Baker Hughes 2007 Annual Report Download - page 127

44 Baker Hughes Incorporated
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
Baker Hughes Incorporated (“Baker Hughes”) is engaged
in the oilfield services industry. Baker Hughes is a major supplier
of products and technology services and systems to the world-
wide oil and natural gas industry and provides products and
services for drilling, formation evaluation, completion and
production of oil and natural gas wells.
Basis of Presentation
The consolidated financial statements include the accounts
of Baker Hughes and all majority owned subsidiaries (“Com-
pany,” “we,” “our” or “us”). Investments over which we have
the ability to exercise significant influence over operating and
financial policies, but do not hold a controlling interest, are
accounted for using the equity method of accounting. All sig-
nificant intercompany accounts and transactions have been
eliminated in consolidation. In the Notes to Consolidated
Financial Statements, all dollar and share amounts in tabula-
tions are in millions of dollars and shares, respectively, unless
otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and judg-
ments that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. We base our estimates
and judgments on historical experience and on various other
assumptions and information that are believed to be reasonable
under the circumstances. Estimates and assumptions about
future events and their effects cannot be perceived with cer-
tainty and, accordingly, these estimates may change as new
events occur, as more experience is acquired, as additional
information is obtained and as our operating environment
changes. While we believe that the estimates and assumptions
used in the preparation of the consolidated financial statements
are appropriate, actual results could differ from those estimates.
Estimates are used for, but are not limited to, determining the
following: allowance for doubtful accounts and inventory val-
uation reserves, recoverability of long-lived assets, useful lives
used in depreciation and amortization, income taxes and
related valuation allowances and insurance, environmental,
legal and pensions and postretirement benefit obligations.
Revenue Recognition
Our products and services are generally sold based upon
purchase orders or contracts with the customer that include
fixed or determinable prices and that do not include right
of return or other similar provisions or other significant post-
delivery obligations. Our products are produced in a standard
manufacturing operation, even if produced to our customer’s
specifications, and are sold in the ordinary course of business
through our regular marketing channels. We recognize reve-
nue for these products upon delivery, when title passes, when
collectibility is reasonably assured and there are no further sig-
nificant obligations for future performance. Provisions for esti-
mated warranty returns or similar types of items are made at
the time the related revenue is recognized. Revenue for services
and rentals is recognized as the services are rendered and when
collectibility is reasonably assured. Rates for services are typically
priced on a per day, per meter, per man hour or similar basis.
Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the time of purchase to be
cash equivalents.
Investments
Prior to September 2007, we invested in auction rate secu-
rities, which are variable-rate debt securities. While the under-
lying security has a long-term maturity, the interest rate is reset
through Dutch auctions that are typically held every 7, 28 or
35 days. The securities trade at par and are callable at par on
any interest payment date at the option of the issuer. Interest
is paid at the end of each auction period. We limited our
investments in auction rate securities to non mortgage-backed
securities that carry a AAA (or equivalent) rating from a recog-
nized rating agency. The investments are classified as available-
for-sale and are recorded at cost, which we believe approximates
fair market value. At December 31, 2007, we held $35.6 mil-
lion of auction rate securities that were part of unsuccessful
auctions. As a result of the unsuccessful auctions, the interest
rate now resets every 28 days at one month LIBOR plus 50 basis
points and the liquidity of these investments has been dimin-
ished. At December 31, 2007, based on our ability and intent
to hold such investments, we have classified all investments
in auction rate securities totaling $35.6 million as noncurrent
investments, which are included in other assets in our consoli-
dated balance sheet. At December 31, 2006, these investments
were classified as short-term investments.
Inventories
Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (“FIFO”) method or the
average cost method, which approximates FIFO, and includes
the cost of materials, labor and manufacturing overhead.
Property, Plant and Equipment and
Accumulated Depreciation
Property, plant and equipment (“PP&E”) is stated at cost
less accumulated depreciation, which is generally provided by
using the straight-line method over the estimated useful lives
of the individual assets. Significant improvements and better-
ments are capitalized if they extend the useful life of the asset.
We manufacture a substantial portion of our rental tools and
equipment and the cost of these items, which includes direct
and indirect manufacturing costs, are capitalized and carried
in inventory until the tool is completed. Once the tool has
been completed, the cost of the tool is reflected in capital
expenditures and the tool is classified as rental tools and