IBM 2012 Annual Report Download - page 81

80 Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
80
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 deferred
income for extended warranty contracts, and in the 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)
2012 2011
Balance at January 1 $ 407 $ 375
Current period accruals 394 435
Accrual adjustments to reflect actual experience (15) 18
Charges incurred (392) (420)
Balance at December 31 $ 394 $ 407
Extended Warranty Liability (Deferred Income)
($ in millions)
2012 2011
Balance at January 1 $ 636 $ 670
Revenue deferred for new extended
warranty contracts 268 314
Amortization of deferred revenue (301) (330)
Other* 4(19)
Balance at December 31 $ 606 $ 636
Current portion $ 289 $ 301
Noncurrent portion 317 335
Balance at December 31 $ 606 $ 636
* 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, legal costs, 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, acquisi-
tion 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 as
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 $1,339 million, $1,373 million and
$1,337 million in 2012, 2011 and 2010, 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 capi-
talized 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 when earned. In addi-
tion, 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 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.