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| 1 | 3M Company |
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| 2 | ACE LTD | 2. Significant accounting policies |
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| 3 | Activision Blizzard, Inc. |
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| 4 | ADOBE SYSTEMS INC |
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Pursuant to these rules and regulations, we have condensed or omitted certain information and
footnote disclosures we normally include in our annual consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal,
recurring adjustments, except as otherwise indicated) necessary to fairly present our financial
position, results of operations and cash flows. Our interim period operating results do not
necessarily indicate the results that may be expected for any other interim period or for the full
fiscal year. These financial statements and accompanying notes should be read in conjunction with
the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the
fiscal year ended November 28, 2008 on file with the SEC.
There have been no material changes in our significant accounting policies, as compared to the
significant accounting policies described in our Annual Report on Form 10-K for the fiscal year
ended November 28, 2008.
Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the nine months ended August 28,
2009, as compared to the recent accounting pronouncements described in our Annual Report on Form
10-K for the fiscal year ended November 28, 2008, that are of significance, or potential
significance, to us.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the
Hierarchy of GAAP, a replacement of SFAS No. 162” (“SFAS 168”). SFAS 168 will become the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168
is effective for financial statements issued for interim and annual periods ending after September
15, 2009 and will be effective for us beginning in the fourth quarter of fiscal 2009. On the
effective date of SFAS 168, it will supersede all then-existing non-SEC accounting and reporting
standards. As SFAS 168 is not intended to change or alter existing GAAP, it is not expected to have
any impact on our consolidated financial statements and will only impact references for accounting
guidance.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No.
46(R)” (“SFAS 167”), which amends the evaluation criteria to identify the primary beneficiary of a
variable interest entity and requires ongoing reassessment of whether an enterprise is the primary
beneficiary of the variable interest entity. The provisions of SFAS 167 are effective for interim
and annual reporting periods ending after November 15, 2009 and will be effective for us beginning
in the fourth quarter of fiscal 2009. We are currently evaluating the impact of adopting SFAS 167 on
our consolidated financial position, results of operations and cash flows.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. The provisions of
SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. We
adopted SFAS 165 during the third quarter of fiscal 2009 and as the pronouncement only requires
additional disclosures, the adoption did not have an impact on our consolidated financial position,
results of operations or cash flows. We have evaluated subsequent events through October 1, 2009,
the date that these financial statements were issued.
In April 2009, the FASB issued three related FASB Staff Positions (“FSP”): (i) FSP Financial
Accounting Standard (“FAS”) No. 115-2 and FAS No. 124-2, “Recognition of Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and
Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining
the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4), which are effective
for interim and annual reporting periods ending after June 15, 2009. FSP FAS 115-2 and FAS 124-2
amends the other-than-temporary impairment guidance in GAAP for debt securities to modify the
requirement for recognizing other-than-temporary impairments, change the existing
impairment model, and modify the presentation and frequency of related disclosures. FSP FAS 107-1
and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for
estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). We
adopted these FSPs during the third quarter of fiscal 2009 and they did not have a material effect
on our consolidated financial position, results of operations or cash flows.
In September 2008, the FASB issued FSP FAS No. 133-1 and FIN No. 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of SFAS No. 133 and FIN No. 45; and
Clarification of the Effective Date of SFAS No. 161” (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1
and FIN 45-4 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) to require disclosures by sellers of credit derivatives, including credit derivatives
embedded in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also amend FIN No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of SFAS No. 5, 57, and 107 and rescission of FIN No. 34”
(“FIN 45”), to require additional disclosure about the current status of the payment/performance
risk of a guarantee. The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for
reporting periods ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the
effective date in SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,
an amendment of SFAS 133” (“SFAS 161”). We adopted the disclosures required by SFAS 161 in the
first quarter of fiscal 2009. Since FSP FAS 133-1 and FIN 45-4 only required additional
disclosures, the adoption did not impact our consolidated financial position, results of operations
or cash flows.
In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life of recognized
intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” This new guidance
applies prospectively to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FSP FAS 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. FSP FAS 142-3 is effective for us beginning in the first quarter of fiscal
2010. Early adoption is not permitted. As this guidance is to be applied prospectively, on
adoption, there is no impact to our current consolidated financial statements.
