Pitney Bowes 2010 Annual Report Download - page 62

PITNEY BOWES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in thousands, except per share data)
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our actual aggregate reserve as necessary. This evaluation is inherently subjective and actual results may differ significantly from
estimated reserves. See Note 17 for further information.
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.
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, three to 15 years; and computer equipment, three to five 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 earnings.
Software Development Costs
We capitalize certain costs of software developed for internal use in accordance with the internal-use software accounting guidance.
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 three to 10 years.
Costs incurred for the development of software to be sold, leased, or otherwise marketed 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, and payroll and payroll-related costs attributable to
programmers, software engineers, quality control and field certifiers. Capitalized software development costs are amortized over the
product’s estimated useful life, principally three to five years, generally on a straight-line basis. Other assets on our Consolidated
Balance Sheets include $19.9 million and $23.2 million of capitalized software development costs at December 31, 2010 and 2009,
respectively. The Consolidated Statements of Income include the related amortization expense of $8.0 million, $10.4 million and $6.1
million for the years ended December 31, 2010, 2009, and 2008, respectively. Total software development costs capitalized in 2010
and 2009 were $6.3 million and $9.2 million, respectively.
Research and Development Costs
Research and product development costs are expensed as incurred. These costs primarily include personnel-related costs.
Business Combinations
We account for business combinations using the acquisition method of accounting, which requires that the assets acquired and
liabilities assumed be recorded at the date of acquisition at their respective fair values. The fair value of intangible assets is estimated
using a cost, market or income approach. Goodwill represents the excess of the purchase price over the estimated fair values of net
tangible and intangible assets acquired. Finite-lived intangible assets are amortized over their estimated useful lives, principally three
to 15 years, using either the straight-line method or an accelerated attrition method.
Impairment Review for Long-lived Assets
Long-lived assets are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. If such a change in circumstances occurs, the related estimated future undiscounted
cash flows expected to result from the use of the asset and its eventual disposition is compared to the carrying amount. If the sum of
the expected cash flows is less than the carrying amount, an impairment charge is recorded. The impairment charge is measured as the
amount by which the carrying amount exceeds the fair value of the asset. The fair value of the impaired asset is determined using
probability weighted expected cash flow estimates, quoted market prices when available and appraisals, as appropriate.
Impairment Review for Goodwill and Intangible Assets
Goodwill is tested annually for impairment, or sooner when circumstances indicate an impairment may exist, at the reporting unit
level. A reporting unit is the operating segment, or a business, which is one level below that operating segment. Reporting units are
aggregated as a single reporting unit if they have similar economic characteristics. Goodwill is tested for impairment using a two-step