Kodak 2001 Annual Report Download - page 56

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Eastman Kodak Company and Subsidiary Companies
Notes to Financial Statements
Note 1: Significant Accounting Policies
Company Operations Eastman Kodak Company (the Company or Kodak)
is engaged primarily in developing, manufacturing, and marketing
traditional and digital imaging products, services and solutions to
consumers, the entertainment industry, professionals, healthcare
providers and other customers. The Company’s products are manufactured
in a number of countries in North and South America, Europe, Australia
and Asia. The Company’s products are marketed and sold in many
countries throughout the world.
Basis of Consolidation The consolidated financial statements include the
accounts of Kodak and its majority owned subsidiary companies.
Intercompany transactions are eliminated and net earnings are reduced
by the portion of the earnings of subsidiaries applicable to minority
interests. The equity method of accounting is used for joint ventures and
investments in associated companies over which Kodak has significant
influence, but does not have effective control. Significant influence is
generally deemed to exist when the Company has an ownership interest
in the voting stock of the investee of between 20% and 50%, although
other factors, such as representation on the investee’s Board of Directors,
voting rights and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is
appropriate. The cost method of accounting is used for investments in
which Kodak has less than a 20% ownership interest, and the Company
does not have the ability to exercise significant influence. These
investments are carried at cost and are adjusted only for other-than-
temporary declines in fair value. The carrying value of these investments
is reported in other long-term assets. The Company’s equity in the net
income and losses of these investments is reported in other income
(charges). See Note 6 and Note 12.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at year end and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Foreign Currency For most subsidiaries and branches outside the U.S.,
the local currency is the functional currency. In accordance with the
Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign
Currency Translation,” the financial statements of these subsidiaries and
branches are translated into U.S. dollars as follows: assets and liabilities
at year-end exchange rates; income, expenses and cash flows at average
exchange rates; and shareholders’ equity at historical exchange rates. For
those subsidiaries for which the local currency is the functional currency,
the resulting translation adjustment is recorded as a component of
accumulated other comprehensive income in the accompanying balance
sheet. Translation adjustments are not tax-effected since they relate to
investments which are permanent in nature.
For certain other subsidiaries and branches, operations are
conducted primarily in U.S. dollars, which is therefore the functional
currency. Monetary assets and liabilities, and the related revenue,
expense, gain and loss accounts, of these foreign subsidiaries and
branches are remeasured at year-end exchange rates. Non-monetary
assets and liabilities, and the related revenue, expense, gain and loss
accounts, are remeasured at historical rates.
The Company has operations in Argentina. Prior to December 31,
2001, the Argentine peso had been pegged to the U.S. dollar at an
exchange rate of 1 to 1. In late December 2001, although the official
exchange rate between the peso and the dollar remained at 1 to 1,
exchange houses started exchanging at a rate of 1.4 pesos to the dollar
in anticipation that the government would announce a devaluation of
the peso. The exchange houses were then closed, and at year-end 2001
there was no exchangeability between the peso and the dollar. The
exchangeability between the peso and the dollar was first re-established
on January 11, 2002, and the day’s closing rate for buying U.S. dollars
was approximately 1.7 Argentine pesos to the dollar. The situation
relating to the devaluation in Argentina did not have a material impact
on the Company’s Consolidated Statement of Financial Position or
Consolidated Statement of Earnings as of and for the year ended
December 31, 2001.
Foreign exchange gains and losses arising from transactions
denominated in a currency other than the functional currency of the
entity involved are included in income. The effects of foreign currency
transactions, including related hedging activities, were losses of $9
million, $13 million, and $2 million in the years 2001, 2000, and 1999,
respectively, and are included in other income (charges).
Concentration of Credit Risk Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents, receivables, foreign currency
forward contracts, commodity forward contracts and interest rate swap
arrangements. The Company places its cash and cash equivalents with
high-quality financial institutions and limits the amount of credit
exposure to any one institution. With respect to receivables, such
receivables arise from sales to numerous customers in a variety of
industries, markets, and geographies around the world. Receivables
arising from these sales are generally not collateralized. The Company
performs ongoing credit evaluations of its customers’ financial conditions
and no single customer accounts for greater than 10% of the sales of
the Company. The Company maintains reserves for potential credit losses
and such losses, in the aggregate, have not exceeded management’s
expectations. With respect to the foreign currency forward contracts,
commodity forward contracts and interest rate swap arrangements, the
counterparties to these contracts are major financial institutions. The