In March 2008, the FASB issued SFAS 161 which requires companies with derivative instruments
to disclose information that should enable financial statement users to understand how and why a
company uses derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS 133 and how derivative instruments and related hedged items affect a
company’s financial position, financial performance and cash flows. We adopted SFAS 161 in the
first quarter of fiscal 2009. Since SFAS 161 only required additional disclosure, the adoption did
not impact our consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141R”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of Accounting Research Bulletin (“ARB”) No. 51” (“SFAS 160”). SFAS 141R will change how
business acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests and classified as a
component of equity. SFAS 141R and SFAS 160 are effective for us beginning in the first quarter of
fiscal 2010. Early adoption is not permitted. We are currently evaluating the impact that SFAS 141R
and SFAS 160 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS 157, which defines fair value, establishes guidelines
for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does
not require any new fair value measurements but rather eliminates inconsistencies in guidance found
in various prior accounting pronouncements and is effective for fiscal years beginning after
November 15, 2007. Effective November 29, 2008, we adopted SFAS 157 for all nonfinancial assets and
nonfinancial liabilities measured at fair value on a non-recurring basis. Examples include
goodwill, intangibles, and other long-lived assets. The adoption of SFAS 157 did not have a
material impact on our consolidated financial position, results of operations or cash flows.
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| 5 | Aflac Incorporated | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Aflac Incorporated (the Parent Company) and its subsidiaries (the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company’s insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). Most of Aflac’s policies are individually underwritten and marketed through independent agents. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business. Aflac Japan accounted for 78% and 76% of the Company’s total revenues in the nine-month periods ended September 30, 2009, and 2008, respectively, and comprised 86% and 87% of total assets at September 30, 2009 and December 31, 2008, respectively.
Basis of Presentation
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations based on currently available information. The most significant items on our balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments, deferred policy acquisition costs, and liabilities for future policy benefits and unpaid policy claims. These accounting estimates and actuarial determinations are sensitive to market conditions, investment yields, mortality, morbidity, commission and other acquisition expenses, and terminations by policyholders. As additional information becomes available, or actual amounts are determinable, the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, we believe the amounts provided are adequate.
The consolidated financial statements include the accounts of the Parent Company, its majority-owned subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of September 30, 2009 and December 31, 2008, and the consolidated statements of earnings and comprehensive income for the three- and nine-month periods ended September 30, 2009, and 2008, and consolidated statements of shareholders' equity and cash flows for the nine-month periods ended September 30, 2009, and 2008. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report to shareholders for the year ended December 31, 2008.
Significant Accounting Policies
As a result of accounting guidance adopted subsequent to December 31, 2008, we have updated our accounting policy for investments. All other categories of significant accounting policies remain unchanged from our annual report to shareholders for the year ended December 31, 2008.
Investments: Our debt securities consist of fixed-maturity securities, which are classified as either held to maturity or available for sale. Securities classified as held to maturity are securities that we have the ability and intent to hold to maturity or redemption and are carried at amortized cost. All other fixed-maturity debt securities, our perpetual securities and our equity securities are classified as available for sale and are carried at fair value. If the fair value is higher than the amortized cost for debt and perpetual securities, or the purchase cost for equity securities, the excess is an unrealized gain, and if lower than cost, the difference is an unrealized loss.
The net unrealized gains and losses on securities available for sale, plus the unamortized unrealized gains and losses on debt securities transferred to the held-to-maturity portfolio, less related deferred income taxes, are recorded through other comprehensive income and included in accumulated other comprehensive income.
Amortized cost of debt and perpetual securities is based on our purchase price adjusted for accrual of discount, or amortization of premium. The amortized cost of debt and perpetual securities we purchase at a discount will equal the face or par value at maturity. Debt and perpetual securities that we purchase at a premium will have an amortized cost equal to face or par value at maturity or the call date, if applicable. Interest is reported as income when earned and is adjusted for amortization of any premium or discount.
Our investments in qualifying special purpose entities (QSPEs) are accounted for as fixed-maturity or perpetual securities. All of our investments in QSPEs are held in our available-for-sale portfolio.
For the collateralized mortgage obligations (CMOs) held in our fixed-maturity securities portfolio, we recognize income using a constant effective yield, which is based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in CMO securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected in net investment income.
