IBM 2015 Annual Report Download - page 88

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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liability is reviewed quarterly to verify that it properly reflects the
remaining obligation based on the anticipated expenditures over
the balance of the obligation period. Adjustments are made when
actual warranty claim experience differs from estimates. Costs
from fixed-price support or maintenance contracts, including
extended warranty contracts, are recognized as incurred.
Revenue from extended warranty contracts is initially 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 stan-
dard 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)
2015 2014
Balance at January 1 $ 197 $ 376
Current period accruals 173 240
Accrual adjustments to refl ect experience* 7(120)
Charges incurred (196) (298)
Balance at December 31 $ 181 $ 197
* Includes an adjustment of $(125million) in 2014 related to the System x business
divestiture.
Extended Warranty Liability (Deferred Income)
($ inmillions)
2015 2014
Balance at January 1 $ 536 $ 579
Revenue deferred for new extended
warranty contracts 286 298
Amortization of deferred revenue* (253) (316)
Other** (31) (24)
Balance at December 31 $ 538 $ 536
Current portion $ 238 $ 254
Noncurrent portion $ 300 $ 282
* Includes an adjustment of $(21million) in 2014 related to the System x business
divestiture.
** 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 prod-
ucts 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, 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 charges for contractually obli-
gated payments to employees terminated in the ongoing course
of business, acquisition costs related to business combinations,
amortization of certain intangible assets and environmental reme-
diation costs.
Advertising and Promotional Expense
The company expenses advertising and promotional costs as
incurred. Cooperative advertising reimbursements from ven-
dors 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 $1,290
million, $1,307 million and $1,294 million in 2015, 2014 and 2013,
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 pro-
duce the finished product after technological feasibility has been
established are capitalized as an intangible asset.
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intel-
lectual 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 transac-
tion-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 roy-
alty, 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 addition, 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 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.