Emerson 2009 Annual Report Download - page 31

Annual Report 29
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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, which for principal assets are 30 to 40 years
for buildings and 8 to 12 years for machinery and equipment. Long-lived tangible assets are reviewed for impairment
whenever events or changes in business circumstances indicate the carrying value of the assets may not be recover-
able. Impairment losses are recognized based on fair value if expected future undiscounted cash ows of the related
assets are less than their carrying values.
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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 dened in ASC 280, Segment Reporting or a business one level below an
operating segment if discrete nancial information for that business unit is prepared and regularly reviewed by the
segment manager. The Company conducts impairment tests of goodwill on an annual basis and between annual tests
if an event occurs or circumstances change that indicates the fair value of a reporting unit may be less than its carrying
value. If a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the
extent that recorded goodwill exceeds the implied fair value of that goodwill. Fair values of reporting units are Level 3
measures and are developed under an income approach that discounts estimated future cash ows using risk-adjusted
interest rates.
All of the Company’s identiable intangible assets are subject to amortization. Identiable intangibles consist of intel-
lectual property such as patents and trademarks, customer relationships and capitalized software, and are amortized
on a straight-line basis over the estimated useful life. 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.
See Note 6.
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Product warranties vary by product lines and are competitive for the markets in which the Company 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.
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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 or delivered, 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 accor-
dance with ASC 985-605, Software: Revenue Recognition. Product sales sometimes also include services such as
installation. In these instances, revenue is assigned to each item based on that item’s objectively determined fair value,
with revenue recognized individually for delivered items only if the delivered items have value to the customer on a
stand-alone basis and performance of the undelivered items is probable and substantially in the Company’s control, or
if the undelivered items are inconsequential or perfunctory. Management believes that all relevant criteria and condi-
tions are considered when recognizing sales.
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In the normal course of business, the Company is exposed to changes in interest rates, foreign currency exchange
rates and commodity prices due to its worldwide presence and diverse business prole. As part of the Company’s risk
management strategy, derivative instruments are selectively used in an effort to minimize the impact of these expo-
sures. Foreign exchange forwards and options are utilized to hedge foreign currency exposures impacting sales or cost
of sales transactions, rm commitments and the fair value of assets and liabilities, while swap and option contracts are
used to minimize the effect of commodity price uctuations on the cost of sales. All derivatives are explicitly associated
with specic underlying exposures and the Company does not hold derivatives for trading or speculative purposes.
Emerson’s foreign currency exposures primarily relate to transactions denominated in euros, Mexican pesos, Canadian
dollars and Swedish kroner. Primary commodity exposures are price uctuations on forecasted purchases of copper,
aluminum and related products. The duration of hedge positions is generally two years or less and amounts currently
hedged beyond 18 months are not signicant.
All derivatives are accounted for under ASC 815, Derivatives and Hedging, and are recognized on the balance sheet at
fair value. For derivatives hedging variability in future cash ows, the effective portion of any gain or loss is deferred in
stockholders’ equity and recognized in earnings only when the underlying hedged transaction occurs. The majority of
the Company’s derivatives that are designated as hedges and qualify for deferral accounting are cash ow hedges. For
derivatives hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative and the offset-
ting loss or gain on the hedged item are recognized in earnings each period. Currency uctuations on non-U.S. dollar