IBM 2011 Annual Report Download - page 83

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies 81
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 89 to 93 and note I, “Intangible Assets Including Goodwill,”
on pages 105 and 106, 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 impairment, or
sooner when circumstances indicate an impairment may exist, using
a qualitative analysis 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
Property, plant and equipment 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 technological
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 79 for additional information). Other intangible assets
are amortized over periods between 1 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 employee services already
rendered and 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 aggregated and recorded as a retirement and nonpension
postretirement benefit obligation equal to this excess.
The current portion of the retirement and nonpension post-
retirement 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.