Waste Management 2006 Annual Report Download - page 96

WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 2005 and 2004
1. Business
The financial statements presented in this report represent the consolidation of Waste Management, Inc., a
Delaware corporation, our wholly-owned and majority-owned subsidiaries and certain variable interest entities for
which we have determined that we are the primary beneficiary (See Note 19). Waste Management, Inc. is a holding
company and all operations are conducted by subsidiaries. When the terms “the Company,” “we,” “us” or “our” are
used in this document, those terms refer to Waste Management, Inc., its consolidated subsidiaries and consolidated
variable interest entities. When we use the term “WMI,” we are referring only to the parent holding company.
We are the leading provider of integrated waste services in North America. Using our vast network of assets
and employees, we provide a comprehensive range of waste management services. Through our subsidiaries we
provide collection, transfer, recycling, disposal and waste-to-energy services. In providing these services, we
actively pursue projects and initiatives that we believe make a positive difference for our environment, including
recovering and processing the methane gas produced naturally by landfills into a renewable energy source. Our
customers include commercial, industrial, municipal and residential customers, other waste management compa-
nies, electric utilities and governmental entities.
We manage and evaluate our principal operations through six operating Groups, of which four are organized by
geographic area and two are organized by function. The geographic Groups include our Eastern, Midwest, Southern
and Western Groups, and the two functional Groups are our Wheelabrator Group, which provides waste-to-energy
services, and our Recycling Group. We also provide additional waste management services that are not managed
through our six Groups, which are presented in this report as “Other.” Refer to Note 20 for additional information
related to our operating segments.
2. Accounting Changes and Reclassifications
Accounting Changes
SFAS No. 123(R) — Share-Based Payment
On January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
2004), Share-Based Payment (“SFAS No. 123(R)”), which requires compensation expense to be recognized for all
share-based payments made to employees based on the fair value of the award at the date of grant. We adopted
SFAS No. 123(R) using the modified prospective method, which results in (i) the recognition of compensation
expense using the provisions of SFAS No. 123(R) for all share-based awards granted or modified after December 31,
2005 and (ii) the recognition of compensation expense using the provisions of SFAS No. 123, Accounting for Stock-
Based Compensation (“SFAS No. 123”) for all unvested awards outstanding at the date of adoption. Under this
transition method, the results of operations of prior periods have not been restated. Accordingly, we will continue to
provide pro forma financial information for periods prior to January 1, 2006 to illustrate the effect on net income
and earnings per share of applying the fair value recognition provisions of SFAS No. 123.
Through December 31, 2005, as permitted by SFAS No. 123, we accounted for equity-based compensation in
accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees,
as amended (“APB No. 25”). Under APB No. 25, we recognized compensation expense based on an award’s
intrinsic value. For stock options, which were the primary form of equity-based awards we granted through
December 31, 2004, this meant we recognized no compensation expense in connection with the grants, as the
exercise price of the options was equal to the fair market value of our common stock on the date of grant and all
other provisions were fixed. As discussed below, beginning in 2005, restricted stock units and performance share
units became the primary form of equity-based compensation awarded under our long-term incentive plans. For
restricted stock units, intrinsic value is equal to the market value of our common stock on the date of grant. For
performance share units, APB No. 25 required “variable accounting,” which resulted in the recognition of
compensation expense based on the intrinsic value of each award at the end of each reporting period until such
time that the number of shares to be issued and all other provisions are fixed.
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