National Oilwell Varco 2003 Annual Report Download - page 34

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33
term debt issuances. These contracts are typically short term in nature. We do not use derivative
financial instruments for trading or speculative purposes.
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 allowance, which totaled
$46.2 million and $49.4 million at December 31, 2003 and 2002, is the amount necessary to
reduce the cost of the inventory to its estimated realizable value.
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 $37.4 million, $25.0 million and $27.1
million for the years ending December 31, 2003, 2002 and 2001.
Long-lived Assets
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
carrying value of assets used in operations that is 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 and non-strategic assets. Facilities that are available for immediate sale,
under a formal plan that is probable of completion within one year, are classified as held for sale.
When we designate an asset as held for sale, we adjust its carrying value to the lower of its
current carrying amount or the estimated fair value less costs to sell and stop recording
depreciation expense. Carrying values are adjusted to reflect any subsequent deterioration in fair
value.
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.
The effect of not amortizing goodwill and other intangibles in periods prior to adoption follows
(in thousands):