We use the specific identification method to determine the gain or loss from securities transactions and report the realized gain or loss in the consolidated statements of earnings.
Our credit analysts/research personnel routinely monitor and evaluate the difference between the amortized cost and fair value of our investments. Additionally, credit analysis and/or credit rating issues related to specific investments may trigger more intensive monitoring to determine if a decline in fair value is other than temporary. For investments with a fair value below amortized cost, the process includes evaluating, among other factors, the length of time and the extent to which amortized cost exceeds fair value, the financial condition, operations, credit and liquidity posture, and future prospects of the issuer as well as our intent or need to dispose of the security prior to a recovery of its fair value to amortized cost. This process is not exact and requires consideration of risks such as credit risk, which to a certain extent can be controlled, and interest rate risk, which cannot be controlled. Therefore, if an investment’s amortized cost exceeds its fair value solely due to changes in interest rates, impairment may not be appropriate.
If, after monitoring and analyses, management believes that fair value will not recover to amortized cost prior to the disposal of the security, we recognize an other-than-temporary impairment of the security. Once a security is considered to be other-than-temporarily impaired, the impairment loss is separated into two separate components, the portion of the impairment related to credit and the portion of the impairment related to factors other than credit. We automatically recognize a charge to earnings for the credit-related portion of other-than-temporary impairments. Impairments related to factors other than credit are charged to earnings in the event we intend to sell the security prior to the recovery of its amortized cost or if it is more likely than not that we would be required to dispose of the security prior to recovery of its amortized cost; otherwise, non-credit-related other-than-temporary impairments are charged to other comprehensive income.
We lend fixed-maturity securities to financial institutions in short-term security lending transactions. These securities continue to be carried as investment assets on our balance sheet during the terms of the loans and are not reported as sales. We receive cash or other securities as collateral for such loans. For loans involving unrestricted cash collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral. For loans collateralized by securities, the collateral is not reported as an asset or liability.
For further information regarding our investments, see Note 3.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued guidance that eliminates the hierarchy of authoritative accounting and reporting guidance on nongovernmental GAAP and replaces it with a single authoritative source, the FASB Accounting Standards CodificationTM (ASC). Securities and Exchange Commission (SEC) rules and interpretive releases, which may not be included in their entirety within the ASC, will remain as authoritative GAAP for SEC registrants. The ASC affects the way in which users refer to GAAP and perform accounting research, but does not change GAAP. This guidance is effective for interim and annual reporting periods ending after September 15, 2009. We adopted the provisions of this guidance as of September 30, 2009. The adoption did not have an impact on our financial position or results of operations.
In May 2009, the FASB issued accounting guidance on subsequent events which establishes standards for the recognition and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This update requires companies to recognize in their financial statements the effects of subsequent events that provide additional evidence about conditions that existed at the balance sheet date. This update prohibits companies from recognizing in their financial statements the effects of subsequent events that provide evidence about conditions that arose after the balance sheet date, but requires information about those events to be disclosed if the financial statements would otherwise be misleading. We adopted this new guidance as of June 30, 2009. The adoption did not have an impact on our financial position or results of operations.
In April 2009, the FASB issued accounting guidance on fair value measurements and disclosures which provides information on how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. This guidance provides factors to consider when determining whether there has been a significant decrease in the volume and level of activity in the market for an asset or liability as well as provides factors for companies to consider in identifying transactions that are not orderly. This guidance also discusses the necessity of adjustments to transaction or quoted prices to estimate fair value in accordance with GAAP when it is determined that there has been a significant decrease in the volume and level of activity or that the transaction is not orderly. This new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance as of March 31, 2009. The adoption did not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued accounting guidance which modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. In accordance with this new guidance, the intention to sell a security and the expectation regarding the recovery of the entire amortized cost basis of a security governs the recognition of other-than-temporary impairment losses. This guidance also modifies the presentation of other-than-temporary impairment losses in financial statements and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance as of March 31, 2009. The adoption did not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued updated accounting guidance on disclosures of financial instruments. This update requires publicly-traded companies to disclose the fair value of specific financial instruments in interim financial statements. This guidance also requires companies to disclose the method or methods and significant assumptions used to estimate the fair value of specific financial instruments and to discuss changes, if any, to those methods or assumptions during the period. This new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the provisions of this guidance as of March 31, 2009. The adoption did not have an impact on our financial position or results of operations.
