Dow Chemical 2009 Annual Report Download - page 117

Table of Contents
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably
estimated based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as
additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Accrued
and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for
environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets as “Accounts and
notes receivable - Other.”
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future
operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or
normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental
operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and readily marketable securities with original maturities of three months or less.
Financial Instruments
The Company calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available
for various types of financial instruments (such as forwards, options and swaps), the Company uses standard pricing models with market-based inputs that
take into account the present value of estimated future cash flows.
The Company utilizes derivatives to manage exposures to currency exchange rates, commodity prices and interest rate risk. The fair values of all
derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these instruments are reported in income or AOCI,
depending on the use of the derivative and whether it qualifies for hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in AOCI, to the extent the hedges are
effective, until the underlying transactions are recognized in income. To the extent effective, gains and losses on derivative and nonderivative instruments used
as hedges of the Company’s net investment in foreign operations are recorded in AOCI as part of the cumulative translation adjustment. The ineffective
portions of cash flow hedges and hedges of net investment in foreign operations, if any, are recognized in income immediately.
Gains and losses on derivatives designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged
items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are marked-to-market at the end of each
accounting period with the results included in income.
Inventories
Inventories are stated at the lower of cost or market. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-
out (“FIFO”); and average cost, and is used consistently from year to year.
Property
Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on
the estimated service lives of depreciable assets and is calculated using the straight-line method, unless the asset was capitalized before 1997 when the
declining balance method was used. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from
service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from
disposal, are included in income.
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