Emerson 2005 Annual Report Download - page 39

E M E R S O N 2 0 0 5 2 7
48%
36%
24%
12%
CRITICAL ACCOUNTING POLICIES
Preparation of the Company’s financial statements requires management to make judgments, assumptions
and estimates regarding uncertainties that affect the reported amounts of assets, liabilities, stockholders’
equity, revenues and expenses. Note 1 of the Notes to Consolidated Financial Statements describes the
significant accounting policies used in preparation of the Consolidated Financial Statements. The most
significant areas involving management judgments and estimates are described below. Actual results in
these areas could differ materially from management’s estimates under different assumptions or conditions.
Revenue Recognition
The Company recognizes nearly all of its revenues through the sale of manufactured products and records
the sale when products are shipped and title passes to the customer and collection is reasonably assured.
In certain instances, revenue is recognized on the percentage-of-completion method, when services are
rendered, or in accordance with AICPA Statement of Position No. 97-2, “Software Revenue Recognition.”
Sales sometimes include multiple items including services such as installation. In such instances, revenue
assigned to each item is based on that item’s objectively determined fair value, and revenue is recognized
individually for delivered items only if the delivered items have value to the customer on a standalone
basis, performance of the undelivered items is probable and substantially in the Company’s control and the
undelivered items are inconsequential or perfunctory. Management believes that all relevant criteria and
conditions are considered when recognizing sales.
Inventories
Inventories are stated at the lower of cost or market. The majority of inventory values are based upon
standard costs which approximate average costs, while the remainder are principally valued on a first-in, first-
out basis. Standard costs are revised at the beginning of each fiscal year. The effects of resetting standards
and operating variances incurred during each period are allocated between inventories and cost of sales.
Management regularly reviews inventory for obsolescence to determine whether a write-down is necessary.
Various factors are considered in making this determination, including recent sales history and predicted
trends, industry market conditions and general economic conditions. See Note 1.
Long-lived Assets
Long-lived assets, which include primarily goodwill and property, plant and equipment, are reviewed for
impairment whenever events or changes in business circumstances indicate the carrying value of the assets
may not be recoverable. If the Company determines that the carrying value of the long-lived asset may not
be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of
the long-lived asset exceeds its fair value. Fair value is generally measured based on a discounted cash flow
method using a discount rate determined by management to be commensurate with the risk inherent in the
Company’s current business model. The estimates of cash flows and discount rate are subject to change due
to the economic environment, including such factors as interest rates, expected market returns and volatility
of markets served. For those businesses monitored by management for impairment, their fair value would
have to be lower by more than 20 percent before an impairment charge would be recognized. Management
believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates
could materially affect the evaluations. See Notes 1, 3 and 6.
Retirement Plans
Defined benefit plan expense and obligations are dependent on assumptions used in calculating such
amounts. These assumptions include discount rate, rate of compensation increases and expected return
on plan assets. In accordance with U.S. generally accepted accounting principles, actual results that differ
from the assumptions are accumulated and amortized over future periods. While management believes
that the assumptions used are appropriate, differences in actual experience or changes in assumptions may
affect the Company’s retirement plan obligations and future expense. Effective for 2006, the Company
adjusted the discount rate for the U.S. retirement plans to 5.25 percent and adjusted the expected long-term
Strong cash flow performance in
2005 maintained a high ratio of
operating cash flow to total debt
of 53 percent.
Operating Cash Flow
to Total Debt
00 0504030201