Baker Hughes 2009 Annual Report Download - page 103

2009 Form 10-K 29
Allowance for Doubtful Accounts
The determination of the collectibility of amounts due
from our customers requires us to use estimates and make
judgments regarding future events and trends, including moni-
toring our customers’ payment history and current credit wor-
thiness to determine that collectibility is reasonably assured, as
well as consideration of the overall business climate in which
our customers operate. Inherently, these uncertainties require
us to make frequent judgments and estimates regarding our
customers’ ability to pay amounts due us in order to deter-
mine the appropriate amount of valuation allowances required
for doubtful accounts. Provisions for doubtful accounts are
recorded when it becomes evident that the customer will not
make the required payments at either contractual due dates or
in the future. At December 31, 2009 and 2008, allowance for
doubtful accounts totaled $157 million, or 6%, and $74 mil-
lion, or 3%, of total gross accounts receivable, respectively.
Starting in late 2008 and continuing through the fourth quarter
of 2009, we experienced a delay in receiving payments from
our customers in Venezuela resulting in an increase in our pro-
visions for doubtful accounts in 2009. We believe that our
allowance for doubtful accounts is adequate to cover potential
bad debt losses under current conditions; however, uncertain-
ties regarding changes in the financial condition of our cus-
tomers, either adverse or positive, could impact the amount
and timing of any additional provisions for doubtful accounts
that may be required. A five percent change in the allowance
for doubtful accounts would have had an impact on income
before income taxes of approximately $8 million in 2009.
Inventory Reserves
Inventory is a significant component of current assets
and is stated at the lower of cost or market. This requires
us to record provisions and maintain reserves for excess, slow
moving and obsolete inventory. To determine these reserve
amounts, we regularly review inventory quantities on hand
and compare them to estimates of future product demand,
market conditions, production requirements and technological
developments. These estimates and forecasts inherently
include uncertainties and require us to make judgments
regarding potential outcomes. At December 31, 2009 and
2008, inventory reserves totaled $297 million, or 14%, and
$244 million, or 11%, of gross inventory, respectively. We
believe that our reserves are adequate to properly value poten-
tial excess, slow moving and obsolete inventory under current
conditions. Significant or unanticipated changes to our esti-
mates and forecasts could impact the amount and timing
of any additional provisions for excess or obsolete inventory
that may be required. A five percent change in this inventory
reserve balance would have had an impact on income before
income taxes of approximately $15 million in 2009.
Impairment of Long-Lived Assets
Long-lived assets, which include property, goodwill, intan-
gible assets, and certain other assets, comprise a significant
amount of our total assets. We review the carrying values of
these assets for impairment periodically, and at least annually
for goodwill, or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. An
impairment loss is recorded in the period in which it is deter-
mined that the carrying amount is not recoverable. This
requires us to make judgments regarding long-term forecasts
of future revenues and costs related to the assets subject to
review. In turn, these forecasts are uncertain in that they
require assumptions about demand for our products and
services, future market conditions and technological develop-
ments. We perform our annual impairment test of goodwill as
of October 1 of each year. In performing the test, we individu-
ally test each of our seven reporting units. These tests involve
the use of three different valuation techniques, including a
market approach, comparable transactions and discounted
cash flow methodology, all of which include, but are not lim-
ited to, assumptions regarding matters such as discount rates,
anticipated growth rates and expected profitability rates and
similar items. The results of the 2009 test indicated that there
were no impairments of goodwill; however, for three reporting
units, the excess of estimated fair value over the carrying value
was less than 15% of the related carrying value. Goodwill
associated with these three reporting units totaled approxi-
mately $394 million at December 31, 2009. Unanticipated
changes, including even small revisions, to these assumptions
could require a provision for impairment in a future period.
Given the nature of these evaluations and their application
to specific assets and specific times, it is not possible to rea-
sonably quantify the impact of changes in these assumptions.
Income Taxes
The liability method is used 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 liabili-
ties 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. Valuation allowances are established to
reduce deferred tax assets when it is more likely than not that
some portion or all of the deferred tax assets will not be real-
ized. In determining the need for valuation allowances, we
have considered and made judgments and estimates regarding
estimated future taxable income and ongoing prudent and
feasible tax planning strategies. These estimates and judgments
include some degree of uncertainty and changes in these esti-
mates and assumptions could require us to adjust the valuation
allowances for our deferred tax assets. Historically, changes to
valuation allowances have been caused by major changes in
the business cycle in certain countries and changes in local
country law. The ultimate realization of the deferred tax assets
depends on the generation of sufficient taxable income in the
applicable taxing jurisdictions.
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
operations in these different jurisdictions are taxed on various
bases: actual income before taxes, deemed profits (which are