Baker Hughes 2013 Annual Report Download - page 70

2013 Annual Report 40
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customer will not make the required payments at either contractual due dates or in the future. At December 31,
2013 and 2012, the allowance for doubtful accounts totaled $238 million, or 4%, and $308 million, or 6%, of total
gross accounts receivable, respectively. We believe that our allowance for doubtful accounts is adequate to cover
potential bad debt losses under current conditions; however, uncertainties regarding changes in the financial
condition of our customers, 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 $12 million in 2013.
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 future outcomes. At
December 31, 2013 and 2012, inventory reserves totaled $382 million, or 9%, and $346 million, or 8%, of gross
inventory, respectively. We believe that our reserves are adequate to properly value potential excess, slow moving
and obsolete inventory under current conditions. Significant or unanticipated changes to our estimates and
forecasts could impact the amount and timing of any additional provisions for excess, slow moving 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 $19 million in 2013.
Goodwill and Other Long-Lived Assets
The purchase price of acquired businesses is allocated to its identifiable assets and liabilities based upon
estimated fair values as of the acquisition date. Goodwill is the excess of the purchase price over the fair value of
tangible and identifiable intangible assets and liabilities acquired in a business acquisition. Our goodwill at
December 31, 2013 totaled $5.97 billion. We perform an annual test of goodwill for impairment as of October 1 of
each year for each of our reporting units, which are generally based on our organizational and reporting structure.
In determining the carrying amount of reporting units, corporate and other assets and liabilities are allocated to the
extent that they relate to the operations of those reporting units. These tests include both qualitative and
quantitative factors. When necessary, we calculate the fair value of a reporting unit using various valuation
techniques, including a market approach, a comparable transactions approach and discounted cash flow ("DCF")
methodology. The market approach and comparable transactions approach provide value indications for a
company through a comparison with guideline public companies or guideline transactions, respectively. Both entail
selecting relevant financial information of the subject company, and capitalizing those amounts using valuation
multiples that are based on empirical market observations. The DCF methodology includes, but is not limited to,
assumptions regarding matters such as discount rates, anticipated growth rates, expected profitability rates and the
timing of expected future cash flows. The results of the 2013 test indicated that there were no impairments of
goodwill. 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
time-frames, it is not possible to reasonably quantify the impact of changes in these assumptions.
Long-lived assets, which include property and equipment, intangible assets other than goodwill, 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 certain intangible assets 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 determined that the carrying amount is not recoverable. This requires us to make judgments
regarding long-term forecasts of future revenue and costs and cash flows related to the assets subject to review.
These forecasts are uncertain in that they require assumptions about demand for our products and services, future
market conditions and technological developments.
Income Taxes
The liability method is used for determining our income tax provisions, 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