Baker Hughes 2007 Annual Report Download - page 129

46 Baker Hughes Incorporated
accurate information becomes available, accruals are adjusted
to reflect current cost estimates. Ongoing environmental com-
pliance costs, such as obtaining environmental permits, instal-
lation of pollution control equipment and waste disposal, are
expensed as incurred. Where we have been identified as a
potentially responsible party in a United States federal or state
“Superfund” site, we accrue our share of the estimated reme-
diation costs of the site. This share is based on the ratio of the
estimated volume of waste we contributed to the site to the
total volume of waste disposed at the site.
Foreign Currency
A number of our significant foreign subsidiaries have des-
ignated the local currency as their functional currency and, as
such, gains and losses resulting from balance sheet translation
of foreign operations are included as a separate component
of accumulated other comprehensive loss within stockholders’
equity. Gains and losses from foreign currency transactions,
such as those resulting from the settlement of receivables or
payables in the non-functional currency, are included in mar-
keting, general and administrative (“MG&A”) expense in the
consolidated statements of operations as incurred. For those
foreign subsidiaries that have designated the U.S. Dollar as
the functional currency, gains and losses resulting from balance
sheet translation of foreign operations are also included in
MG&A expense in the consolidated statements of operations
as incurred. We recorded net foreign currency transaction and
translation gains in MG&A in the consolidated statement of
operations of $10.7 million, $1.7 million and $6.8 million in
2007, 2006 and 2005, respectively.
Derivative Financial Instruments
We monitor our exposure to various business risks includ-
ing commodity prices, foreign currency exchange rates and
interest rates and occasionally use derivative financial instru-
ments to manage the impact of certain of these risks. Our pol-
icies do not permit the use of derivative financial instruments
for speculative purposes. We use foreign currency forward
contracts to hedge certain firm commitments and transactions
denominated in foreign currencies. We have used and may
use interest rate swaps to manage interest rate risk.
At the inception of any new derivative, we designate the
derivative as a hedge as that term is defined in SFAS 133 (as
amended and interpreted) Accounting for Derivative Instru-
ments and Hedging Activities or we determine the derivative
to be undesignated as a hedging instrument as the facts
dictate. We document all relationships between the hedging
instruments and the hedged items, as well as our risk manage-
ment objectives and strategy for undertaking various hedge
transactions. We assess whether the derivatives that are
used in hedging transactions are highly effective in offsetting
changes in cash flows of the hedged item at both the incep-
tion of the hedge and on an ongoing basis.
Reclassifications
During the fourth quarter of 2007, we began classifying cer-
tain expenses as cost of sales and cost of services and rentals that
were previously classified as selling, general and administrative
expenses. The change was the result of an internal review
to improve management reporting. The reclassified expenses
relate to selling and field service costs which are closely related
to operating activities. In addition, we have renamed selling,
general and administrative expenses on the statement of
operations to marketing, general and administrative expenses
to more accurately describe the costs included therein. The
impact of these reclassifications is to increase cost of sales
by $366.1 million, $318.6 million and $276.2 million for the
years ended December 31, 2007, 2006 and 2005, respec-
tively; increase cost of services and rentals by $123.9 million,
$114.3 million and $104.7 million for the years ended Decem-
ber 31, 2007, 2006 and 2005, respectively; and decrease mar-
keting, general and administrative expense by $490.0 million,
$432.9 million and $380.9 million for the years ended Decem-
ber 31, 2007, 2006 and 2005, respectively. These reclassifica-
tions had no impact on total costs and expenses as these changes
offset one another. All prior periods have been reclassified to
conform to this new presentation.
New Accounting Standards
In February 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 155, Accounting for Certain Hybrid Financial
Instruments – an amendment of FASB Statements No. 133
and No. 140 (“SFAS 155”). SFAS 155 amends SFAS 133,
which required that a derivative embedded in a host contract
that does not meet the definition of a derivative be accounted
for separately under certain conditions. SFAS 155 is effective
for all financial instruments acquired or issued (or subject to
a remeasurement event) following the start of an entity’s first
fiscal year beginning after September 15, 2006. We adopted
SFAS 155 on January 1, 2007, and there was no impact on
our consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpreta-
tion of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. It prescribes the minimum
threshold a tax position is required to meet before being rec-
ognized in the financial statements. FIN 48 also provides guid-
ance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. We adopted FIN 48 on January 1, 2007 as required,
and recorded a reduction to beginning retained earnings of
$64.2 million. See Note 6 for further information.
In September 2006, the FASB issued FASB Staff Position
No. AUG AIR-1 (“FSP AUG AIR-1”), which addresses the
accounting for planned major maintenance activities. FSP AUG
AIR-1 prohibits the use of the accrue-in-advance method of
accounting for planned major maintenance activities in annual
and interim financial reporting periods. We adopted FSP AUG
AIR-1 on January 1, 2007 to change our method of account-
ing for repairs and maintenance activities on certain rental
tools from the accrue-in-advance method to the direct expense
method. The adoption resulted in the reversal of a $34.2 mil-
lion accrued liability for future repairs and maintenance (“R&M”)
costs and the recording of an income tax liability of $9.0 mil-
lion. The net impact of $25.2 million has been recorded as an