Emerson 2005 Annual Report Download - page 46

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Notes to Consolidated Financial Statements
EMERSON ELECTRIC CO. AND SUBSIDIARIES
(Dollars in millions except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its controlled affiliates. All significant intercompany
transactions, profits and balances are eliminated in consolidation. Other investments of 20 percent to 50 percent are accounted for by the
equity method. Investments in nonpublicly-traded companies of less than 20 percent are carried at cost. Investments in publicly-traded
companies of less than 20 percent are carried at fair value, with changes in fair value reflected in accumulated other comprehensive income.
Foreign Currency Translation
The functional currency of a vast majority of the Company’s non-U.S. subsidiaries is the local currency. Adjustments resulting from the
translation of financial statements are reflected in accumulated other comprehensive income.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
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.
Property, Plant and Equipment
The Company records investments in land, buildings, and machinery and equipment at cost. Depreciation is computed principally using
the straight-line method over estimated service lives. Service lives for principal assets are 30 to 40 years for buildings and 8 to 12 years for
machinery and equipment. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate
the carrying value of the assets may not be recoverable. Impairment losses are recognized based on fair value if expected future cash flows
of the related assets are less than their carrying values.
Goodwill and Intangible Assets
Assets and liabilities acquired in business combinations are accounted for using the purchase method and recorded at their respective fair
values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A reporting unit is an operating segment as
defined in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,”
or a business one level below an operating segment if discrete financial information is prepared and regularly reviewed by the segment
manager. The Company conducts a formal impairment test of goodwill on an annual basis and between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Under the
impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, a goodwill impairment is recognized to the extent
that the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the goodwill. Fair values of reporting units are
estimated using discounted cash flows and market multiples.
All of the Company’s intangible assets (other than goodwill) are subject to amortization. Capitalized software is being amortized on
a straight-line basis with a weighted-average life of three years. Other intangibles consist of intellectual property (such as patents and
trademarks) and customer relationships, which are being amortized on a straight-line basis with a weighted-average life of nine years.
Based on intangible assets as of September 30, 2005, amortization expense will approximate $83 in 2006, $71 in 2007, $55 in 2008,
$43 in 2009 and $36 in 2010. These intangibles are also subject to evaluation for potential impairment if an event occurs or circumstances
change that indicate the carrying amount may not be recoverable.
Warranty
The Company’s product warranties vary by each of its product lines and are competitive for the markets in which it operates. Warranty
generally extends for a period of one to two years from the date of sale or installation. Provisions for warranty are determined primarily
based on historical warranty cost as a percentage of sales or a fixed amount per unit sold based on failure rates, adjusted for specific
problems that may arise. Product warranty expense is less than 1 percent of sales.
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