Proctor and Gamble 2005 Annual Report Download - page 51

Management’s฀Discussion฀and฀Analysis The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries 47
Currency฀Translation
Financial฀statements฀of฀operating฀subsidiaries฀outside฀the฀United฀States฀
of฀America฀(U.S.)฀generally฀are฀measured฀using฀the฀local฀currency฀as฀the฀
functional฀currency.฀Adjustments฀to฀translate฀those฀statements฀into฀U.S.฀
dollars฀are฀recorded฀in฀other฀comprehensive฀income.฀For฀subsidiaries฀฀
operating฀in฀highly฀inflationary฀economies,฀the฀U.S.฀dollar฀is฀the฀functional฀
currency.฀Remeasurement฀adjustments฀for฀financial฀statements฀in฀highly฀
inflationary฀economies฀and฀other฀transactional฀exchange฀gains฀and฀
losses฀are฀reflected฀in฀earnings.
Cash฀Flow฀Presentation
The฀Statement฀of฀Cash฀Flows฀is฀prepared฀using฀the฀indirect฀method,฀
which฀reconciles฀net฀earnings฀to฀cash฀flow฀from฀operating฀activities.฀
These฀adjustments฀include฀the฀removal฀of฀timing฀differences฀between฀
the฀occurrence฀of฀operating฀receipts฀and฀payments฀and฀their฀recognition฀
in฀net฀earnings.฀The฀adjustments฀also฀remove฀from฀operating฀activities฀
cash฀flows฀arising฀from฀investing฀and฀financing฀activities,฀which฀are฀
presented฀separately฀from฀operating฀activities.฀Cash฀flows฀from฀foreign฀
currency฀transactions฀and฀operations฀are฀translated฀at฀an฀average฀
exchange฀rate฀for฀the฀period.฀Cash฀flows฀from฀hedging฀activities฀are฀
included฀in฀the฀same฀category฀as฀the฀items฀being฀hedged.฀Cash฀flows฀
from฀derivative฀instruments฀designated฀as฀net฀investment฀hedges฀
are฀classified฀as฀financing฀activities.฀Cash฀flows฀from฀other฀derivative฀
instruments฀used฀to฀manage฀interest,฀commodity฀or฀currency฀exposures฀
are฀classified฀as฀operating฀activities.฀Cash฀paid฀for฀acquisitions฀is฀
classified฀as฀investing฀activities.
Cash฀Equivalents
Highly฀liquid฀investments฀with฀remaining฀stated฀maturities฀of฀three฀
months฀or฀less฀when฀purchased฀are฀considered฀cash฀equivalents฀and฀
recorded฀at฀cost.฀
Investments
Investment฀securities฀consist฀of฀auction฀rate฀securities฀that฀approximate฀
fair฀value฀and฀readily-marketable฀debt฀and฀equity฀securities฀that฀are฀
classified฀as฀trading฀with฀unrealized฀gains฀or฀losses฀charged฀to฀earnings.฀
Other฀investments฀that฀are฀not฀controlled฀and฀over฀which฀we฀do฀not฀
have฀the฀ability฀to฀exercise฀significant฀influence฀are฀accounted฀for฀under฀
the฀cost฀method.
