Kodak 2004 Annual Report Download - page 60

Financials
58
E A S T M A N฀ K OD A K ฀ C O M PA N Y
assured,฀the฀fee฀is฀deferred฀and฀revenue฀is฀recognized฀at฀the฀time฀collection฀
becomes฀reasonably฀assured,฀which฀is฀generally฀upon฀receipt฀of฀payment.฀฀
Software฀maintenance฀and฀support฀revenue฀is฀recognized฀ratably฀over฀the฀
term฀of฀the฀related฀maintenance฀period.฀฀
The฀Company’s฀transactions฀may฀involve฀the฀sale฀of฀equipment,฀
software,฀and฀related฀services฀under฀multiple฀element฀arrangements.฀The฀
Company฀allocates฀revenue฀to฀the฀various฀elements฀based฀on฀verifiable฀
objective฀evidence฀of฀fair฀value฀(if฀software฀is฀not฀included฀or฀is฀incidental฀
to฀the฀transaction)฀or฀Kodak-specific฀objective฀evidence฀of฀fair฀value฀if฀
software฀is฀included฀and฀is฀other฀than฀incidental฀to฀the฀sales฀transaction฀as฀
a฀whole.฀Revenue฀allocated฀to฀an฀individual฀element฀is฀recognized฀when฀all฀
other฀revenue฀recognition฀criteria฀are฀met฀for฀that฀element.฀
Revenue฀from฀the฀sale฀of฀integrated฀solutions,฀which฀includes฀trans-
actions฀that฀require฀significant฀production,฀modification฀or฀customization฀
of฀software,฀is฀recognized฀in฀accordance฀with฀contract฀accounting.฀Under฀
contract฀accounting,฀revenue฀is฀recognized฀by฀utilizing฀either฀the฀percent-
age-of-completion฀or฀completed-contract฀method.฀The฀Company฀currently฀
utilizes฀the฀completed-contract฀method฀for฀all฀solution฀sales,฀as฀sufficient฀
history฀does฀not฀currently฀exist฀to฀allow฀the฀Company฀to฀accurately฀estimate฀
total฀costs฀to฀complete฀these฀transactions.฀Revenue฀from฀other฀long-term฀
contracts,฀primarily฀government฀contracts,฀is฀generally฀recognized฀using฀
the฀percentage-of-completion฀method.
At฀the฀time฀revenue฀is฀recognized,฀the฀Company฀also฀records฀reduc-
tions฀to฀revenue฀for฀customer฀incentive฀programs฀in฀accordance฀with฀the฀
provisions฀of฀Emerging฀Issues฀Task฀Force฀(EITF)฀Issue฀No.฀01-09,฀“Ac-
counting฀for฀Consideration฀Given฀from฀a฀Vendor฀to฀a฀Customer฀(Including฀a฀
Reseller฀of฀the฀Vendor’s฀Products).”฀Such฀incentive฀programs฀include฀cash฀
and฀volume฀discounts,฀price฀protection,฀promotional,฀cooperative฀and฀other฀
advertising฀allowances,฀and฀coupons.฀For฀those฀incentives฀that฀require฀
the฀estimation฀of฀sales฀volumes฀or฀redemption฀rates,฀such฀as฀for฀volume฀
rebates฀or฀coupons,฀the฀Company฀uses฀historical฀experience฀and฀internal฀
and฀customer฀data฀to฀estimate฀the฀sales฀incentive฀at฀the฀time฀revenue฀is฀
recognized.฀฀
In฀instances฀where฀the฀Company฀provides฀slotting฀fees฀or฀similar฀
arrangements,฀this฀incentive฀is฀recognized฀as฀a฀reduction฀in฀revenue฀when฀
payment฀is฀made฀to฀the฀customer฀(or฀at฀the฀time฀the฀Company฀has฀incurred฀
the฀obligation,฀if฀earlier)฀unless฀the฀Company฀receives฀a฀benefit฀over฀a฀
period฀of฀time,฀in฀which฀case฀the฀incentive฀is฀recorded฀as฀an฀asset฀and฀is฀
amortized฀as฀a฀reduction฀of฀revenue฀over฀the฀term฀of฀the฀arrangement.฀Ar-
rangements฀in฀which฀the฀Company฀receives฀an฀identifiable฀benefit฀include฀
arrangements฀that฀have฀enforceable฀exclusivity฀provisions฀and฀those฀that฀
provide฀a฀clawback฀provision฀entitling฀the฀Company฀to฀a฀pro฀rata฀reim-
bursement฀if฀the฀customer฀does฀not฀fulfill฀its฀obligations฀under฀the฀contract.฀฀
฀The฀Company฀may฀offer฀customer฀financing฀to฀assist฀customers฀in฀
their฀acquisition฀of฀Kodak’s฀products.฀At฀the฀time฀a฀financing฀transaction฀is฀
consummated,฀which฀qualifies฀as฀a฀sales-type฀lease,฀the฀Company฀records฀
equipment฀revenue฀equal฀to฀the฀total฀lease฀receivable฀net฀of฀unearned฀
income.฀Unearned฀income฀is฀recognized฀as฀finance฀income฀using฀the฀
effective฀interest฀method฀over฀the฀term฀of฀the฀lease.฀Leases฀not฀qualifying฀
as฀sales-type฀leases฀are฀accounted฀for฀as฀operating฀leases.฀The฀Company฀
recognizes฀revenue฀from฀operating฀leases฀on฀an฀accrual฀basis฀as฀the฀rental฀
payments฀become฀due.฀฀
The฀Company’s฀sales฀of฀tangible฀products฀are฀the฀only฀class฀of฀
revenues฀that฀exceeds฀10%฀of฀total฀consolidated฀net฀sales.฀All฀other฀sales฀
classes฀are฀individually฀less฀than฀10%,฀and฀therefore,฀have฀been฀combined฀
with฀the฀sales฀of฀tangible฀products฀on฀the฀same฀line฀in฀accordance฀with฀
Regulation฀S-X.
