National Oilwell Varco 2011 Annual Report Download - page 51

Index to Financial Statements
Along with the normal impairment analysis, the Company performed a sensitivity analysis on the projected results, the goodwill and the other indefinite-lived intangible asset
impairment analysis assuming revenue for each individual reporting unit for goodwill and each individual indefinite-lived intangible asset decreased an additional 20% from
the current projections for 2012 and 2013, while holding all other factors constant and no impairment was identified. Additionally, if the Company were to increase its
discount rate 100 basis points, while keeping all other assumptions constant, there would be no impairments in any of the goodwill associated with the Companys reporting
units or any of the Companys indefinite-lived intangible assets. While the Company does not believe that these events (20% drop in additional revenue for the next three
years or 100 basis point increases in weighted average costs of capital) or changes are likely to occur, it is reasonably possible these events could transpire if market conditions
worsen and if the market fails to continue to recover in 2012. Any significant changes to these assumptions and factors could have a material impact on the Companys
goodwill impairment analysis.
Service and Product Warranties
The Company provides service and warranty policies on certain of its products. The Company accrues liabilities under service and warranty policies based upon specific
claims and a review of historical warranty and service claim experience in accordance with ASC Topic 450 Contingencies (ASC Topic 450). Adjustments are made to
accruals as claim data and historical experience change. In addition, the Company incurs discretionary costs to service its products in connection with product performance
issues and accrues for them when they are encountered. At December 31, 2011 and 2010, service and product warranties totaled $211 million and $215 million, respectively.
Income Taxes
The Company is a U.S. registered company and is subject to income taxes in the U.S. The Company operates through various subsidiaries in a number of countries throughout
the world. Income taxes have been provided based upon the tax laws and rates of the countries in which the Company operates and income is earned.
The Companys annual tax provision is based on taxable income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. The
determination and evaluation of the annual tax provision and tax positions involves the interpretation of the tax laws in the various jurisdictions in which the Company
operates. It requires significant judgment and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of income,
deductions and tax credits. Changes in tax laws, regulations, and treaties, foreign currency exchange restrictions or the Companys level of operations or profitability in each
jurisdiction could impact the tax liability in any given year. The Company also operates in many jurisdictions where the tax laws relating to the pricing of transactions between
related parties are open to interpretation, which could potentially result in aggressive tax authorities asserting additional tax liabilities with no offsetting tax recovery in other
countries.
The Company maintains liabilities for estimated tax exposures in jurisdictions of operation. The annual tax provision includes the impact of income tax provisions and benefits
for changes to liabilities that the Company considers appropriate, as well as related interest. Tax exposure items primarily include potential challenges to intercompany pricing
and certain operating expenses that may not be deductible in foreign jurisdictions. These exposures are resolved primarily through the settlement of audits within these tax
jurisdictions or by judicial means. The Company is subject to audits by federal, state and foreign jurisdictions which may result in proposed assessments. The Company
believes that an appropriate liability has been established for estimated exposures under the guidance in ASC Topic 740 Income Taxes (ASC Topic 740). However,
actual results may differ materially from these estimates. The Company reviews these liabilities quarterly and to the extent audits or other events result in an adjustment to the
liability accrued for a prior year, the effect will be recognized in the period of the event.
The Company currently has recorded valuation allowances that the Company intends to maintain until it is more likely than not the deferred tax assets will be realized. Income
tax expense recorded in the future will be reduced to the extent of decreases in the Companys valuation allowances. The realization of remaining deferred tax assets is
primarily dependent on future taxable income. Any reduction in future taxable income including but not limited to any future restructuring activities may require that the
Company record an additional valuation allowance against deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such
period and could have a significant impact on future earnings.
The Company has not provided for deferred taxes on the unremitted earnings of certain subsidiaries that are permanently reinvested. Should the Company make a distribution
from the unremitted earnings of these subsidiaries, the Company may be required to record additional taxes. Unremitted earnings of these subsidiaries were $3,789 million and
$2,503 million at December 31, 2011 and 2010, respectively. The Company makes a determination each period whether to permanently reinvest these earnings. If, as a result
of these reassessments, the Company distributes these earnings in the future, additional tax liabilities would result, offset by any available foreign tax credits.
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