Xerox 2008 Annual Report Download - page 58

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
Of these amounts, $20 and $45 were included in Other current
assets and $183 and $219 were included in Other long-term assets,
as of December 31, 2008 and 2007, respectively.
Provisions for Losses on Uncollectible Receivables
The provisions for losses on uncollectible trade and finance
receivables are determined principally on the basis of past
collection experience applied to ongoing evaluations of our
receivables and evaluations of the default risks of repayment.
Allowances for doubtful accounts receivable were $131 and $128,
as of December 31, 2008 and 2007, respectively. Allowances for
doubtful accounts on finance receivables were $198 and $203 at
December 31, 2008 and 2007, respectively.
Inventories
Inventories are carried at the lower of average cost or market.
Inventories also include equipment that is returned at the end of
the lease term. Returned equipment is recorded at the lower of
remaining net book value or salvage value. Salvage value consists
of the estimated market value (generally determined based on
replacement cost) of the salvageable component parts, which are
expected to be used in the remanufacturing process. We regularly
review inventory quantities and record a provision for excess and/
or obsolete inventory based primarily on our estimated forecast of
product demand, production requirements and servicing
commitments. Several factors may influence the realizability of our
inventories, including our decision to exit a product line,
technological changes and new product development. The
provision for excess and/or obsolete raw materials and equipment
inventories is based primarily on near term forecasts of product
demand and include consideration of new product introductions as
well as changes in remanufacturing strategies. The provision for
excess and/or obsolete service parts inventory is based primarily on
projected servicing requirements over the life of the related
equipment populations.
Cost of sales in 2008 included a charge of $39 associated with an
Office segment product line equipment and residual value write-
off. The write-off was the result of a late 2008 change in strategy
reflecting our decision to discontinue the remanufacture of
end-of-lease returned inventory from a certain Office segment
product line following an assessment of the current and expected
market for these products.
Land, Buildings and Equipment and Equipment on
Operating Leases
Land, buildings and equipment are recorded at cost. Buildings and
equipment are depreciated over their estimated useful lives.
Leasehold improvements are depreciated over the shorter of the
lease term or the estimated useful life. Equipment on operating
leases is depreciated to estimated salvage value over the lease
term. Depreciation is computed using the straight-line method.
Significant improvements are capitalized and maintenance and
repairs are expensed. Refer to Note 5 – Inventories and Equipment
on Operating Leases, Net and Note 6 – Land, Buildings and
Equipment, Net for further discussion.
Internal Use Software
We capitalize direct costs associated with developing, purchasing
or otherwise acquiring software for internal use and amortize these
costs on a straight-line basis over the expected useful life of the
software, beginning when the software is implemented. Useful
lives of the software generally vary from 3 to 5 years. Amortization
expense was $50, $76, and $73 for the years ended December 31,
2008, 2007 and 2006, respectively. Capitalized costs were $288
and $270 as of December 31, 2008 and 2007, respectively.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment annually or more frequently if an
event or circumstance indicates that an impairment loss may have
been incurred. Application of the goodwill impairment test requires
judgment, including the identification of reporting units,
assignment of assets and liabilities to reporting units, assignment
of goodwill to reporting units, and determination of the fair value
of each reporting unit. We estimate the fair value of each reporting
unit using a discounted cash flow methodology. This requires us to
use significant judgment including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-
term rate of growth for our business, the useful life over which cash
flows will occur, determination of our weighted average cost of
capital, and relevant market data.
Other intangible assets primarily consist of assets obtained in
connection with business acquisitions, including installed customer
base and distribution network relationships, patents on existing
technology and trademarks. We apply an impairment evaluation
whenever events or changes in business circumstances indicate
that the carrying value of our intangible assets may not be
recoverable. Other intangible assets are amortized on a straight-
line basis over their estimated economic lives. We believe that 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. Refer to Note 8 – Goodwill and Intangible Assets,
Net for further information.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, including
buildings, equipment, internal-use software and other intangible
56 Xerox 2008 Annual Report