Xerox 2006 Annual Report Download - page 64

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
not be recoverable. Other intangible assets are amortized
on a straight-line basis over their estimated economic
lives. The straight-line method of amortization reflects an
appropriate allocation of the cost of the intangible assets
to earnings in proportion to the amount of economic
benefits obtained annually by the Company.
Impairment of Long-Lived Assets: We review the
recoverability of our long-lived assets, including
buildings, equipment, internal-use software and other
intangible assets, when events or changes in
circumstances occur that indicate that the carrying value
of the asset may not be recoverable. The assessment of
possible impairment is based on our ability to recover the
carrying value of the asset from the expected future
pre-tax cash flows (undiscounted and without interest
charges) of the related operations. If these cash flows are
less than the carrying value of such asset, an impairment
loss is recognized for the difference between estimated
fair value and carrying value. Our primary measure of
fair value is based on discounted cash flows. The
measurement of impairment requires management to
make estimates of these cash flows related to long-lived
assets, as well as other fair value determinations.
Treasury Stock: We account for repurchased
common stock under the cost method and include such
treasury stock as a component of our Common
shareholders’ equity. Retirement of Treasury stock is
recorded as a reduction of Common stock and Additional
paid-in-capital.
Research, Development and Engineering
(“R,D&E”): Research, development and engineering
costs are expensed as incurred. R,D&E was $922, $943
and $914, for the three years ended December 31, 2006,
respectively. Research and development (“R&D”) costs
were $761 in 2006, $755 in 2005 and $760 in 2004.
Sustaining engineering costs are incurred with respect to
on-going product improvements or environmental
compliance after initial product launch. Our sustaining
engineering costs were $161, $188, and $154, for the
three years ended December 31, 2006, respectively.
Restructuring Charges: Costs associated with exit
or disposed activities, including lease termination costs
and certain employee severance costs associated with
restructuring, plant closing or other activity, are
recognized when they are incurred. In those geographies
where we have either a formal severance plan or a history
of consistently providing severance benefits representing
a substantive plan, we recognize severance costs when
they are both probable and reasonably estimable.
Pension and Post-Retirement Benefit
Obligations: We sponsor pension plans in various forms
in several countries covering substantially all employees
who meet eligibility requirements. Post-retirement
benefit plans cover primarily U.S. employees for
retirement medical costs. As permitted by existing
accounting rules, we employ a delayed recognition
feature in measuring the costs of pension and post-
retirement benefit plans. This requires changes in the
benefit obligations and changes in the value of assets set
aside to meet those obligations to be recognized not as
they occur, but systematically and gradually over
subsequent periods. All changes are ultimately
recognized as components of net periodic benefit cost,
except to the extent they may be offset by subsequent
changes. At any point, changes that have been identified
and quantified but not recognized as components of net
periodic benefit cost, are recognized in accumulated
other comprehensive loss, net of tax.
Several statistical and other factors that attempt to
anticipate future events are used in calculating the
expense, liability and asset values related to our pension
and post-retirement benefit plans. These factors include
assumptions we make about the discount rate, expected
return on plan assets, rate of increase in healthcare costs,
the rate of future compensation increases, and mortality,
among others. Actual returns on plan assets are not
immediately recognized in our income statement, due to
the delayed recognition requirement. In calculating the
expected return on the plan asset component of our net
periodic pension cost, we apply our estimate of the long-
term rate of return to the plan assets that support our
pension obligations, after deducting assets that are
specifically allocated to Transitional Retirement
Accounts (which are accounted for based on specific plan
terms).
For purposes of determining the expected return on
plan assets, we utilize a calculated value approach in
determining the value of the pension plan assets, as
opposed to a fair market value approach. The primary
difference between the two methods relates to systematic
recognition of changes in fair value over time (generally
two years) versus immediate recognition of changes in
fair value. Our expected rate of return on plan assets is
62