International Paper 2012 Annual Report Download - page 80

TEMPORARY INVESTMENTS
Temporary investments with an original maturity of
three months or less are treated as cash equivalents
and are stated at cost, which approximates market.
INVENTORIES
Inventories are valued at the lower of cost or market
and include all costs directly associated with manu-
facturing products: materials, labor and manufactur-
ing overhead. In the United States, costs of raw
materials and finished pulp and paper products,
other than newly acquired inventory from the
Temple-Inland, Inc. acquisition, are generally
determined using the last-in, first-out method. Other
inventories are valued using the first-in, first-out or
average cost methods.
PLANTS, PROPERTIES AND EQUIPMENT
Plants, properties and equipment are stated at cost,
less accumulated depreciation. Expenditures for
betterments are capitalized, whereas normal repairs
and maintenance are expensed as incurred. The
units-of-production method of depreciation is used
for major pulp and paper mills, and the straight-line
method is used for other plants and equipment.
Annual straight-line depreciation rates are, for build-
ings — 2.50% to 8.50% , and for machinery and
equipment — 5% to 33% .
FORESTLANDS
At December 31, 2012 , International Paper and its
subsidiaries owned or managed approximately
327,000 acres of forestlands in Brazil, and through
licenses and forest management agreements, had
harvesting rights on government-owned forestlands
in Russia. Costs attributable to timber are charged
against income as trees are cut. The rate charged is
determined annually based on the relationship of
incurred costs to estimated current merchantable
volume.
GOODWILL
Goodwill relating to a single business reporting unit
is included as an asset of the applicable segment,
while goodwill arising from major acquisitions that
involve multiple business segments is classified as a
corporate asset for segment reporting purposes. For
goodwill impairment testing, this goodwill is allo-
cated to reporting units. Annual testing for possible
goodwill impairment is performed as of the begin-
ning of the fourth quarter of each year, with addi-
tional interim testing performed when management
believes that it is more likely than not events or cir-
cumstances have occurred that would result in the
impairment of a reporting unit’s goodwill.
In performing this testing, the Company estimates
the fair value of its reporting units using the pro-
jected future cash flows to be generated by each unit
over the estimated remaining useful operating lives
of the unit’s assets, discounted using the estimated
cost of capital for each reporting unit. These esti-
mated fair values are then analyzed for reason-
ableness by comparing them to historic market
transactions for businesses in the industry, and by
comparing the sum of the reporting unit fair values
and other corporate assets and liabilities divided by
diluted common shares outstanding to the Compa-
ny’s traded stock price on the testing date. For
reporting units whose recorded value of net assets
plus goodwill is in excess of their estimated fair
values, the fair values of the individual assets and
liabilities of the respective reporting units are then
determined to calculate the amount of any goodwill
impairment charge required. See Note 8 for further
discussion.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment upon
the occurrence of events or changes in circum-
stances that indicate that the carrying value of the
assets may not be recoverable, measured by
comparing their net book value to the undiscounted
projected future cash flows generated by their use.
Impaired assets are recorded at their estimated fair
value. See Note 6 for further discussion.
INCOME TAXES
International Paper uses the asset and liability
method of accounting for income taxes whereby
deferred income taxes are recorded for the future tax
consequences attributable to differences between
the financial statement and tax bases of assets and
liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply
to taxable income in the years in which those
temporary differences are expected to be recovered
or settled. Deferred tax assets and liabilities are
remeasured to reflect new tax rates in the periods
rate changes are enacted.
International Paper records its worldwide tax provi-
sion based on the respective tax rules and regu-
lations for the jurisdictions in which it operates.
Where the Company believes that a tax position is
supportable for income tax purposes, the item is
included in its income tax returns. Where treatment
of a position is uncertain, liabilities are recorded
based upon the Company’s evaluation of the “more
likely than not” outcome considering the technical
merits of the position based on specific tax regu-
lations and the facts of each matter. Changes to
recorded liabilities are made only when an identifi-
able event occurs that changes the likely outcome,
such as settlement with the relevant tax authority,
the expiration of statutes of limitation for the subject
tax year, a change in tax laws, or a recent court case
that addresses the matter.
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