Emerson 2010 Annual Report Download - page 39

2010 Annual Report
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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 is valued based on standard costs
that approximate average costs, while the remainder is principally valued on a first-in, first-out basis. Cost standards
are revised at the beginning of each fiscal year. The annual effect of resetting standards plus any 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, 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 the sum of expected future undiscounted cash flows of the
related assets is less than their carrying values.
GOODWILL AND OTHER 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 ASC 280, Segment Reporting, or a business one level below an oper-
ating segment if discrete financial 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 in the fourth quarter and between
annual tests if events or circumstances indicate 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 flows using risk-adjusted interest rates.
All of the Company’s identifiable intangible assets are subject to amortization. Identifiable 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 events or circumstances indicate the carrying amount may not be recoverable. See Note 6.
WARRANTY
Warranties vary by product line and are competitive for the markets in which the Company operates. Warranties gener-
ally extend 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 one 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 or delivered and title passes to the customer with collection reasonably assured. In certain
circumstances, revenue is recognized on the percentage-of-completion method, when services are rendered, or
in accordance with ASC 985-605 related to software. Sales arrangements sometimes involve delivering multiple
elements, including services such as installation. In these instances, the revenue assigned to each element is based
on its objectively determined fair value, with revenue recognized individually for delivered elements only if they have
value to the customer on a stand-alone basis, the performance of the undelivered items is probable and substantially
in the Company’s control or the undelivered elements are inconsequential or perfunctory, and there are no unsatisfied
contingencies related to payment. Management believes that all relevant criteria and conditions are considered when
recognizing revenue.
DERIVATIVES AND HEDGING
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 profile. Emerson’s foreign currency expo-
sures primarily relate to transactions denominated in euros, Mexican pesos, Canadian dollars and Chinese renminbi.
Primary commodity exposures are price fluctuations on forecasted purchases of copper, aluminum and related prod-
ucts. As part of the Company’s risk management strategy, derivative instruments are selectively used in an effort to
minimize the impact of these exposures. Foreign exchange forwards and options are utilized to hedge foreign currency
exposures impacting sales or cost of sales transactions, firm commitments and the fair value of assets and liabilities,
while swap and option contracts are used to minimize the effect of commodity price fluctuations on the cost of sales.