National Oilwell Varco 2002 Annual Report Download - page 31

Inventories
Inventories consist of oilfield products, manufactured equipment, manufactured specialized
drilling products and downhole motors and spare parts for manufactured equipment and drilling
products. Inventories are stated at the lower of cost or market using the first-in, first-out or
average cost methods. Allowances for excess and obsolete inventories are determined based on
our historical usage of inventory on-hand as well as our future expectations related to our
substantial installed base and the development of new products. The amount reserved, which
totaled $49.4 million and $49.1 million at December 31, 2002 and 2001, respectively, is the
recorded cost of the inventory minus its estimated realizable value. Provisions for excess and
obsolete inventories have been immaterial in recent years.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major improvements that
extend the lives of property and equipment are capitalized while minor replacements,
maintenance and repairs are charged to operations as incurred. Disposals are removed at cost less
accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is
provided using the straight-line method or declining balance method over the estimated useful
lives of individual items. Depreciation expense was $25.0 million, $27.1 million and $24.7
million for the years ending December 31, 2002, 2001 and 2000.
Long-lived Assets
Effective January 1, 2002, we adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144 superceded SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". The adoption of SFAS 144 had no
effect on our results of operations. We record impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than the carrying
amount of those assets. The net carrying value of assets not recoverable is reduced to fair value if
lower than carrying value. In determining the fair market value of the assets, we consider market
trends and recent transactions involving sales of similar assets, or when not available, discounted
cash flow analysis.
Assets Held for Sale
In the course of integrating acquisitions and streamlining operations, we have closed certain
manufacturing facilities. Facilities where we have a formal plan to sell the facility are classified
as held for sale. We expect these facilities to be sold within the next 1 to 3 years. When we
designate an asset as held for sale, we record its carrying value at the lower of its current carrying
amount or the estimated fair value less costs to sell and stop recording depreciation expense.
Intangible Assets
Beginning in 2002, we adopted FAS 142 "Accounting for Goodwill and Other Intangible Assets"
and accordingly stopped amortizing goodwill that arose from acquisitions before June 30, 2001.
We also performed an impairment test as of the beginning of 2002 that indicated no impairment
of goodwill or other intangibles. The effect of not amortizing goodwill and other intangibles in
periods prior to adoption follows (in thousands):
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