In March 2008, the FASB issued an update to its guidance on derivatives and hedging. This guidance establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This update expands disclosure requirements with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for in accordance with GAAP, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, this new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This update is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted this new guidance as of January 1, 2009. The adoption did not have an effect on our financial position or results of operations.
In December 2007, the FASB issued updated accounting guidance on noncontrolling interests in consolidated financial statements. Among other things, this new guidance requires entities to account for noncontrolling (minority) interests in subsidiaries as a component of equity separate from the parent’s equity in the consolidated financial statements and is effective for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. We adopted this new guidance as of January 1, 2009. The adoption did not have an effect on our financial position or results of operations.
Accounting Pronouncements Pending Adoption
In June 2009, the FASB issued amended guidance on accounting for variable interest entities (VIEs). This guidance defines new criteria for determining the primary beneficiary of a VIE; increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE; eliminates the exemption for the consolidation of “qualifying special purpose entities” (QSPEs); and requires additional disclosures regarding VIEs. This accounting guidance is effective for fiscal years beginning after November 15, 2009, and early application is prohibited. For information concerning our investments in VIEs, see Note 3. We are currently evaluating the potential impact of the adoption of this guidance on our financial position and results of operations.
In June 2009, the FASB issued amended guidance on accounting for transfers of financial assets. This guidance eliminates the concept of a QSPE and its exemption from consolidation in the transferor’s financial statements, establishes conditions for reporting a transfer of a portion of a financial asset as a sale, modifies the financial asset derecognition criteria, revises how interests retained by the transferor in a sale of financial assets are initially measured, removes guaranteed mortgage securitization recharacterization provisions, and requires additional disclosures. In accordance with this new guidance, former QSPEs will need to be evaluated for consolidation by transferors, servicers, and guarantors. This guidance is effective for fiscal years beginning after November 15, 2009, and early application is prohibited. For information on our investments in QSPEs, see Note 3. We are currently evaluating the potential impact of the adoption of this guidance on our financial position and results of operations.
In December 2008, the FASB issued accounting guidance on employers’ disclosures about postretirement benefit plan assets. This guidance requires more detailed disclosures about plan assets of a defined benefit pension or other postretirement plan, including investment strategies; major categories of plan assets; concentrations of risk within plan assets; inputs and valuation techniques used to measure the fair value of plan assets; and the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period. This new guidance is effective for fiscal years ending after December 15, 2009, with earlier application permitted. We do not expect the adoption of this guidance to have an effect on our financial position or results of operations.
SEC Guidance
On October 14, 2008, the SEC issued a letter to the FASB addressing questions raised by various interested parties regarding declines in the fair value of perpetual preferred securities, or so-called “hybrid securities,” which have both debt and equity characteristics, and the assessment of those declines under existing accounting guidelines for other-than-temporary impairments. In its letter, the SEC recognized that hybrid securities are often structured in equity form but generally possess significant debt-like characteristics. The SEC also recognized that existing accounting guidance does not specifically address the impact, if any, of the debt-like characteristics of these hybrid securities on the assessment of other-than-temporary impairments.
After consultation with and concurrence of the FASB staff, the SEC concluded that it will not object to the use of an other-than-temporary impairment model that considers the debt-like characteristics of hybrid securities (including the anticipated recovery period), provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade), in filings after the date of its letter until the matter can be addressed further by the FASB.
We maintain investments in subordinated financial instruments, or so-called “hybrid securities.” Within this class of investments, we own perpetual securities. These perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than the issuers’ equity securities. Perpetual securities have characteristics of both debt and equity investments, along with unique features that create economic maturity dates for the securities. Although perpetual securities have no contractual maturity date, they have stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term rate of interest of 125 to more than 300 basis points above an appropriate market index, generally by the 25th year after issuance. We believe this interest step-up penalty has the effect of creating an economic maturity date for our perpetual securities. We accounted for and reported perpetual securities as debt securities and classified them as both available-for-sale and held-to-maturity securities until the third quarter of 2008.
