Emerson 2006 Annual Report Download - page 43

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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, “Soft-
ware 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.
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Effective October 1, 2002, Emerson adopted the fair value method provisions of Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation.” Under the Standard’s prospective method of adoption, options granted, modied,
or settled after September 30, 2002, are expensed based on their fair value at date of grant over the vesting period, generally three
years. Previously, the Company accounted for options pursuant to Accounting Principles Board Opinion No. 25, and no expense was
recognized. Effective July 1, 2005, Emerson adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (FAS 123R), under the Standard’s modied prospective method, and FAS 123R did not have a material impact on the nancial
statements. The following table illustrates the effect on 2005 and 2004 net earnings and earnings per share if the fair value based
method had been applied to all outstanding and unvested awards. The adoption of FAS 123R did not have an impact in 2006.
      2004 2005
Net earnings, as reported $1,257 1,422
Add: Stock-based employee compensation expense included in reported
net earnings, net of related tax effects 42 65
Deduct: Total stock-based employee compensation expense determined
under the fair value based method for all awards, net of related tax effects 48 67
Pro forma net earnings $1,251 1,420
Earnings per share:
Basic – as reported $ 3.00 3.43
Basic – pro forma $ 2.99 3.42
Diluted – as reported $ 2.98 3.40
Diluted – pro forma $ 2.97 3.39
See Note 14 for more information regarding stock-based compensation.
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All derivative instruments are reported on the balance sheet at fair value. For each derivative instrument designated as a cash ow
hedge, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings
with the underlying hedged item. For each derivative instrument designated as a fair value hedge, the gain or loss on the derivative
and the offsetting gain or loss on the hedged item are recognized immediately in earnings. Currency uctuations on non-U.S.
dollar obligations that have been designated as hedges on non-U.S. net asset exposures are included in accumulated other
comprehensive income.
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No provision is made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries (approximately $2.5 billion at
September 30, 2006). These earnings are permanently invested or otherwise indenitely retained for continuing international
operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not
practicable. During 2005, the Company repatriated approximately $1.4 billion ($1.8 billion in total) of cash from undistributed
earnings of non-U.S. subsidiaries under the American Jobs Creation Act of 2004 and recorded a tax expense of $63.