Emerson 2012 Annual Report Download - page 39

2012 Annual Report | 37
GOODWILL AND OTHER INTANGIBLE ASSETS
Assets and liabilities acquired in business combinations are accounted for using the acquisition 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
operating 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. Estimated fair values of reporting units
are Level 3 measures and are developed primarily under an income approach that discounts estimated future cash
flows using risk-adjusted interest rates. In 2012, the Company adopted updates to ASC 350, Intangibles - Goodwill and
Other, that allow in certain cases for an initial qualitative assessment of whether fair value exceeds carrying value for
goodwill impairment testing.
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 their estimated useful lives. 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.
PRODUCT 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
limited circumstances, revenue is recognized using the percentage-of-completion method as performance occurs, or
in accordance with ASC 985-605 related to software. Management believes that all relevant criteria and conditions are
considered when recognizing revenue.
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 management 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. Approximately ten percent of the Company’s revenues arise from
qualifying sales arrangements that include the delivery of multiple elements, principally in the Network Power and
Process Management segments. The vast majority of these deliverables are tangible products, with a small portion
attributable to installation, service and maintenance. Selling prices are primarily determined using vendor-specific
objective evidence. Generally, contract duration is short-term and cancellation, termination or refund provisions apply
only in the event of contract breach and have historically not been invoked. The use of management estimated selling
prices to allocate consideration in multiple deliverables arrangements became effective for the Company October 1,
2010. The impact of this change was inconsequential.
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
exposures 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 and aluminum and
related products. 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. All derivatives are associated with specific underlying exposures and the Company does not hold deriva-
tives for trading or speculative purposes. The duration of hedge positions is generally two years or less and amounts
currently hedged beyond 18 months are not significant.