Emerson 2006 Annual Report Download - page 42

Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
                                  
Years ended September 30 | Dollars in millions, except per share amounts

                          
The consolidated nancial statements include the accounts of the Company and its controlled afliates. All signicant intercompany
transactions, prots 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 reected in accumulated other
comprehensive income.
                           
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 nancial statements are reected in accumulated other comprehensive income.
               
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
          
Inventories are stated at the lower of cost or market. The majority of inventory values are based upon standard costs which approxi-
mate average costs, while the remainder are principally valued on a rst-in, rst-out basis. Standard costs are revised at the beginning
of each scal year. The effects of resetting standards and operating variances incurred during each period are allocated between
inventories and cost of sales.
                            
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 ows of the related assets are less than their carrying values.
                             
Assets and liabilities acquired in business combinations are accounted for using the purchase method and recorded at their respec-
tive fair values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A reporting unit is an operating
segment as dened 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 nancial 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 impair-
ment 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 ows and market multiples.
All of the Company’s intangible assets (other than goodwill) are subject to amortization. Intangibles consist of intellectual property
(such as patents and trademarks), customer relationships and capitalized software and are amortized on a straight-line basis. 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.
       
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 xed amount per unit sold based on failure rates, adjusted for specic
problems that may arise. Product warranty expense is less than 1 percent of sales.