Incremental฀direct฀acquisition฀costs฀such฀as฀commissions฀(i.e.฀costs฀
that฀vary฀with฀and฀are฀directly฀related฀to฀the฀acquisition฀of฀a฀contract฀which฀
would฀not฀have฀been฀incurred฀but฀for฀the฀acquisition฀of฀the฀contract)฀are฀
expensed฀as฀incurred฀and฀included฀in฀cost฀of฀goods฀sold฀in฀the฀accompany-
ing฀Consolidated฀Statement฀of฀Earnings.฀
Research฀and฀Development฀Costs฀฀Research฀and฀development฀(R&D)฀
costs,฀which฀include฀costs฀in฀connection฀with฀new฀product฀development,฀
fundamental฀and฀exploratory฀research,฀process฀improvement,฀product฀use฀
technology฀and฀product฀accreditation,฀are฀charged฀to฀operations฀in฀the฀pe-
riod฀in฀which฀they฀are฀incurred.฀In฀connection฀with฀a฀business฀combination,฀
the฀purchase฀price฀allocated฀to฀research฀and฀development฀projects฀that฀
have฀not฀yet฀reached฀technological฀feasibility฀and฀for฀which฀no฀alternative฀
future฀use฀exists฀is฀charged฀to฀operations฀in฀the฀period฀of฀acquisition.฀R&D฀
costs฀were฀$854฀million,฀$776฀million฀and฀$757฀million฀in฀2004,฀2003฀and฀
2002,฀respectively.฀฀฀
Advertising฀฀Advertising฀costs฀are฀expensed฀as฀incurred฀and฀included฀in฀
selling,฀general฀and฀administrative฀expenses฀in฀the฀accompanying฀Consoli-
dated฀Statement฀of฀Earnings.฀Advertising฀expenses฀amounted฀to฀$513฀mil-
lion,฀$596฀million฀and฀$630฀million฀in฀2004,฀2003฀and฀2002,฀respectively.฀
Shipping฀and฀Handling฀Costs฀฀Amounts฀charged฀to฀customers฀and฀
costs฀incurred฀by฀the฀Company฀related฀to฀shipping฀and฀handling฀are฀
included฀in฀net฀sales฀and฀cost฀of฀goods฀sold,฀respectively,฀in฀accordance฀
with฀EITF฀Issue฀No.฀00-10,฀“Accounting฀for฀Shipping฀and฀Handling฀Fees฀and฀
Costs.”
Impairment฀of฀Long-Lived฀Assets฀฀The฀Company฀applies฀the฀provi-
sions฀of฀SFAS฀No.฀144,฀“Accounting฀for฀the฀Impairment฀or฀Disposal฀of฀
Long-Lived฀Assets.”฀Under฀the฀guidance฀of฀SFAS฀No.฀144,฀the฀Company฀
reviews฀the฀carrying฀value฀of฀its฀long-lived฀assets,฀other฀than฀goodwill฀and฀
purchased฀intangible฀assets฀with฀indefinite฀useful฀lives,฀for฀impairment฀
whenever฀events฀or฀changes฀in฀circumstances฀indicate฀that฀the฀carrying฀
value฀may฀not฀be฀recoverable.฀The฀Company฀assesses฀the฀recoverability฀of฀
the฀carrying฀value฀of฀long-lived฀assets฀by฀first฀grouping฀its฀long-lived฀assets฀
with฀other฀assets฀and฀liabilities฀at฀the฀lowest฀level฀for฀which฀identifiable฀
cash฀flows฀are฀largely฀independent฀of฀the฀cash฀flows฀of฀other฀assets฀and฀
liabilities฀(the฀asset฀group)฀and,฀secondly,฀by฀estimating฀the฀undiscounted฀
future฀cash฀flows฀that฀are฀directly฀associated฀with฀and฀that฀are฀expected฀
to฀arise฀from฀the฀use฀of฀and฀eventual฀disposition฀of฀such฀asset฀group.฀The฀
Company฀estimates฀the฀undiscounted฀cash฀flows฀over฀the฀remaining฀useful฀
life฀of฀the฀primary฀asset฀within฀the฀asset฀group.฀If฀the฀carrying฀value฀of฀the฀
asset฀group฀exceeds฀the฀estimated฀undiscounted฀cash฀flows,฀the฀Com-
pany฀records฀an฀impairment฀charge฀to฀the฀extent฀the฀carrying฀value฀of฀the฀
long-lived฀asset฀exceeds฀its฀fair฀value.฀The฀Company฀determines฀fair฀value฀
through฀quoted฀market฀prices฀in฀active฀markets฀or,฀if฀quoted฀market฀prices฀
are฀unavailable,฀through฀the฀performance฀of฀internal฀analyses฀of฀discounted฀
cash฀flows฀or฀external฀appraisals.
฀In฀connection฀with฀its฀assessment฀of฀recoverability฀of฀its฀long-lived฀
assets฀and฀its฀ongoing฀strategic฀review฀of฀the฀business฀and฀its฀operations,฀
the฀Company฀continually฀reviews฀the฀remaining฀useful฀lives฀of฀its฀long-lived฀