Emerson 2015 Annual Report Download - page 40

38 | 2015 Annual Report
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 10 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 or maintenance. 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.
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. The Company’s foreign
currency exposures relate to transactions denominated in currencies that differ from the functional currencies of
its business units, primarily in euros, Mexican pesos, Canadian dollars and Singapore dollars. 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 may be 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 derivatives for
trading or speculative purposes. The duration of hedge positions is generally two years or less.
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 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
obligations 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 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.
Counterparties to derivative arrangements are companies with high credit ratings, and the Company has
bilateral collateral arrangements with them for which credit rating-based posting thresholds vary depending on
the arrangement. If credit ratings on the Company’s debt fall below preestablished levels, counterparties can
require immediate full collateralization on all instruments in net liability positions. No collateral was posted with
counterparties and none was held by the Company at year end. The maximum collateral that could have been
required was $68. The Company can also demand full collateralization of instruments in net asset positions should
any of the Company’s counterparties’ credit ratings fall below certain thresholds. Risk from credit loss when
derivatives are in asset positions is not considered material. The Company has master netting arrangements 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 consolidated balance
sheet and 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.