National Oilwell Varco 2012 Annual Report Download - page 70

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Index to Financial Statements
NATIONAL OILWELL VARCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Nature of Business
We design, construct, manufacture and sell comprehensive systems, components, and products used in oil and gas drilling and production, provide oilfield services and
supplies, and distribute products and provide supply chain integration services to the upstream oil and gas industry. Our revenues and operating results are directly related to
the level of worldwide oil and gas drilling and production activities and the profitability and cash flow of oil and gas companies, drilling contractors and oilfield service
companies, which in turn are affected by current and anticipated prices of oil and gas. Oil and gas prices have been and are likely to continue to be volatile.
Basis of Consolidation
The accompanying Consolidated Financial Statements include the accounts of National Oilwell Varco, Inc. and its consolidated subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Investments that are not wholly-owned, but where we exercise control, are fully consolidated with the equity
held by minority owners and their portion of net income (loss) reflected as noncontrolling interests in the accompanying consolidated financial statements. Investments in
unconsolidated affiliates, over which we exercise significant influence, but not control, are accounted for by the equity method.
2. Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, receivables, and payables approximated fair value because of the relatively short maturity
of these instruments. Cash equivalents include only those investments having a maturity date of three months or less at the time of purchase. The carrying values of other
financial instruments approximate their respective fair values.
Derivative Financial Instruments
Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging (ASC Topic 815) requires companies to recognize all of its derivative instruments as
either assets or liabilities in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends
on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow
hedge, or a hedge of a net investment in a foreign operation.
The Company records all derivative financial instruments at their fair value in its Consolidated Balance Sheet. Except for certain non-designated hedges discussed below, all
derivative financial instruments that the Company holds are designated as either cash flow or fair value hedges and are highly effective in offsetting movements in the
underlying risks. Such arrangements typically have terms between two and 24 months, but may have longer terms depending on the underlying cash flows being hedged,
typically related to the projects in our backlog. The Company may also use interest rate contracts to mitigate its exposure to changes in interest rates on anticipated long-term
debt issuances.
At December 31, 2011, the Company has determined that its derivative financial instruments representing assets of $26 million and liabilities of $96 million (primarily
currency related derivatives) are level 2 in the fair value hierarchy as the fair value is based on publicly available foreign exchange and interest rates at each financial reporting
date. At December 31, 2011, the net fair value of the Companys foreign currency forward contracts totaled a net liability of $70 million.
Inventories
Inventories consist of raw materials, work-in-process and oilfield and industrial finished products, manufactured equipment and spare parts. 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 installed base and the development of new products. The allowance, which totaled $281 million and $270 million at
December 31, 2011 and 2010, respectively, is the amount necessary to reduce the cost of the inventory to its estimated realizable value.
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