Motorola 2008 Annual Report Download - page 98

Derivative Instruments: Gains and losses on hedges of existing assets or liabilities are marked-to-market and
the result is included in Other within Other income (expense) within the Company’s consolidated statements of
operations. Gains and losses on financial instruments that qualify for hedge accounting and are used to hedge firm
future commitments or forecasted transactions are deferred until such time as the underlying transactions are
recognized or recorded immediately when the transaction is no longer expected to occur. Gains or losses on
financial instruments that do not qualify as hedges under Statement of Financial Accounting Standards (“SFAS”)
No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) are recognized
immediately as income or expense.
Earnings (Loss) Per Share: The Company calculates its basic earnings (loss) per share based on the weighted-
average effect of all common shares issued and outstanding. Net earnings (loss) is divided by the weighted average
common shares outstanding during the period to arrive at the basic earnings (loss) per share. Diluted earnings
(loss) per share is calculated by dividing net earnings (loss) by the sum of the weighted average number of common
shares used in the basic earnings (loss) per share calculation and the weighted average number of common shares
that would be issued assuming exercise or conversion of all potentially dilutive securities, excluding those securities
that would be anti-dilutive to the earnings (loss) per share calculation. Both basic and diluted earnings (loss) per
share amounts are calculated for earnings (loss) from continuing operations and net earnings (loss) for all periods
presented.
Share-Based Compensation Costs: The Company has incentive plans that reward employees with stock
options, stock appreciation rights, restricted stock and restricted stock units, as well as an employee stock purchase
plan. Prior to January 1, 2006, the Company applied the intrinsic value method of accounting for share-based
compensation. On January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment”
(“SFAS 123R”) using the modified prospective transition method. The Company had previously disclosed the fair
value of its stock options in its footnotes. The amount of compensation cost for share-based awards is measured
based on the fair value of the awards, as of the date that the share-based awards are issued and adjusted to the
estimated number of awards that are expected to vest. The fair value of stock options and stock appreciation rights
is generally determined using a Black-Scholes option pricing model which incorporates assumptions about expected
volatility, risk free rate, dividend yield, and expected life. Compensation cost for share-based awards is recognized
on a straight-line basis over the vesting period.
Retirement Benefits: The Company records annual expenses relating to its pension benefit and
postretirement plans based on calculations which include various actuarial assumptions, including discount rates,
assumed asset rates of return, compensation increases, turnover rates and health care cost trend rates. The
Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based
on current rates and trends. The effects of the gains, losses, and prior service costs and credits are amortized over
future service periods. The funding status, or projected benefit obligation less plan assets, for each plan, is reflected
in the Company’s consolidated balance sheets using a December 31 measurement date.
Advertising Expense: Advertising expenses, which are the external costs of marketing the Company’s
products, are expensed as incurred. Advertising expenses were $790 million, $1.1 billion and $1.2 billion for the
years ended December 31, 2008, 2007, and 2006, respectively.
Use of Estimates: The preparation of the accompanying consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make estimates and assumptions
about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities
reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such
estimates include the valuation of accounts receivable and long-term receivables, inventories, Sigma Fund,
investments, goodwill, intangible and other long-lived assets, legal contingencies, guarantee obligations,
indemnifications, and assumptions used in the calculation of income taxes, retirement and other post-employment
benefits and allowances for discounts, price protection, product returns, and customer incentives, among others.
These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates
its estimates and assumptions on an ongoing basis using historical experience and other factors, including the
current economic environment, which management believes to be reasonable under the circumstances. We adjust
such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity,
foreign currency, energy markets and declines in consumer spending have combined to increase the uncertainty
inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision,
actual results could differ significantly from these estimates. Changes in those estimates resulting for continuing
changes in the economic environment will be reflected in the financial statements in future periods.
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