Baker Hughes 2009 Annual Report Download - page 115

2009 Form 10-K 41
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
Baker Hughes Incorporated (“Baker Hughes”) is engaged
in the oilfield services industry. We are a major supplier of
wellbore related products and technology services and systems
and provide products and services for drilling, formation eval-
uation, completion and production, and reservoir technology
and consulting to the worldwide oil and natural gas industry.
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 esti-
mates and judgments on historical experience and on various
other assumptions and information that are believed to be rea-
sonable under the circumstances. Estimates and assumptions
about future events and their effects cannot be perceived with
certainty 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 state-
ments are appropriate, actual results could differ from those
estimates. Estimates are used for, but are not limited to, deter-
mining the following: allowance for doubtful accounts and
inventory valuation reserves, recoverability of long-lived assets,
useful lives used in depreciation and amortization, income
taxes and related valuation allowances and insurance, environ-
mental, legal, pensions and postretirement benefit obligations
and stock-based compensation.
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
significant obligations for future performance. Provisions for
estimated 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. In certain situations, revenue is generated
from trans actions that may include multiple products and
services under one contract or agreement. Revenue from
these arrangements is recognized as each item or service
is delivered based on their relative fair value.
Cost of Sales and Cost of Services and Rentals
Cost of sales and cost of services and rentals include mate-
rial, labor, selling and field service costs, and overhead costs
associated with the manufacture and distribution of our prod-
ucts for sale or rental. Distribution costs include freight costs,
purchasing and receiving costs, warehousing costs and other
costs of our distribution network.
Research and Engineering
Research and engineering expenses include costs associ-
ated with the research and development of new products
and services and costs associated with sustaining engineering
of existing products and services. These costs are expensed
as incurred and include research and development costs for
new products and services of $231 million, $263 million and
$234 million for the year ended December 31, 2009, 2008
and 2007, respectively.
Marketing, General and Administrative
Marketing, general and administrative (“MG&A”) expenses
include all advertising and marketing efforts, business devel-
opment costs, and other general and administrative costs not
directly associated with the manufacture and distribution of
our products for sale or rental and the employee related costs
associated with these functions. MG&A expenses also include
gains and losses from foreign currency transactions.
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. We limited our
investments in auction rate securities (“ARS”) to non mortgage-
backed securities that, at the time of the initial investment,
carried an AAA (or equivalent) rating from a recognized
rating agency. During 2009, we sold all ARS investments and
recorded a gain of $4 million. During 2008, we recorded an
impairment loss of $25 million on these investments.