We concluded in the third quarter of 2008 that all of our investments in perpetual securities should be classified as available-for-sale securities. We also concluded that our perpetual securities should be evaluated for other-than-temporary impairments using an equity security impairment model for periods prior to June 30, 2008, as opposed to our previous policy of using a debt security impairment model. We recognized realized investment losses of $294 million ($191 million after-tax) in the third quarter of 2008 as a result of applying our equity impairment model to this class of securities through June 30, 2008. Included in the $191 million other-than-temporary impairment charge is $40 million, $53 million, $50 million, and $38 million, net of tax, that relate to the years ended December 31, 2007, 2006, 2005 and 2004, respectively; and, $10 million, net of tax, that relates to the quarter ended June 30, 2008. There were no impairment charges related to the perpetual securities in the first quarter of 2008. The impact of classifying all of our perpetual securities as available-for-sale securities and assessing them for other-than-temporary impairments under our equity impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period. In response to the SEC letter mentioned above regarding the appropriate impairment model for hybrid securities, we have applied our debt security impairment model to our perpetual securities in periods subsequent to June 30, 2008, with the exception of certain securities that are rated below investment grade and are therefore being evaluated under our equity impairment model. We will continue with this approach pending further guidance from the SEC or the FASB.
Recent accounting guidance not discussed above is not applicable to our business. For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2008. |
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| 6 | ALLEGHENY TECHNOLOGIES INCORPORATED | Note 1. Accounting Policies |
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| 7 | AMAZON COM INC | Note 1 — Accounting Policies Unaudited Interim Financial Information We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2009 due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2008 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period presentation. Principles of Consolidation The consolidated financial statements include the accounts of Amazon.com, Inc. (“the Company”), its wholly-owned subsidiaries, and those entities (relating primarily to www.amazon.cn) in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities. Estimates are used for, but not limited to, valuation of investments, collectability of receivables, sales returns, incentive discount offers, valuation of inventory, depreciable lives of fixed assets and internally-developed software, valuation of acquired intangibles and goodwill, income taxes, stock-based compensation, and contingencies. Actual results could differ materially from those estimates. Subsequent Events We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through October 22, 2009, the day the financial statements were issued. Earnings per Share Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. Treasury Stock We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity. Accounts Receivable, Net and Other Included in “Accounts receivable, net and other” on our consolidated balance sheets are amounts primarily related to vendor and customer receivables. At September 30, 2009 and December 31, 2008, vendor receivables, net, were $243 million and $400 million, and customer receivables, net, were $285 million and $311 million.
Allowance for Doubtful Accounts We estimate losses on receivables based on known troubled accounts and historical experience of losses incurred. The allowance for doubtful customer and vendor receivables was $84 million and $81 million at September 30, 2009 and December 31, 2008. Internal-use Software and Website Development Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software. Costs related to design or maintenance of internal-use software are expensed as incurred. During Q3 2009 and Q3 2008, we capitalized $48 million (including $10 million of stock-based compensation) and $41 million (including $7 million of stock-based compensation) of costs associated with internal-use software and website development. For the nine months ended September 30, 2009 and 2008, we capitalized $134 million (including $25 million of stock-based compensation) and $139 million (including $20 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $44 million and $37 million for Q3 2009 and Q3 2008, and $126 million and $105 million for the nine months ended September 30, 2009 and 2008. Depreciation of Fixed Assets Fixed assets include assets such as furniture and fixtures, heavy equipment, technology infrastructure, internal-use software and website development. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets (generally two years or less for assets such as internal-use software, three years for our technology infrastructure, five years for furniture and fixtures, and ten years for heavy equipment). Depreciation expense is generally classified within the corresponding operating expense categories on our consolidated statements of operations, and certain assets are amortized as “Cost of sales.” Depreciation expense for fixed assets was $96 million and $80 million for Q3 2009 and Q3 2008, and $276 million and $225 million for the nine months ended September 30, 2009 and 2008. Other Assets Included in “Other assets” on our consolidated balance sheets are amounts primarily related to marketable securities restricted for longer than one year, the majority of which are attributable to collateralization of bank guarantees and debt related to our international operations; deferred costs; acquired intangible assets, net of amortization; certain equity investments; and intellectual property rights, net of amortization. Investments We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. Such investments are included in “Cash and cash equivalents” or “Marketable securities” on the accompanying consolidated balance sheets, classified as available-for-sale and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive loss.” The weighted average method is used to determine the cost of Euro-denominated securities sold, and the specific identification method is used to determine the cost of all other securities. Equity investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over an investee. The total of these investments in equity-method investees, including identifiable intangible assets, deferred tax liabilities and goodwill, is classified on our consolidated balance