E-Z-GO 2006 Annual Report Download - page 65

U.S. Government, allocable research and development and general and administrative expenses. Pursuant to contract provisions, agencies of the
U.S. Government have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments
and progress payments. Such advances and payments are reflected as an offset against the related inventory balances. In accordance with indus-
try practice, our inventoried costs include amounts related to contracts with long production cycles, a portion of which is not expected to be real-
ized within one year.
Customer deposits are recorded against inventory when the right of offset exists. All other customer deposits are recorded in accrued liabilities.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. Land improvements and build-
ings are depreciated primarily over estimated lives ranging from five to 40 years, while machinery and equipment are depreciated primarily over
three to 15 years. We capitalize expenditures for improvements that increase asset values and extend useful lives.
Long-Lived Assets
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If the carrying value of the asset held for use exceeds the sum of the undis-
counted expected future cash flows, the carrying value of the asset is written down to fair value. Long-lived assets held for sale are stated at the
lower of cost or fair value less cost to sell. Fair value is determined using pertinent market information, including appraisals or brokers’ estimates
and/or estimated future discounted cash flows.
Goodwill
We evaluate the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in sales, earnings
or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired. The
reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for busi-
nesses one level below that operating segment (a “component”), in which case such component is the reporting unit. In certain instances, we
have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. Goodwill is consid-
ered to be potentially impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are established primarily
using a discounted cash flow methodology. The determination of discounted cash flows is based on the businesses’ strategic plans and long-
range planning forecasts. When available, comparative market multiples are used to corroborate discounted cash flow results.
Derivative Financial Instruments
We are exposed to market risk primarily from changes in interest rates, currency exchange rates and securities pricing. To manage the volatility
relating to these exposures, we net these exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, we enter
into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. All derivative instru-
ments are reported on the consolidated balance sheets at fair value. Designation to support hedge accounting is performed on a specific exposure
basis. We record changes in fair value of financial instruments qualifying as fair value hedges in income, offset, in part or in whole, by corre-
sponding changes in the fair value of the underlying exposures being hedged. Changes in fair values of derivatives accounted for as cash flow
hedges, to the extent they are effective as hedges, are recorded in other comprehensive (loss) income, net of deferred taxes. We report changes in
fair value of derivatives not qualifying as hedges in income. We do not hold or issue derivative financial instruments for trading or speculative
purposes.
Foreign currency denominated assets and liabilities are translated into U.S. dollars with the adjustments from the currency rate changes recorded
in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use
foreign currency financing transactions, including currency swaps, to effectively hedge long-term investments in foreign operations with the same
corresponding currency. Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation
adjustment account with the offset recorded as an adjustment to the non-U.S. dollar financing liability.
Fair Values of Financial Instruments
The fair value of our cash and cash equivalents, accounts receivable, accounts payable, and variable-rate receivables and debt approximates the
carrying value of these financial instruments. We determine the estimated fair values of other financial instruments, including debt, equity and risk
management instruments, using available market information and valuation methodologies, primarily discounted cash flow analysis or indepen-
dent investment bankers.
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Notes to the Consolidated Financial Statements