Emerson 2013 Annual Report Download - page 31

Emerson > 2013 Annual Report 29
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 inventory 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 a
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.
If an initial assessment indicates it is more likely than not
an impairment may exist, it is evaluated by comparing the
unit’s estimated fair value 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 2013, Emerson’s total market value based
on its exchange-traded stock price was approximately
$46 billion while its common stockholders’ equity was
$11 billion.The European network power systems business,
with goodwill of $1.0 billion, has faced integration
challenges as well as difficult end markets stemming from
the financial crisis and persistent weak economy in Europe.
The estimated fair value of this business exceeded its
carrying value by less than 10 percent. The assumptions
used in estimating fair value include the resumption
of economic growth in Europe, continued successful
execution of plans to expand the business and improve
the cost structure, and end market growth for data center
services and solutions, including uninterruptible power
supplies and precision cooling.
RETIREMENT PLANS
While the Company continues to focus on a prudent
long-term investment strategy for its pension-related
assets, the determination of defined benefit plan expense
and obligations are dependent on assumptions made,
including the expected annual rate of return on plan assets,
the discount rate and the rate of annual compensation
increases. Management believes that the assumptions used
are appropriate; however, actual experience may differ.
In accordance with U.S. generally accepted accounting
principles, actual results that differ from the Company’s
assumptions are accumulated as deferred actuarial gains or
losses and amortized to expense in future periods.
As of September 30, 2013, pension plans were
underfunded by a total of $121 million (which includes
$368 million of unfunded plans). The Company contributed
$160 million to defined benefit plans in 2013 and expects to
contribute approximately $145 million in 2014. At year-end
2013, the discount rate for U.S. plans was 4.75 percent,
and was 4.00 percent in 2012. The assumed investment
return on plan assets was 7.75 percent in both 2013 and
2012, and is expected to be 7.50 percent in 2014. Deferred
actuarial losses to be amortized to expense in future years
were $1.2 billion ($800 million after-tax) as of September
30, 2013. Defined benefit pension plan expense for 2014
is expected to be approximately $155 million, compared
with $228 million in 2013, which reflects the impact of the
higher interest rate environment and favorable investment
performance the last two years. See Notes 10 and 11.
INCOME TAXES
Income tax expense and tax assets and liabilities reflect
management’s assessment of taxes paid or expected
to be paid (received) on items included in the financial
statements. Uncertainty exists regarding tax positions taken
in previously filed tax returns still under examination and
positions expected to be taken in future returns. Deferred tax
assets and liabilities arise because of temporary differences
between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards.
Deferred income taxes are measured using enacted tax rates
in effect for the year in which the temporary differences are
expected to be recovered or settled. Valuation allowances
are provided to reduce deferred tax assets to the amount
that will more likely than not be realized. The impact on
deferred tax assets and liabilities of a change in tax rates
is recognized in the period that includes the enactment
date. The Company also pays U.S. federal income taxes, net
of available foreign tax credits, on cash repatriated from
non-U.S. locations. No provision is made for U.S. income
taxes on the undistributed earnings of non-U.S. subsidiaries
where these earnings are considered permanently
invested or otherwise indefinitely retained for continuing