sheets as “Other assets.” Our share of the investees’ earnings or losses and amortization of the related intangible assets, if any, is classified as “Equity-method investment activity, net of tax” on our consolidated statements of operations. Equity investments without readily determinable fair values for which we do not have the ability to exercise significant influence, are accounted for using the cost method of accounting. Under the cost method, investments in private companies are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings, and additional investments. We classify our equity investments that have readily determinable fair values as available-for-sale and record these investments at their fair values with unrealized gains and losses, net of tax, included in “Accumulated other comprehensive loss.” We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as our ability and intent to hold the investment until a forecasted recovery occurs. Factors considered include quoted market prices; recent financial results and operating trends; other publicly available information; implied values from any recent transactions or offers of investee securities; or other conditions that may affect the value of our investments. Accrued Expenses and Other Included in “Accrued expenses and other” at September 30, 2009 and December 31, 2008 were liabilities of $260 million and $270 million for unredeemed gift certificates. We reduce the liability for a gift certificate when it is applied to an order. If a gift certificate is not redeemed, we recognize revenue when it expires or, for a certificate without an expiration date, when the likelihood of its redemption becomes remote, generally two years from date of issuance. Unearned Revenue Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period. Current unearned revenue is included in “Accrued expenses and other” and non-current unearned revenue is included in “Other long-term liabilities” on our consolidated balance sheets. Current unearned revenue was $372 million and $191 million at September 30, 2009 and December 31, 2008. Non-current unearned revenue was $103 million and $46 million at September 30, 2009 and December 31, 2008. Income Taxes Income tax expense includes U.S. and international income taxes. We do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries since we intend to invest such undistributed earnings indefinitely outside of the U.S. Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis. We utilize a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our tax contingencies in income tax expense.
Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value: Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets. Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. Shipping Activities Outbound shipping charges to customers are included in “Net sales” and were $208 million and $191 million for Q3 2009 and Q3 2008, and $583 million and $569 million for the nine months ended September 30, 2009 and 2008. Outbound shipping-related costs are included in “Cost of sales” and totaled $388 million and $323 million for Q3 2009 and Q3 2008, and $1.1 billion and $957 million for the nine months ended September 30, 2009 and 2008. The net cost to us of shipping activities was $180 million and $132 million for Q3 2009 and Q3 2008, and $494 million and $388 million for the nine months ended September 30, 2009 and 2008. Stock-Based Compensation Compensation cost for all stock-based awards is measured at fair value on date of grant and recognized over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future estimates may differ substantially from our current estimates. Recent Accounting Pronouncements In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167, which is incorporated in Accounting Standards Codification (“ASC”) Topic 810, Consolidation, requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS No. 167 is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements. In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168, which is incorporated in ASC Topic 105, Generally Accepted Accounting Principles, identifies the ASC as the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. We adopted SFAS No. 168 in Q3 2009 and include references to the ASC within our consolidated financial statements. In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue Recognition, to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective beginning January 1, 2011. Earlier application is permitted. We are currently evaluating both the timing and the impact of the pending adoption of the ASU on our consolidated financial statements. |
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| 8 | AMEDISYS INC |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition We earn net service revenue through our home health and hospice agencies by providing a variety of services almost exclusively in the homes of our patients. This net service revenue is earned and billed either on an episode of care basis (on a 60-day episode of care basis for home health services and on a 90-day episode of care basis for the first two hospice episodes of care and on a 60-day episode of care basis for any subsequent hospice episodes), on a per visit basis or on a daily basis depending upon the payment terms and conditions established with each payor for services provided. We refer to home health revenue earned and billed on a 60-day episode of care as episodic-based revenue. For the services we provide, Medicare is our largest payor. When we record our service revenue, we record it net of estimated revenue adjustments and contractual adjustments to reflect amounts we estimate to be realizable for services provided, as discussed below. We believe, based on information currently available to us and based on our judgment, that changes to one or more factors that impact the accounting estimates (such as our estimates related to revenue adjustments, contractual adjustments and episodes in progress) we make in determining net service revenue, which changes are likely to occur from period to period, will not materially impact our reported consolidated financial condition, results of operations, cash flows or our future financial results. Home Health Revenue Recognition Medicare Revenue Net service revenue is recorded under the Medicare payment program (“PPS”) based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if our patient’s care was unusually costly; (b) a low utilization adjustment (“LUPA”) if the number of visits was fewer than five; (c) a partial payment if our patient transferred to another provider or we received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required (thresholds set at 6, 14 and 20 visits); (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare Program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments. We make adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. We estimate the impact of such payment adjustments based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims, and record this estimate during the period in which services are rendered as an estimated revenue adjustment and a corresponding reduction to patient accounts receivable. Therefore, we believe that our reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered. During the three and nine-month periods ended September 30, 2009, we recorded $1.9 million and $5.9 million, respectively, in estimated revenue adjustments to Medicare revenue as compared to $1.9 million and $4.1 million during the three and nine-month periods ended September 30, 2008, respectively. In addition to revenue recognized on completed episodes, we also recognize a portion of revenue associated with episodes in progress. Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed as of the end of the period. We estimate this revenue on a monthly basis based upon historical trends. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per episode and our estimate of the average percentage complete based on visits performed. As of September 30, 2009 and 2008, the difference between the cash received from Medicare for a request for anticipated payment (“RAP”) on episodes in progress and the associated estimated revenue was included as a reduction to our outstanding patient accounts receivable in our condensed consolidated balance sheets for such periods, since only a nominal amount represents cash collected in advance of providing services.
Non-Medicare Revenue Episodic-based Revenue. We recognize revenue in a similar manner as we recognize Medicare revenue for episodic-based rates that are paid by Medicaid and other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms. Non-episodic Based Revenue. Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to our established or estimated per-visit rates, as applicable. Contractual adjustments are recorded for the difference between our standard rates and the contracted rates realizable from patients, third parties and others for services provided and are deducted from gross revenue to determine net service revenue and are also recorded as a reduction to our outstanding patient accounts receivable. In addition, we receive a minimal amount of our net service revenue from patients who are either self-insured or are obligated for an insurance co-payment. Hospice Revenue Recognition Hospice Medicare Revenue Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. We make adjustments to Medicare revenue for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. We estimate the impact of these adjustments based on our historical experience, which primarily includes our historical collection rate on Medicare claims, and record it during the period services are rendered as an estimated revenue adjustment and as a reduction to our outstanding patient accounts receivable. Additionally, as Medicare is subject to an inpatient cap limit and an overall payment cap, we monitor our provider numbers and estimate amounts due back to Medicare if a cap has been exceeded. We record these adjustments as a reduction to revenue and increase other accrued liabilities. We have received notice from CMS that we have exceeded the overall payment cap for the fiscal year ended October 31, 2007 by $0.1 million, which we had previously accrued. As of September 30, 2009 we had paid the amount due and had no other amounts accrued for estimated amounts due back to Medicare. We believe that our estimates of such adjustments are reasonable, thus we believe our revenue and patients accounts receivable are recorded at amounts that will be ultimately realized. Hospice Non-Medicare Revenue We record gross revenue on an accrual basis based upon the date of service at amounts equal to our established rates or estimated per visit rates, as applicable. Contractual adjustments are recorded for the difference between our established rates and the amounts estimated to be realizable from patients, third parties and others for services provided and are deducted from gross revenue to determine our net service revenue and patient accounts receivable. Patient Accounts Receivable Our patient accounts receivable are uncollateralized and consist of amounts due from Medicare, Medicaid, other third-party payors and patients. We believe there is a certain level of credit risk associated with non-Medicare payors. To provide for our non-Medicare patient accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying amount to its estimated net realizable value. We believe the credit risk associated with our Medicare accounts, which represent 76% and 74% of our net patient accounts receivable at September 30, 2009 and December 31, 2008, respectively, is limited due to (i) our historical collection rate of over 99% from Medicare and (ii) the fact that Medicare is a U.S. government payor. Accordingly, we do not record an allowance for doubtful accounts for our Medicare patient accounts receivable, which are recorded at their net realizable value after recording estimated revenue adjustments as discussed above. There is no other single payor, other than Medicare, that accounts for more than 10% of our total outstanding patient receivables, and thus we believe there are no other significant concentrations of receivables that would subject us to any significant credit risk in the collection of our patient accounts receivable. We fully reserve for accounts, which are aged at 360 days or greater. We write off accounts on a monthly basis once we have exhausted our collection efforts and deem an account to be uncollectible. Medicare Home Health Our Medicare billing process begins with a process to ensure that our billings are accurate through the utilization of an electronic Medicare claim review. We submit a RAP for 60% of our estimated payment for the initial episode at the start of care or 50% of the estimated payment for any subsequent episodes of care contiguous with the first episode for a particular patient. The full amount of the episode is billed after the episode has been completed (“final billed”). The RAP received for that particular episode is then deducted from our final payment. If a final bill is not submitted within the greater of 120 days from the start of the episode, or 60 days from the date the RAP was paid, any RAPs received for that episode will be recouped by Medicare from any other claims in process for that particular provider number. The RAP and final claim must then be re-submitted.
