1.5 to 5 years.
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease term, rarely exceeding
25 years.
Capitalized software costs incurred or acquired after techno-
logical feasibility has been established are amortized over periods
ranging up to 3 years. Capitalized costs for internal-use software
are amortized on a straight-line basis over periods up to 2 years.
(See “Software Costs” on page 71 for additional information). Other
intangible assets are amortized over periods between 2 and 7 years.
Environmental
The cost of internal environmental protection programs that are
preventative in nature are expensed as incurred. When a cleanup
program becomes likely, and it is probable that the company will
incur cleanup costs and those costs can be reasonably estimated,
the company accrues remediation costs for known environmental
liabilities. The company’s maximum exposure for all environmental
liabilities cannot be estimated and no amounts are recorded for
environmental liabilities that are not probable or estimable.
Asset Retirement Obligations
Asset retirement obligations (ARO) are legal obligations associated
with the retirement of long-lived assets. These liabilities are initially
recorded at fair value and the related asset retirement costs are
capitalized by increasing the carrying amount of the related assets
by the same amount as the liability. Asset retirement costs are
subsequently depreciated over the useful lives of the related
assets. Subsequent to initial recognition, the company records
period-to-period changes in the ARO liability resulting from the
passage of time in interest expense and revisions to either
the timing or the amount of the original expected cash flows to
the related assets.
Defined Benefit Pension and
Nonpension Postretirement Benefit Plans
The funded status of the company’s defined benefit pension plans
and nonpension postretirement benefit plans (retirement-related
benefit plans) is recognized in the Consolidated Statement of
Financial Position. The funded status is measured as the difference
between the fair value of plan assets and the benefit obligation at
December 31, the measurement date. For defined benefit pension
plans, the benefit obligation is the projected benefit obligation
(PBO), which represents the actuarial present value of benefits
expected to be paid upon retirement based on estimated future
compensation levels. For the nonpension postretirement benefit
plans, the benefit obligation is the accumulated postretirement
benefit obligation (APBO), which represents the actuarial present
value of postretirement benefits attributed to employee services
already rendered. The fair value of plan assets represents the
current market value of cumulative company and participant
contributions made to an irrevocable trust fund, held for the sole
benefit of participants, which are invested by the trust fund.
Overfunded plans, with the fair value of plan assets exceeding the
benefit obligation, are aggregated and recorded as a prepaid
pension asset equal to this excess. Underfunded plans, with the
benefit obligation exceeding the fair value of plan assets, are aggre-
gated and recorded as a retirement and nonpension postretirement
benefit obligation equal to this excess.
The current portion of the retirement and nonpension postretire-
ment benefit obligations represents the actuarial present value of
benefits payable in the next 12 months exceeding the fair value
of plan assets, measured on a plan-by-plan basis. This obligation
is recorded in compensation and benefits in the Consolidated
Statement of Financial Position.