Inventory฀Valuation
Inventories฀are฀valued฀at฀cost,฀which฀is฀not฀in฀excess฀of฀current฀market฀
prices.฀Product-related฀inventories฀are฀primarily฀maintained฀on฀the฀฀
first-in,฀first-out฀method.฀Minor฀amounts฀of฀product฀inventories,฀
including฀certain฀cosmetics฀and฀commodities,฀are฀maintained฀on฀the฀
last-in,฀first-out฀method.฀The฀cost฀of฀spare฀part฀inventories฀is฀maintained฀
using฀the฀average฀cost฀method.฀
Goodwill฀and฀Other฀Intangible฀Assets฀
The฀cost฀of฀intangible฀assets฀with฀determinable฀useful฀lives฀is฀amortized฀
to฀reflect฀the฀pattern฀of฀economic฀benefits฀consumed,฀principally฀on฀a฀
straight-line฀basis฀over฀the฀estimated฀periods฀benefited.฀Goodwill฀and฀
indefinite-lived฀intangibles,฀primarily฀brand฀names฀and฀trademarks,฀
are฀not฀amortized,฀but฀are฀evaluated฀annually฀for฀impairment.฀Our฀
impairment฀testing฀for฀goodwill฀is฀performed฀separately฀from฀our฀
impairment฀testing฀of฀individual฀indefinite-lived฀intangibles.฀The฀annual฀
evaluation฀for฀impairment฀of฀goodwill฀and฀indefinite-lived฀intangibles฀
is฀based฀on฀valuation฀models฀that฀incorporate฀internal฀projections฀of฀
expected฀future฀cash฀flows฀and฀operating฀plans.฀We฀evaluate฀a฀number฀
of฀factors฀to฀determine฀whether฀an฀indefinite฀life฀is฀appropriate,฀
including฀the฀competitive฀environment,฀market฀share,฀brand฀history,฀
operating฀plan฀and฀the฀macroeconomic฀environment฀of฀the฀countries฀in฀
which฀the฀brands฀are฀sold.฀Where฀certain฀events฀or฀changes฀in฀operating฀
conditions฀occur,฀indefinite-lived฀intangibles฀may฀be฀adjusted฀to฀a฀
determinable฀life฀and฀an฀impairment฀assessment฀may฀be฀performed.
Due฀to฀the฀nature฀of฀our฀business,฀there฀are฀a฀number฀of฀brand฀
intangibles฀that฀have฀been฀determined฀to฀have฀indefinite฀lives.฀If฀it฀
is฀determined฀that฀a฀brand฀intangible฀does฀not฀have฀an฀indefinite฀
life,฀our฀policy฀is฀to฀amortize฀the฀intangible฀asset฀over฀the฀expected฀
useful฀life.฀Patents,฀technology฀and฀other฀intangibles฀with฀contractual฀
terms฀are฀amortized฀over฀their฀respective฀contractual฀lives.฀Other฀non-
contractual฀intangible฀assets฀with฀determinable฀lives฀are฀amortized฀over฀
periods฀generally฀ranging฀from฀5฀to฀20฀years.฀Where฀certain฀events฀or฀
changes฀in฀operating฀conditions฀occur,฀lives฀on฀intangible฀assets฀with฀
determinable฀lives฀may฀be฀adjusted฀and฀an฀impairment฀assessment฀may฀
be฀performed฀on฀the฀recoverability฀of฀the฀carrying฀amounts.฀
Property,฀Plant฀and฀Equipment
Property,฀plant฀and฀equipment฀are฀recorded฀at฀cost฀reduced฀by฀
accumulated฀depreciation.฀Depreciation฀expense฀is฀recognized฀over฀the฀
assets’฀estimated฀useful฀lives฀using฀the฀straight-line฀method.฀Machinery฀
and฀equipment฀includes฀office฀furniture฀and฀equipment฀(15-year฀life),฀
computer฀equipment฀and฀capitalized฀software฀(3฀to฀5-year฀lives)฀and฀
manufacturing฀equipment฀(3฀to฀20-year฀lives).฀Buildings฀are฀depreciated฀
over฀an฀estimated฀useful฀life฀of฀40฀years.฀Estimated฀useful฀lives฀are฀
periodically฀reviewed฀and,฀where฀appropriate,฀changes฀are฀made฀
prospectively.฀Where฀certain฀events฀or฀changes฀in฀operating฀conditions฀
occur,฀asset฀lives฀may฀be฀adjusted฀and฀an฀impairment฀assessment฀may฀
be฀performed฀on฀the฀recoverability฀of฀the฀carrying฀amounts.฀
Fair฀Values฀of฀Financial฀Instruments
Certain฀financial฀instruments฀are฀required฀to฀be฀recorded฀at฀fair฀value.฀
The฀estimated฀fair฀values฀of฀such฀financial฀instruments,฀including฀certain฀
debt฀instruments,฀investment฀securities฀and฀derivatives,฀have฀been฀
determined฀using฀market฀information฀and฀valuation฀methodologies,฀
primarily฀discounted฀cash฀flow฀analysis.฀These฀estimates฀require฀
Notes฀to฀Consolidated฀Financial฀Statements The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
Millions฀of฀dollars฀except฀per฀share฀amounts฀or฀otherwise฀specified.฀