Kodak 2005 Annual Report Download - page 75

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EASTMAN KODAK COMPANY
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 digital and traditional imaging
products, services and solutions to consumers, businesses, the graphic communications market, 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 and Asia.
The Company’s products are marketed and sold in many countries throughout the world.
Basis of Consolidation
The consolidated fi nancial 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 signifi cant infl uence, but does not have effective
control. Signifi cant infl uence 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. Income and losses of investments accounted
for using the equity method are reported in other income (charges), net, in the accompanying Consolidated Statement of Operations. See
Note 7, “Investments,” and Note 14, “Other Income (Charges), Net.”
The cost method of accounting is used for investments in equity securities that do not have a readily determined market value and when the
Company does not have the ability to exercise signifi cant infl uence. 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 in the accompanying
Consolidated Statement of Financial Position.
Certain amounts for prior periods have been reclassifi ed to conform to the current period classifi cation.
Use of Estimates
The preparation of fi nancial statements in conformity with accounting principles generally accepted in the United States of America 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.
Change in Estimate
During 2005, the Company revised the useful lives of production machinery and equipment from 3-20 years to 3-5 years and manufacturing-related
buildings from 10-40 years to 5-20 years. These revisions primarily refl ect the faster-than-expected decline in the Company’s traditional fi lm and
paper business. As a result, the Company recognized increased depreciation expense for the year ended December 31, 2005 of $139 million
($137 million after tax, $.48 per diluted share). Note that this after-tax amount, as presented above, refl ects a full valuation allowance against any
amounts in the U.S., as described more fully in Note 15, “Income Taxes.”
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 fi nancial 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 fl ows 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 (loss) 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 of these foreign subsidiaries and branches are remeasured at year-end exchange rates, while the related revenue, expense, and
gain and loss accounts are remeasured at average exchange rates. Non-monetary assets and liabilities, and the related revenue, expense, and gain
and loss accounts, are remeasured at historical rates. Adjustments that result from the remeasurement of the assets and liabilities of these
subsidiaries are included in net (loss) earnings in the accompanying Consolidated Statement of Operations.