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New฀Accounting฀Standards
In฀January฀2003,฀the฀Financial฀Accounting฀Standards฀Board฀
(“FASB”)฀issued฀FASB฀Interpretation฀No.฀46฀(“FIN฀46”),฀Consol-
idation฀of฀Variable฀Interest฀Entities.฀An฀entity฀is฀subject฀to฀the฀
consolidation฀rules฀of฀FIN฀46฀and฀is฀referred฀to฀as฀a฀variable฀
interest฀entity฀(“VIE”)฀if฀the฀entity’s฀equity฀investors฀lack฀the฀
characteristics฀of฀a฀controlling฀financial฀interest฀or฀do฀not฀have฀
sufficient฀equity฀at฀risk฀for฀the฀entity฀to฀finance฀its฀operations฀
without฀additional฀financial฀support.฀In฀December฀2003,฀the฀
FASB฀issued฀modifications฀to฀FIN฀46฀(“FIN฀46R”),฀resulting฀in฀
multiple฀effective฀dates฀based฀on฀the฀nature฀as฀well฀as฀the฀cre-
ation฀date฀of฀a฀VIE.฀The฀adoption฀of฀FIN฀46฀and฀FIN฀46R฀in฀
2004฀had฀no฀impact฀on฀our฀consolidated฀financial฀statements.
In฀May฀2004,฀the฀FASB฀issued฀FASB฀Staff฀Position฀No.฀106-2฀
(“FSP฀106-2”),฀Accounting฀and฀Disclosure฀Requirements฀
Related฀to฀the฀Medicare฀Prescription฀Drug,฀Improvement฀and฀
Modernization฀Act฀of฀2003,฀which฀provides฀guidance฀on฀the฀
accounting฀for฀the฀effects฀of฀the฀Medicare฀Prescription฀Drug,฀
Improvement฀and฀Modernization฀Act฀of฀2003฀for฀employers฀
that฀sponsor฀postretirement฀health฀care฀plans฀that฀provide฀฀
prescription฀drug฀benefits.฀We฀adopted฀the฀provisions฀of฀FSP฀
106-2฀in฀the฀third฀quarter฀of฀2004,฀resulting฀in฀a฀reduction฀
in฀our฀accumulated฀postretirement฀benefit฀obligation฀of฀
$18.8฀million.฀We฀recognized฀a฀reduction฀in฀our฀net฀periodic฀
postretirement฀benefit฀costs฀of฀$2.0฀million฀for฀2004฀as฀a฀
result฀of฀the฀adoption฀of฀FSP฀106-2.
In฀November฀2004,฀the฀FASB฀issued฀SFAS฀No.฀151,฀Inven-
tory฀Costs฀–฀an฀Amendment฀of฀ARB฀No.฀43,฀Chapter฀4,฀which฀
amends฀the฀guidance฀in฀ARB฀No.฀43฀to฀clarify฀the฀accounting฀
for฀abnormal฀amounts฀of฀idle฀facility฀expense,฀freight,฀han-
dling฀costs฀and฀wasted฀material.฀SFAS฀No.฀151฀requires฀that฀
these฀items฀be฀recognized฀as฀current฀period฀charges.฀In฀addi-
tion,฀SFAS฀No.฀151฀requires฀the฀allocation฀of฀fixed฀production฀
overheads฀to฀inventory฀based฀on฀the฀normal฀capacity฀of฀the฀
production฀facilities.฀SFAS฀No.฀151฀is฀effective฀for฀inventory฀
costs฀incurred฀during฀fiscal฀years฀beginning฀after฀June฀15,฀2005.฀
We฀are฀currently฀evaluating฀the฀provisions฀of฀SFAS฀No.฀151฀and฀
will฀adopt฀SFAS฀No.฀151฀on฀January฀1,฀2006.
In฀December฀2004,฀the฀FASB฀issued฀SFAS฀No.฀153,฀
Exchanges฀of฀Nonmonetary฀Assets฀–฀an฀amendment฀of฀APB฀
Opinion฀No.฀29,฀to฀address฀the฀measurement฀of฀exchanges฀of฀
nonmonetary฀assets.฀SFAS฀No.฀153฀eliminates฀the฀exception฀
from฀fair฀value฀measurement฀for฀nonmonetary฀exchanges฀of฀
similar฀productive฀assets฀and฀replaces฀it฀with฀a฀general฀excep-
tion฀for฀exchanges฀of฀nonmonetary฀assets฀that฀do฀not฀have฀
commercial฀substance.฀A฀nonmonetary฀exchange฀has฀commer-
cial฀substance฀if฀the฀future฀cash฀flows฀of฀the฀entity฀are฀
expected฀to฀change฀significantly฀as฀a฀result฀of฀the฀exchange.฀
SFAS฀No.฀153฀is฀effective฀for฀nonmonetary฀exchanges฀occur-
ring฀after฀June฀30,฀2005.฀We฀will฀adopt฀SFAS฀No.฀153฀on฀
July฀1,฀2005.
