Emerson 2012 Annual Report Download - page 40

38 | 2012 Annual Report
All derivatives are accounted for under ASC 815, Derivatives and Hedging, and recognized at fair value. For derivatives
hedging variability in future cash flows, the effective portion of any gain or loss is deferred in stockholders’ equity and
recognized in earnings when the underlying hedged transaction impacts earnings. The majority of the Company’s
derivatives that are designated as hedges and qualify for deferral accounting are cash flow hedges. For derivatives
hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative and the offsetting loss
or gain on the hedged item are recognized in earnings each period. Currency fluctuations on non-U.S. dollar obli-
gations that have been designated as hedges of non-U.S. dollar net asset exposures are reported in equity. To the
extent that any hedge is not fully effective at offsetting cash flow or fair value changes in the underlying hedged item,
there could be a net earnings impact. The Company also uses derivatives to hedge economic exposures that do not
receive deferral accounting under ASC 815. The underlying exposures for these hedges relate primarily to purchases
of commodity-based components used in the Company’s manufacturing processes, and the revaluation of certain
foreign-currency-denominated assets and liabilities. Gains or losses from the ineffective portion of any hedge,
as well as any gains or losses on derivative instruments not designated as hedges, are recognized in the income
statement immediately.
The Company has bilateral collateral arrangements with derivatives counterparties for which credit rating-based
posting thresholds vary depending on the arrangement. If credit ratings on the Company’s debt fall below preestab-
lished levels, counterparties can require immediate full collateralization on all instruments in net liability positions.
Similarly, Emerson can demand full collateralization should any of the Company’s counterparties’ credit ratings fall
below certain thresholds. Counterparties to derivative arrangements are companies with high credit ratings. Risk from
credit loss when derivatives are in asset positions is considered immaterial. The Company has master netting arrange-
ments in place with its counterparties that allow the offsetting of certain derivative-related amounts receivable and
payable when settlement occurs in the same period. Accordingly, counterparty balances are netted in the consoli-
dated balance sheet. Net values of contracts are reported in other current assets or accrued expenses as appropriate
depending on positions with counterparties as of the balance sheet date. See Note 7.
INCOME TAXES
The provision for income taxes is based on pretax income reported in the consolidated statements of earnings and
tax rates currently enacted in each jurisdiction. Certain income and expense items are recognized in different time
periods for financial reporting and income tax filing purposes, and deferred income taxes are provided for the effect of
temporary differences. The Company also provides for U.S. federal income taxes, net of available foreign tax credits,
on earnings intended to be repatriated from non-U.S. locations. No provision has been made for U.S. income taxes
on approximately $6.3 billion of undistributed earnings of non-U.S. subsidiaries as of September 30, 2012, as these
earnings are considered permanently invested or otherwise indefinitely retained for continuing international opera-
tions. Recognition of U.S. taxes on undistributed non-U.S. earnings would be triggered by a management decision to
repatriate those earnings, although there is no current intention to do so. Determination of the amount of taxes that
might be paid on these undistributed earnings if eventually remitted is not practicable. See Note 13.
COMPREHENSIVE INCOME
Comprehensive income is primarily composed of net earnings plus changes in foreign currency translation, pension
and postretirement adjustments, and the effective portion of changes in the fair value of cash flow hedges. Accumu-
lated other comprehensive income, net of tax (a component of equity), consists of foreign currency translation credits
of $466 and $671, deferred pension and postretirement charges of $1,213 and $1,164 and cash flow hedges and other
credits of $16 and charges of $69, respectively, at September 30, 2012 and 2011. Accumulated other comprehensive
income attributable to noncontrolling interests in subsidiaries consists primarily of earnings, plus foreign currency
translation.
(2) Weighted Average Common Shares
Basic earnings per common share consider only the weighted average of common shares outstanding while diluted
earnings per common share consider the dilutive effects of stock options and incentive shares. Options to purchase
approximately 7.7 million, 4.6 million and 3.9 million shares of common stock were excluded from the computation of
diluted earnings per share in 2012, 2011 and 2010, respectively, as the effect would have been antidilutive. Earnings
allocated to participating securities were inconsequential for all years presented. Reconciliations of weighted average
shares for basic and diluted earnings per common share follow:
(shares in millions) 2010 2011 2012
Basic shares outstanding 750.7 748.5 730.6
Dilutive shares 6.3 5.0 4.0
Diluted shares outstanding 757.0 753.5 734.6