National Oilwell Varco 2012 Annual Report Download - page 74

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Index to Financial Statements
profit margins are updated and reviewed at least quarterly by senior management. Factors that may affect future project costs and margins include shipyard access, weather,
production efficiencies, availability and costs of labor, materials and subcomponents and other factors. These factors can impact the accuracy of the Companys estimates and
materially impact the Companys current and future reported earnings.
The asset, Costs in excess of billings, represents revenues recognized in excess of amounts billed. The liability, Billings in excess of costs, represents billings in excess
of revenues recognized.
Drill Pipe Sales
For drill pipe sales, if requested in writing by the customer, delivery may be satisfied through delivery to the Companys customer storage location or to a third-party storage
facility. For sales transactions where title and risk of loss have transferred to the customer but the supporting documentation does not meet the criteria for revenue recognition
prior to the products being in the physical possession of the customer, the recognition of the revenues and related inventory costs from these transactions are deferred until the
customer takes physical possession.
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. The Company monitors the actual cost of performing these discretionary services and adjusts the accrual based on the
most current information available.
The changes in the carrying amount of service and product warranties are as follows (in millions):
Balance at December 31, 2009 $ 217
Net provisions for warranties issued during the year 52
Amounts incurred (45)
Currency translation adjustments (9)
Balance at December 31, 2010 $ 215
Net provisions for warranties issued during the year 40
Amounts incurred (47)
Currency translation adjustments and other 3
Balance at December 31, 2011 $ 211
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis
of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.
Concentration of Credit Risk
We grant credit to our customers, which operate primarily in the oil and gas industry. Concentrations of credit risk are limited because we have a large number of
geographically diverse customers, thus spreading trade credit risk. We control credit risk through credit evaluations, credit limits and monitoring procedures. We perform
periodic credit evaluations of our customers financial condition and generally do not require collateral, but may require letters of credit for certain international sales. Credit
losses are provided for in the financial statements. Allowances for doubtful accounts are determined based on a continuous process of assessing the Companys portfolio on
an individual customer basis taking into account current market conditions and trends. This process consists of a thorough review of historical collection experience, current
aging status of the customer accounts, and financial condition of the Companys customers. Based on a review of these factors, the Company will establish or adjust
allowances for specific customers. Accounts receivable are net of allowances for doubtful accounts of approximately $107 million at both December 31, 2011 and 2010.
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