Baker Hughes 2007 Annual Report Download - page 128

2007 Form 10-K 45
equipment in PP&E. The capitalized costs of computer soft-
ware developed or purchased for internal use are classified
in machinery and equipment in PP&E.
Goodwill, Intangible Assets and Amortization
Goodwill, including goodwill associated with equity method
investments, and intangible assets with indefinite lives are not
amortized. Intangible assets with finite useful lives are amor-
tized either on a straight-line basis over the asset’s estimated
useful life or on a basis that reflects the pattern in which the
economic benefits of the intangible assets are realized.
Impairment of Long-Lived Assets
We review property, intangible assets and certain other
assets for impairment whenever events or changes in circum-
stances indicate that the carrying amount may not be recover-
able. The determination of recoverability is made based upon
the estimated undiscounted future net cash flows, excluding
interest expense. The amount of impairment loss, if any, is
determined by comparing the fair value, as determined by a
discounted cash flow analysis, with the carrying value of the
related assets.
We perform an annual impairment test of goodwill for
each of our reporting units as of October 1, or more frequently
if circumstances indicate an impairment may exist. Our report-
ing units are based on our organizational and reporting struc-
ture. Corporate and other assets and liabilities are allocated
to the reporting units to the extent that they relate to the
operations of those reporting units in determining their carry-
ing amount. Investments in affiliates are also reviewed for
impairment whenever events or changes in circumstances indi-
cate that impairment may exist. The determination of impair-
ment is made by comparing the carrying amount with its fair
value, which is calculated using a combination of a market
capitalization and discounted cash flow approach.
Income Taxes
We use the liability method for determining our income
taxes, under which current and deferred tax liabilities and
assets are recorded in accordance with enacted tax laws and
rates. Under this method, the amounts of deferred tax liabilities
and assets at the end of each period are determined using the
tax rate expected to be in effect when taxes are actually paid
or recovered. Future tax benefits are recognized to the extent
that realization of such benefits is more likely than not.
Deferred income taxes are provided for the estimated
income tax effect of temporary differences between financial
and tax bases in assets and liabilities. Deferred tax assets are
also provided for certain tax credit carryforwards. A valuation
allowance to reduce deferred tax assets is established when it
is more likely than not that some portion or all of the deferred
tax assets will not be realized.
We intend to indefinitely reinvest certain earnings of our
foreign subsidiaries in operations outside the U.S., and accord-
ingly, we have not provided for U.S. income taxes on such
earnings. We do provide for the U.S. and additional non-U.S.
taxes on earnings anticipated to be repatriated from our non-
U.S. subsidiaries.
We operate in more than 90 countries under many legal
forms. As a result, we are subject to the jurisdiction of numer-
ous domestic and foreign tax authorities, as well as to tax
agreements and treaties among these governments. Our oper-
ations in these different jurisdictions are taxed on various bases:
actual income before taxes, deemed profits (which are gener-
ally determined using a percentage of revenues rather than
profits) and withholding taxes based on revenue. Determina-
tion of taxable income in any jurisdiction requires the interpre-
tation of the related tax laws and regulations and the use of
estimates and assumptions regarding significant future events,
such as the amount, timing and character of deductions, per-
missible revenue recognition methods under the tax law and
the sources and character of income and tax credits. Changes
in tax laws, regulations, agreements and treaties, foreign cur-
rency exchange restrictions or our level of operations or profit-
ability in each tax jurisdiction could have an impact upon the
amount of income taxes that we provide during any given year.
Our tax filings for various periods are subjected to audit by
tax authorities in most jurisdictions where we conduct business.
These audits may result in assessments of additional taxes that
are resolved with the authorities or through the courts. We
believe that these assessments may occasionally be based on
erroneous and even arbitrary interpretations of local tax law.
We have received tax assessments from various tax authorities
and are currently at varying stages of appeals and/or litigation
regarding these matters. We have provided for the amounts
we believe will ultimately result from these proceedings. We
believe we have substantial defenses to the questions being
raised and will pursue all legal remedies should an unfavorable
outcome result. However, resolution of these matters involves
uncertainties and there are no assurances that the outcomes
will be favorable. We provide for uncertain tax positions pur-
suant to FIN 48, Accounting for Uncertainty in Income Taxes:
an Interpretation of FASB Statement No. 109.
Product Warranties
We sell certain products with a product warranty that
provides that customers can return a defective product dur-
ing a specified warranty period following the purchase in
exchange for a replacement product, repair at no cost to the
customer or the issuance of a credit to the customer. We
accrue amounts for estimated warranty claims based upon
current and historical product sales data, warranty costs
incurred and any other related information known to us.
Environmental Matters
Estimated remediation costs are accrued using currently
available facts, existing environmental permits, technology and
presently enacted laws and regulations. For sites where we are
primarily responsible for the remediation, our cost estimates
are developed based on internal evaluations and are not dis-
counted. Such accruals are recorded when it is probable that
we will be obligated to pay for environmental site evaluation,
remediation or related activities, and such costs can be reason-
ably estimated. If the obligation can only be estimated within
a range, we accrue the minimum amount in the range. Such
accruals are recorded even if significant uncertainties exist over
the ultimate cost of the remediation. As additional or more