Emerson 2015 Annual Report Download - page 31

2015 Annual Report | 29
value or cash flows are not material. Sensitivity analysis
has limitations; for example, a weaker U.S. dollar would
benefit future earnings through favorable translation of
non-U.S. operating results, and lower commodity prices
would benefit future earnings through lower cost of
sales. See Notes 1, and 7 through 9.
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 statements. 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 estimates under different assumptions
or conditions.
REVENUE RECOGNITION
The Company recognizes nearly all revenue 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 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 performance related to 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.
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 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 that
discounts estimated future cash flows using discount
rates 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 the 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.
RETIREMENT PLANS
The Company maintains a prudent long-term investment
strategy for its pension assets, consistent with the
duration of its pension obligations. The determination
of defined benefit plan expense and liabilities is
dependent on various assumptions, 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. The Company will begin transitioning
from defined benefit to defined contribution retirement
plans in 2016. The principal U.S. defined benefit plan
will close to newly-hired employees while shorter-
tenured current employees will cease accruing benefits.
Affected employees will transition to an enhanced
defined contribution plan. See Notes 10 and 11.