Sara Lee 2010 Annual Report Download - page 60

Notes to financial statements
Shipping and Handling Costs Shipping and handling costs are
$607 million in 2010, $655 million in 2009 and $644 million in
2008. The majority of these costs are recognized in the “Selling,
general and administrative expenses” line of the Consolidated
Statements of Income.
Inventory Valuation Inventories are stated at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Rebates, discounts and other cash consideration received from a
vendor related to inventory purchases is reflected as a reduction
in the cost of the related inventory item, and is therefore, reflected
in cost of sales when the related inventory item is sold.
Recognition and Reporting of Planned Business Dispositions
When a decision to dispose of a business component is made, it
is necessary to determine how the results will be presented within
the financial statements and whether the net assets of that business
are recoverable. The following summarizes the significant account-
ing policies and judgments associated with a decision to dispose
of a business.
Discontinued Operations A discontinued operation is a business
component that meets several criteria. First, it must be possible to
clearly distinguish the operations and cash flows of the component
from other portions of the business. Second, the operations need
to have been sold or classified as held for sale. Finally, after the
disposal, the cash flows of the component must be eliminated from
continuing operations and the corporation may not have any signifi-
cant continuing involvement in the business. Significant judgments
are involved in determining whether a business component meets
the criteria for discontinued operation reporting and the period in
which these criteria are met.
If a business component is reported as a discontinued operation,
the results of operations through the date of sale are presented on
a separate line of the income statement. Interest on corporate level
debt is not allocated to discontinued operations. Any gain or loss
recognized upon the disposition of a discontinued operation is
also reported on a separate line of the income statement. Prior to
disposition, the assets and liabilities of discontinued operations are
aggregated and reported on separate lines of the balance sheet.
Gains and losses related to the sale of business components
that do not meet the discontinued operation criteria are reported
in continuing operations and separately disclosed if significant.
Businesses Held for Sale In order for a business to be classified
as held for sale, several criteria must be achieved. These criteria
include, among others, an active program to market the business
and locate a buyer, as well as the probable disposition of the busi-
ness within one year. Upon being classified as held for sale, the
recoverability of the carrying value of a business must be assessed.
Evaluating the recoverability of the assets of a business classified
as held for sale follows a defined order in which property and intan-
gible assets subject to amortization are considered only after the
recoverability of goodwill, intangible assets not subject to amortization
and other assets are assessed. After the valuation process is
completed, the held for sale business is reported at the lower of its
carrying value or fair value less cost to sell and no additional depre-
cation expense is recognized related to property. The carrying value
of a held for sale business includes the portion of the cumulative
translation adjustment related to the operation.
Businesses Held for Use If a decision to dispose of a business
is made and the held for sale criteria are not met, the business
is considered held for use and its assets are evaluated for recover-
ability in the following order: assets other than goodwill, property
and intangibles; property and intangibles subject to amortization;
and finally, goodwill. In evaluating the recoverability of property and
intangible assets subject to amortization, in a held for use business,
the carrying value of the business is first compared to the sum of
the undiscounted cash flows expected to result from the use and
eventual disposition of the operation. If the carrying value exceeds
the undiscounted expected cash flows, then an impairment is rec-
ognized if the carrying value of the business exceeds its fair value.
There are inherent judgments and estimates used in determining
future cash flows and it is possible that additional impairment charges
may occur in future periods. In addition, the sale of a business can
result in the recognition of a gain or loss that differs from that
anticipated prior to the closing date.
Property Property is stated at historical cost and depreciation
is computed using the straight-line method over the lives of the
assets. Machinery and equipment are depreciated over periods
ranging from 3 to 25 years and buildings and building improvements
over periods of up to 40 years. Additions and improvements that
substantially extend the useful life of a particular asset and interest
costs incurred during the construction period of major properties
are capitalized. Leasehold improvements are capitalized and amor-
tized over the shorter of the remaining lease term or remaining
economic useful life. Repairs and maintenance costs are charged
to expense. Upon sale or disposition of a property element, the
cost and related accumulated depreciation are removed from the
accounts. Capitalized interest was $10 million in 2010, $10 million
in 2009 and $18 million in 2008.
Property is tested for recoverability whenever events or changes
in circumstances indicate that its carrying value may not be recover-
able. Such events include significant adverse changes in the business
climate, current period operating or cash flow losses, forecasted
continuing losses or a current expectation that an asset group will
be disposed of before the end of its useful life. Recoverability of
property is evaluated by a comparison of the carrying amount of an
asset or asset group to future net undiscounted cash flows expected
to be generated by the asset or asset group. If the carrying amount
exceeds the estimated future undiscounted cash flows then an
asset is not recoverable. The impairment loss recognized is the
amount by which the carrying amount of the asset exceeds the
estimated fair value using discounted estimated future cash flows.
58 Sara Lee Corporation and Subsidiaries