In฀December฀2004,฀the฀FASB฀revised฀SFAS฀No.฀123,฀Share-
Based฀Payment฀(“SFAS฀No.฀123R”).฀SFAS฀No.฀123R฀is฀a฀revision฀
of฀SFAS฀No.฀123฀and฀supersedes฀APB฀No.฀25.฀SFAS฀No.฀123R฀
requires฀a฀public฀entity฀to฀measure฀the฀cost฀of฀employee฀ser-
vices฀received฀in฀exchange฀for฀an฀award฀of฀equity฀instruments฀
based฀on฀the฀grant-date฀fair฀value฀of฀the฀award.฀That฀cost฀will฀
be฀recognized฀over฀the฀period฀in฀which฀an฀employee฀is฀
required฀to฀provide฀service฀in฀exchange฀for฀the฀award.฀SFAS฀
No.฀123R฀also฀requires฀a฀public฀entity฀to฀initially฀measure฀the฀
cost฀of฀employee฀services฀rendered฀in฀exchange฀for฀an฀award฀
of฀liability฀instruments฀at฀its฀current฀fair฀value.฀The฀fair฀value฀of฀
that฀award฀is฀to฀be฀remeasured฀subsequently฀at฀each฀reporting฀
date฀through฀the฀settlement฀date.฀Changes฀in฀the฀fair฀value฀
during฀the฀required฀service฀period฀are฀to฀be฀recognized฀as฀
compensation฀cost฀over฀that฀period.฀We฀are฀currently฀in฀the฀
process฀of฀evaluating฀different฀option฀pricing฀models฀and฀the฀
impact฀of฀SFAS฀No.฀123R฀on฀our฀consolidated฀financial฀state-
ments.฀We฀will฀adopt฀SFAS฀No.฀123R฀on฀July฀1,฀2005.
In฀December฀2004,฀the฀FASB฀issued฀FASB฀Staff฀Position฀
No.฀109-1฀(“FSP฀109-1”),฀Application฀of฀FASB฀Statement฀
No.฀109,฀“Accounting฀for฀Income฀Taxes”฀(“SFAS฀No.฀109”)฀
to฀the฀Tax฀Deduction฀on฀Qualified฀Production฀Activities฀Pro-
vided฀by฀the฀American฀Jobs฀Creation฀Act฀of฀2004,฀which฀฀
provides฀guidance฀on฀the฀recently฀enacted฀American฀Jobs฀฀
Creation฀Act฀of฀2004฀(the฀“Act”).฀The฀Act฀provides฀a฀tax฀
deduction฀for฀income฀from฀qualified฀domestic฀production฀
activities.฀FSP฀109-1฀provides฀for฀the฀treatment฀of฀the฀deduc-
tion฀as฀a฀special฀deduction฀as฀described฀in฀SFAS฀No.฀109.฀
As฀such,฀the฀deduction฀will฀have฀no฀effect฀on฀existing฀deferred฀
tax฀assets฀and฀liabilities.฀The฀impact฀of฀the฀deduction฀is฀to฀be฀
reported฀in฀the฀period฀in฀which฀the฀deduction฀is฀claimed฀on฀
our฀U.S.฀tax฀return.฀We฀do฀not฀expect฀that฀this฀deduction฀will฀
have฀a฀material฀impact฀on฀our฀effective฀tax฀rate฀in฀future฀years.฀
FSP฀109-1฀is฀effective฀prospectively฀as฀of฀January฀1,฀2005.
In฀December฀2004,฀the฀FASB฀issued฀FASB฀Staff฀Position฀
No.฀109-2฀(“FSP฀109-2”),฀Accounting฀and฀Disclosure฀Guidance฀
for฀the฀Foreign฀Repatriation฀Provision฀within฀the฀American฀
Jobs฀Creation฀Act฀of฀2004,฀which฀provides฀guidance฀under฀
SFAS฀No.฀109฀with฀respect฀to฀recording฀the฀potential฀impact฀
of฀the฀repatriation฀provisions฀of฀the฀Act฀on฀a฀company’s฀
income฀tax฀expense฀and฀deferred฀tax฀liability.฀FSP฀109-2฀states฀
that฀a฀company฀is฀allowed฀time฀beyond฀the฀financial฀reporting฀
period฀of฀enactment฀to฀evaluate฀the฀effect฀of฀the฀Act฀on฀its฀
plan฀for฀reinvestment฀or฀repatriation฀of฀foreign฀earnings฀for฀
purposes฀of฀applying฀SFAS฀No.฀109.฀We฀have฀not฀yet฀decided฀
on฀whether,฀and฀to฀what฀extent,฀we฀might฀elect฀to฀repatriate฀
foreign฀earnings฀under฀the฀provisions฀in฀the฀Act.฀Any฀such฀
repatriation฀under฀the฀Act฀must฀occur฀by฀December฀31,฀2005.฀
Accordingly,฀our฀consolidated฀financial฀statements฀do฀not฀
reflect฀a฀provision฀for฀taxes฀related฀to฀this฀election.฀The฀maxi-
mum฀amount฀we฀could฀elect฀to฀repatriate฀is฀$500฀million฀as฀
prescribed฀in฀the฀Act.฀Our฀evaluation฀of฀the฀effect฀if฀the฀elec-
tion฀is฀made฀is฀expected฀to฀be฀completed฀by฀the฀end฀of฀the฀
second฀quarter฀of฀2005.
Reclassifications
Certain฀reclassifications,฀including฀reclassifications฀for฀
deferred฀income฀taxes฀and฀other฀tax฀liabilities,฀have฀been฀
made฀to฀the฀prior฀years’฀consolidated฀financial฀statements฀
to฀conform฀with฀the฀current฀year฀presentation.
46฀฀฀฀฀Baker฀Hughes฀Incorporated