Emerson 2012 Annual Report Download - page 31

2012 Annual Report | 29
Critical Accounting Policies
Preparation of the Company’s financial statements
requires management to make judgments, assumptions
and estimates regarding uncertainties that could affect
reported revenue, expenses, assets, liabilities and equity.
Note 1 describes the significant accounting policies
used in preparation of the consolidated financial state-
ments. The most significant areas where management
judgments and estimates impact the primary financial
statements are described below. Actual results in these
areas could differ materially from management’s esti-
mates under different assumptions or conditions.
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 limited circumstances, revenue is
recognized using the percentage-of-completion method
as performance occurs, 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 vendor-specific
objective evidence, third-party evidence or a manage-
ment estimate of the relative selling price. Revenue is
recognized individually for delivered elements only if they
have value to the customer on a stand-alone basis and
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 condi-
tions are considered when recognizing revenue.
INVENTORIES
Inventories are stated at the lower of cost or market. The
majority of inventory values are based on standard costs,
which approximate average costs, while the remainder
are principally valued on a first-in, first-out basis. Cost
standards are revised at the beginning of each year. The
annual effect of resetting standards plus any operating
variances incurred during each period are allocated
between inventories and cost of sales. The Company’s
businesses review inventory for obsolescence, make
appropriate provisions and dispose of obsolete inven-
tory on a regular basis. Various factors are considered in
these reviews, including sales history and recent trends,
industry conditions and general economic conditions.
LONG-LIVED ASSETS
Long-lived assets, which include property, plant and
equipment, goodwill and identifiable intangible assets are
reviewed for impairment whenever events or changes in
business circumstances indicate impairment may exist.
If the Company determines that the carrying value of the
long-lived asset may not be recoverable, a permanent
impairment charge is recorded for the amount by which
the carrying value of the long-lived asset exceeds its
estimated fair value. Reporting units are also reviewed
for possible goodwill impairment at least annually, in
the fourth quarter, by comparing the estimated fair value
of each unit to its carrying value. Fair value is generally
estimated using an income approach based on discounted
future cash flows using a discount rate judged by
management to be commensurate with the applicable
risk. Estimates of future sales, operating results, cash
flows and discount rates are subject to changes in
the economic environment, including such factors as
the general level of market interest rates, expected
equity market returns and volatility of markets served,
particularly when recessionary economic circumstances
continue for an extended period of time. Management
believes the estimates of future cash flows and fair values
are reasonable; however, changes in estimates due to
variance from assumptions could materially affect
the evaluations.
At the end of 2012, Emerson’s total market value based
on its exchange-traded stock price was approximately
$35 billion while its common stockholders’ equity was
$10 billion. In the Network Power segment, certain busi-
nesses with goodwill totaling $1.5 billion face challenges
amid the global economic uncertainty. The estimated fair
values of these businesses exceed their carrying values
by approximately 10 percent. The assumptions used in
estimating the fair values include continued successful
execution of plans to expand the businesses and improve
the cost structures, as well as growth in served markets,
particularly for European uninterruptible power supplies
and precision cooling, North American and European
data center infrastructure management, and
connectivity solutions.