John Deere 2011 Annual Report Download - page 28

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are significant accounting policies in addition
to those included in other notes to the consolidated financial
statements.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the
reported amounts and related disclosures. Actual results could
differ from those estimates.
Revenue Recognition
Sales of equipment and service parts are recorded when the sales
price is determinable and the risks and rewards of ownership are
transferred to independent parties based on the sales agreements
in effect. In the U.S. and most international locations, this transfer
occurs primarily when goods are shipped. In Canada and some
other international locations, certain goods are shipped to dealers
on a consignment basis under which the risks and rewards of
ownership are not transferred to the dealer. Accordingly, in
these locations, sales are not recorded until a retail customer has
purchased the goods. In all cases, when a sale is recorded by the
company, no significant uncertainty exists surrounding the
purchaser’s obligation to pay. No right of return exists on sales
of equipment. Service parts returns are estimable and accrued at
the time a sale is recognized. The company makes appropriate
provisions based on experience for costs such as doubtful
receivables, sales incentives and product warranty.
Financing revenue is recorded over the lives of related
receivables using the interest method. Insurance premiums
recorded in other income are generally recognized in proportion
to the costs expected to be incurred over the contract period.
Deferred costs on the origination of financing receivables are
recognized as a reduction in finance revenue over the expected
lives of the receivables using the interest method. Income and
deferred costs on the origination of operating leases are recog-
nized on a straight-line basis over the scheduled lease terms in
finance revenue.
Sales Incentives
At the time a sale is recognized, the company records an
estimate of the future sales incentive costs for allowances
and financing programs that will be due when a dealer sells
the equipment to a retail customer. The estimate is based on
historical data, announced incentive programs, field inventory
levels and retail sales volumes.
Product Warranties
At the time a sale is recognized, the company records the
estimated future warranty costs. These costs are usually
estimated based on historical warranty claims (see Note 22).
Sales Taxes
The company collects and remits taxes assessed by different
governmental authorities that are both imposed on and
concurrent with revenue producing transactions between the
company and its customers. These taxes may include sales, use,
value-added and some excise taxes. The company reports the
collection of these taxes on a net basis (excluded from revenues).
Shipping and Handling Costs
Shipping and handling costs related to the sales of the company’s
equipment are included in cost of sales.
Advertising Costs
Advertising costs are charged to expense as incurred. This expense
was $163 million in 2011, $154 million in 2010 and $175 million
in 2009.
Depreciation and Amortization
Property and equipment, capitalized software and other
intangible assets are stated at cost less accumulated depreciation
or amortization. These assets are depreciated over their esti-
mated useful lives generally using the straight-line method.
Equipment on operating leases is depreciated over the terms of
the leases using the straight-line method. Property and equip-
ment expenditures for new and revised products, increased
capacity and the replacement or major renewal of significant
items are capitalized. Expenditures for maintenance, repairs and
minor renewals are generally charged to expense as incurred.
Securitization of Receivables
Certain financing receivables are periodically transferred to
special purpose entities (SPEs) in securitization transactions
(see Note 13). These securitizations qualify as collateral for
secured borrowings and no gains or losses are recognized at the
time of securitization. The receivables remain on the balance
sheet and are classified as “Financing receivables securitized
- net.” The company recognizes finance income over the lives
of these receivables using the interest method.
Receivables and Allowances
All financing and trade receivables are reported on the balance
sheet at outstanding principal adjusted for any charge-offs,
the allowance for credit losses and doubtful accounts, and any
deferred fees or costs on originated financing receivables.
Allowances for credit losses and doubtful accounts are main-
tained in amounts considered to be appropriate in relation to
the receivables outstanding based on collection experience,
economic conditions and credit risk quality. Receivables are
written-off to the allowance when the account is considered
uncollectible.
Impairment of Long-Lived Assets, Goodwill and
Other Intangible Assets
The company evaluates the carrying value of long-lived assets
(including property and equipment, goodwill and other
intangible assets) when events or circumstances warrant such
a review. Goodwill and intangible assets with indefinite lives
are tested for impairment annually at the end of the third fiscal
quarter each year, or more often if events or circumstances
indicate a reduction in the fair value below the carrying value.
Goodwill is allocated and reviewed for impairment by reporting
units, which consist primarily of the operating segments and
certain other reporting units. The goodwill is allocated to the
reporting unit in which the business that created the goodwill
resides. To test for goodwill impairment, the carrying value of
each reporting unit is compared with its fair value. If the
carrying value of the goodwill or long-lived asset is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset (see Note 5).
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