EMC 2005 Annual Report Download - page 36

Table of Contents
The discount rate selected was based on highly rated long-term bond indices and yield curves that match the duration of the plan's benefit obligations. The
bond indices and yield curve analyses include only bonds rated Aa or higher from a reputable rating agency. A 25 basis point change in the discount rate has a
minimal impact on the expense.
Critical Accounting Policies
Our consolidated financial statements are based on the selection and application of generally accepted accounting principles which require us to make
estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and
their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from
those estimates, and any such differences may be material to our financial statements. We believe that the policies set forth below may involve a higher degree
of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our
financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant
accounting policies are presented within Note A to our Consolidated Financial Statements.
Revenue Recognition
Revenue recognition is governed by various accounting principles, including Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition";
Emerging Issues Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables"; Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition"; FAS No. 48, "Revenue Recognition When Right of Return Exists"; FAS No. 13, "Accounting for Leases"; and SOP No. 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," among others. The application of the appropriate accounting principle to our
revenue is dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As
our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue
recognition involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review
of specific transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these
factors could materially impact the timing and amount of revenue and costs recognized. Should market or economic conditions deteriorate, our actual return
experience could exceed our estimate.
Warranty Costs
We accrue for systems warranty costs at the time of shipment. While we engage in extensive product quality programs and processes, our warranty
obligation is affected by product failure rates, material usage and service delivery costs. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, investments, inventories, goodwill and
other intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts and notes receivable are evaluated based upon the
credit-worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. Should current market
and economic conditions deteriorate, our actual bad debt experience could exceed our estimate. The determination of whether unrealized losses on
investments are other than temporary is based upon the type of investments held, market conditions, length of the impairment, magnitude of the impairment
and ability to hold the investment to maturity. Should current market and economic conditions deteriorate, our ability to recover the cost of our investments
may be impaired. The recoverability of inventories is based upon the types and levels of inventory held, forecasted demand, pricing, competition and changes
in technology. Should current market and economic conditions deteriorate, our actual recovery could be less than our estimate. Other intangible assets are
evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in
judgments on any of these factors could materially impact the value of the asset. Our goodwill valuation is based upon a discounted cash flow analysis
performed at the reporting unit level. The analysis factors in estimated revenue and expense growth rates. The estimates are based upon our historical
experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure necessary to achieve the related
revenues. Changes in judgments on any of these factors could materially impact the value of the asset.
Restructuring Charges
We recognized restructuring charges in 2005, 2004, 2003 and prior years. The restructuring charges include, among other items, estimated losses on the
sale of real estate, employee termination benefit costs, subletting of facilities and termination of various contracts. The amount of the actual obligations may
be different than our estimates due to various factors, including market conditions and negotiations with third parties. Should the actual amounts differ from
our estimates, the amount of the restructuring charges could be materially impacted.
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