IBM 2011 Annual Report Download - page 82

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies80
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)
2011 2010
Balance at January 1 $ 375 $ 316
Current period accruals 435 407
Accrual adjustments to reflect actual experience 18 69
Charges incurred (420) (418)
Balance at December 31 $ 407 $ 375
Extended Warranty Liability (Deferred Income)
($ in millions)
2011 2010
Balance at January 1 $ 670 $ 665
Revenue deferred for new extended
warranty contracts 314 329
Amortization of deferred revenue (330) (301)
Other* (19) (22)
Balance at December 31 $ 636 $ 670
Current portion $ 301 $ 315
Noncurrent portion 335 355
Balance at December 31 $ 636 $ 670
* 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 compensation,
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 rebalancing
accruals for contractually obligated payments to employees terminated
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 $1,373 million, $1,337 million
and $1,255 million in 2011, 2010 and 2009, respectively, 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 79.
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intellectual
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 realizable 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.