Johnson Controls 2011 Annual Report Download - page 60

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allowance for doubtful accounts is based on historical experience, existing economic conditions and any specific
customer collection issues the Company has identified.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using either the last-in, first-out (LIFO)
method or the first-in, first-out (FIFO) method. Finished goods and work-in-process inventories include material,
labor and manufacturing overhead costs.
Pre-Production Costs Related to Long-Term Supply Arrangements
The Company’s policy for engineering, research and development, and other design and development costs related
to products that will be sold under long-term supply arrangements requires such costs to be expensed as incurred or
capitalized if reimbursement from the customer is assured. Customer reimbursements are recorded as an increase in
cash and a reduction of selling, general and administrative expense when reimbursement from the customer is
received if reimbursement from the customer is not assured. At September 30, 2011 and 2010, the Company
recorded within the consolidated statements of financial position approximately $215 million and $304 million,
respectively, of engineering and research and development costs for which customer reimbursement is assured. The
reimbursable costs are recorded in other current assets if reimbursement will occur in less than one year and in other
noncurrent assets if reimbursement will occur beyond one year.
Costs for molds, dies and other tools used to make products that will be sold under long-term supply arrangements
are capitalized within property, plant and equipment if the Company has title to the assets or has the non-cancelable
right to use the assets during the term of the supply arrangement. Capitalized items, if specifically designed for a
supply arrangement, are amortized over the term of the arrangement; otherwise, amounts are amortized over the
estimated useful lives of the assets. The carrying values of assets capitalized in accordance with the foregoing policy
are periodically reviewed for impairment whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. At September 30, 2011 and 2010, approximately $109 million and $72 million,
respectively, of costs for molds, dies and other tools were capitalized within property, plant and equipment which
represented assets to which the Company had title. In addition, at September 30, 2011 and 2010, the Company
recorded within the consolidated statements of financial position in other current assets approximately $254 million
and $212 million, respectively, of costs for molds, dies and other tools for which customer reimbursement is
assured.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the
respective assets using the straight-line method for financial reporting purposes and accelerated methods for income
tax purposes. The estimated useful lives range from 10 to 40 years for buildings and improvements and from 3 to 15
years for machinery and equipment.
The Company capitalizes interest on borrowings during the active construction period of major capital projects.
Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets.
Goodwill and Other Intangible Assets
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired.
The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or
changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its
reporting units, which have been determined to be the Company’s reportable segments or one level below the
reportable segments in certain instances, using a fair-value method based on management’s judgments and
assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to
sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating
the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of
earnings of comparable entities with similar operations and economic characteristics. In certain instances, the
Company uses discounted cash flow analyses to further support the fair value estimates. The inputs utilized in the
analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, ―Fair Value
Measurements and Disclosures.‖ The estimated fair value is then compared with the carrying amount of the
reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the
carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth
quarter of fiscal year 2011, 2010 and 2009 indicated that the estimated fair value of each reporting unit substantially