National Oilwell Varco 2010 Annual Report Download - page 48

Along with the normal impairment analysis, the Company performed a sensitivity analysis on the projected results, the goodwill and the other
indefinite-lived intangible asset impairment analysis assuming revenue for each individual reporting unit for goodwill and each individual
indefinite-lived intangible asset decreased an additional 20% from the current projections for 2011, 2012 and 2013, while holding all other factors
constant and no impairment was identified. Additionally, if the Company were to increase its discount rate 100 basis points, while keeping all
other assumptions constant, there would be no impairments in any of the goodwill associated with the Companys reporting units or any of the
Companys indefinite-lived intangible assets. While the Company does not believe that these events (20% drop in additional revenue for the next
three years or 100 basis point increases in weighted average costs of capital) or changes are likely to occur, it is reasonably possible these events
could transpire if market conditions worsen and if the market fails to continue to recover in 2011 and/or 2012. Any significant changes to these
assumptions and factors could have a material impact on the Companys goodwill impairment analysis.
Service and Product Warranties
The Company provides service and warranty policies on certain of its products. The Company accrues liabilities under service and warranty
policies based upon specific claims and a review of historical warranty and service claim experience in accordance with ASC Topic 450
Contingencies (ASC Topic 450). Adjustments are made to accruals as claim data and historical experience change. In addition, the
Company incurs discretionary costs to service its products in connection with product performance issues and accrues for them when they are
encountered. At December 31, 2010 and 2009, service and product warranties totaled $215 million and $217 million, respectively.
Income Taxes
The Company is a U.S. registered company and is subject to income taxes in the U.S. The Company operates through various subsidiaries in a
number of countries throughout the world. Income taxes have been provided based upon the tax laws and rates of the countries in which the
Company operates and income is earned.
The Companys annual tax provision is based on expected taxable income, statutory rates and tax planning opportunities available in the various
jurisdictions in which it operates. The determination and evaluation of the annual tax provision and tax positions involves the interpretation of the
tax laws in the various jurisdictions in which the Company operates. It requires significant judgment and the use of estimates and assumptions
regarding significant future events such as the amount, timing and character of income, deductions and tax credits. Changes in tax laws,
regulations, and treaties, foreign currency exchange restrictions or the Companys level of operations or profitability in each jurisdiction could
impact the tax liability in any given year. The Company also operates in many jurisdictions where the tax laws relating to the pricing of
transactions between related parties are open to interpretation, which could potentially result in aggressive tax authorities asserting additional tax
liabilities with no offsetting tax recovery in other countries.
The Company maintains liabilities for estimated tax exposures in jurisdictions of operation. The annual tax provision includes the impact of
income tax provisions and benefits for changes to liabilities that the Company considers appropriate, as well as related interest. Tax exposure
items primarily include potential challenges to intercompany pricing and certain operating expenses that may not be deductible in foreign
jurisdictions. These exposures are resolved primarily through the settlement of audits within these tax jurisdictions or by judicial means. The
Company is subject to audits by federal, state and foreign jurisdictions which may result in proposed assessments. The Company believes that an
appropriate liability has been established for estimated exposures under the guidance in ASC Topic 740 Income Taxes (ASC Topic 740).
However, actual results may differ materially from these estimates. The Company reviews these liabilities quarterly and to the extent audits or
other events result in an adjustment to the liability accrued for a prior year, the effect will be recognized in the period of the event.
The Company currently has recorded valuation allowances that the Company intends to maintain until it is more likely than not the deferred tax
assets will be realized. Income tax expense recorded in the future will be reduced to the extent of decreases in the Companys valuation
allowances. The realization of remaining deferred tax assets is primarily dependent on future taxable income. Any reduction in future taxable
income including but not limited to any future restructuring activities may require that the Company record an additional valuation allowance
against deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a
significant impact on future earnings.
The Company has not provided for deferred taxes on the unremitted earnings of certain subsidiaries that are permanently reinvested. Should the
Company make a distribution from the unremitted earnings of these subsidiaries, the Company may be required to record additional taxes.
Unremitted earnings of these subsidiaries were $2,503 million and $2,764 million at December 31, 2010 and 2009, respectively. The Company
makes an annual determination whether to permanently reinvest these earnings. If, as a result of these reassessments, the Company distributes
these earnings in the future, additional tax liability would result, offset by any available foreign tax credits.
48