IBM 2014 Annual Report Download - page 92

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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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 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, other than reported as
discontinued operations, and amounts related to accretion of asset
retirement obligations.
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 identifi-
able 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 a separately identifiable intangible asset. Goodwill
recorded in an acquisition is assigned to applicable reporting
units based on expected revenues. 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. Acquisi-
tion-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 and indefinite-lived intangi-
ble assets, are tested for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. The impairment test is based on undiscounted cash
flows and, if impaired, the asset is written down to fair value based
on either discounted cash flows or appraised values. Goodwill and
indefinite-lived intangible assets are tested annually, in the fourth
quarter, for impairment and whenever changes in circumstances
indicate an impairment may exist. Goodwill is tested at the report-
ing unit level which 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 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 ranging up
to 2years. 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 associ-
ated 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 pen-
sion 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 obliga-
tion is the accumulated postretirement benefit obligation (APBO),
which represents the actuarial present value of postretirement