Baker Hughes 2015 Annual Report Download - page 48

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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 $19 million in 2015.
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, 2015 and 2014, inventory reserves totaled $278 million, or 9%, and $319 million, or 7%, 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 $14 million in 2015.
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, 2015 and 2014, totaled $6.07 billion and $6.08 billion, respectively. We perform an annual test of
goodwill for impairment as of October 1 of each year for each of our reporting units which are the same as our five
reportable segments. When performing the annual impairment test we have the option of performing a qualitative
or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it
is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would be
required to perform a quantitative impairment test for goodwill. In 2015 and 2014, we performed a qualitative
assessment for our annual goodwill impairment test. In 2013, a quantitative assessment for the determination of
impairment was made by comparing the carrying amount of each reporting unit with its fair value.
In performing our annual goodwill impairment analysis for 2015, our qualitative assessment included
consideration of current industry and market conditions and circumstances as well as any mitigating factors that
would most affect the fair value of the Company and its reporting units. Among those mitigating factors, we
considered the value of the consideration to be received at closing of the Merger, based on the terms of the Merger
Agreement, compared to the carrying value of the Company and its reporting units. Based on our assessment and
consideration of the totality of the facts and circumstances, including our business environment in the fourth quarter
of 2015, we determined that it was not more likely than not that the fair value of the Company or any of its reporting
units is less than their respective carrying amounts. As such, no impairments of goodwill were recorded for the year
ended December 31, 2015, or any of the prior years included in the accompanying financial statements.
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. 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. Unanticipated changes,
including even small revisions, to these assumptions could result in a provision for impairment in a future period. In
addition, a decline in our stock price could result in an impairment. 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.