Pitney Bowes 2007 Annual Report Download - page 61

PITNEY BOWES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in thousands, except per share data)
43
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) basis for most U.S.
inventories, and on the first-in, first-out (FIFO) basis for most non-U.S. inventories.
Other Current Assets and Prepayments
Other current assets and prepayments include primarily postage meter receivables billed in advance and costs paid in
advance.
Fixed Assets and Depreciation
Property, plant and equipment and rental equipment are stated at cost and depreciated principally using the straight-line
method over their estimated useful lives. The estimated useful lives of depreciable fixed assets are as follows: buildings, up
to 50 years; plant and equipment, 3 to 15 years; and computer equipment, 3 to 5 years. Major improvements which add to
productive capacity or extend the life of an asset are capitalized while repairs and maintenance are charged to expense as
incurred. Leasehold improvements are amortized over the shorter of the estimated useful life or their related lease term.
Fully depreciated assets are retained in fixed assets and accumulated depreciation until they are removed from service. In the
case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less
proceeds from disposal, are included in income.
Capitalized Software Development Costs
We capitalize certain costs of software developed for internal use in accordance with Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Capitalized costs include purchased
materials and services, payroll and payroll-related costs and interest costs. The cost of internally developed software is
amortized on a straight-line basis over its estimated useful life, principally 3 to 10 years.
We capitalize software development costs related to software to be sold, leased, or otherwise marketed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed. Software development costs are expensed as incurred until technological feasibility has
been established, at which time such costs are capitalized until the product is available for general release to the public.
Capitalized software development costs include purchased materials and services, payroll and payroll-related costs
attributable to programmers, software engineers, quality control and field certifiers, and interest costs. Capitalized software
development costs are amortized over the estimated product useful life, principally 3 to 5 years, using the greater of the
straight-line method or the ratio of current product revenues to total projected future revenues. Other assets on our
Consolidated Balance Sheets include $21.6 million and $14.8 million of capitalized software development costs at December
31, 2007 and 2006, respectively. The Consolidated Statements of Income include the related amortization expense of $3.9
million, $1.6 million, and $1.4 million for the years ended December 31, 2007, 2006, and 2005, respectively. Total software
development costs capitalized in 2007 and 2006 were $10.1 million and $8.5 million, respectively.
Research and Development Costs
Research and product development costs not subject to SFAS 86 are expensed as incurred. These costs primarily include
personnel related costs.
Business Combinations, Goodwill and Intangible Assets
We account for business combinations using the purchase method of accounting which requires that the assets acquired and
liabilities assumed be recorded at the date of acquisition at their respective fair values. Goodwill represents the excess of the
purchase price over the estimated fair values of net tangible and intangible assets acquired in business combinations.
Goodwill is tested for impairment on an annual basis or as circumstances warrant. We estimate the fair value of intangible
assets primarily using a cost, market and income approach. Intangible assets with finite lives acquired under business
combinations are amortized over their estimated useful lives, principally 3 to 15 years. Customer relationship intangibles are
generally amortized using an accelerated attrition method. All other intangibles are amortized on a straight-line method. See
Note 6 to the Consolidated Financial Statements.