Kodak 2002 Annual Report Download - page 44

Financials
44
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 net 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
(charges) income. See Note 6, “Investments” and Note 12, “Other
(Charges) Income.”
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 Consolidated Statement of Financial Position.
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.
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 $19 million, $9 million, and $13 million in the years
2002, 2001, and 2000, respectively, and are included in other
(charges) income in the accompanying Consolidated Statement of
Earnings.
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 Company has never
experienced non-performance by any of its counterparties.
Additionally, the Company guarantees debt and other
obligations with certain unconsolidated affiliates and customers,
which could potentially subject the Company to significant
concentrations of credit risk. However, with the exception of the
Company’s total debt guarantees for which there is a
concentration with one of Kodak’s unconsolidated affiliate
companies, these guarantees relate to numerous customers in a
variety of industries, markets and geographies around the world.
The Company does not believe that material payments will be
required under any of its guarantee arrangements. See Note 10
under “Other Commitments and Contingencies.”