Medicare Hospice For our hospice patients, our pre-billing process includes verifying that we are eligible for payment from Medicare for the services that we provide to our patients. Once each patient has been confirmed for eligibility, we will bill Medicare on a monthly basis for the services provided to the patient. Non-Medicare Home Health and Hospice For our non-Medicare patients, our pre-billing process primarily begins with verifying a patient’s eligibility for services with the applicable payor. Once the patient has been confirmed for eligibility, we will provide services to the patient and bill the applicable payor based on either the contracted rates or expected payment rates, which are based on our historical experience. We estimate an allowance for doubtful accounts to reduce the carrying amount of the receivables to the amounts we estimate will be ultimately collected. Our review and evaluation of non-Medicare accounts includes a detailed review of outstanding balances and special consideration to concentrations of receivables from particular payors or groups of payors with similar characteristics that would subject us to any significant credit risk. Where such groups have been identified, we have given special consideration to both the billing methodology and evaluation of the ultimate collectibility of the accounts. In addition, the amount of the allowance for doubtful accounts is based upon our assessment of historical and expected collections, business and economic conditions, trends in payment and an evaluation of collectibility based upon the date that the service was provided. Based upon our best judgment, we believe the allowance for doubtful accounts adequately provides for accounts that will not be collected due to credit risk. Fair Value of Financial Instruments The following details our financial instruments where the carrying value and fair value differ (amounts in millions):
The estimates of the fair value of our long-term debt are based upon a discounted present value analysis of future cash flows. Due to the existing uncertainty in the capital and credit markets, the actual rates that would be obtained to borrow under similar conditions could materially differ from the estimates we have used. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows:
For our other financial instruments, including our cash and cash equivalents, patient accounts receivable, accounts payable and accrued expenses, we estimate the carrying amounts’ approximate fair value due to their short term maturity. Our deferred compensation plan assets are recorded at fair value.
Weighted-Average Shares Outstanding Net income attributable to Amedisys, Inc. common stockholders, calculated on the treasury stock method, is based on the weighted average number of shares outstanding during the period. The following table sets forth, for the periods indicated, shares used in our computation of the weighted-average shares outstanding, which are used to calculate our basic and diluted net income attributable to Amedisys, Inc. common stockholders (amounts in thousands):
The following table sets forth shares that were anti-dilutive to the computation of diluted net income per common share (amounts in thousands):
Recently Issued Accounting Pronouncements In June 2009, the Financial Accounting Standards Board issued guidance which divides nongovernmental U.S. GAAP into the authoritative Codification and guidance that is nonauthoritative. The Codification is not intended to change U.S. GAAP; however, it does significantly change the way in which accounting literature is organized and because it completely replaces existing standards, it will affect the way U.S. GAAP is referenced by most companies in their financial statements and accounting policies. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have an impact on our consolidated financial statements. |
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| 9 | AMERICAN ELECTRIC POWER CO INC |
General The accompanying unaudited condensed consolidated financial statements and footnotes were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the unaudited condensed consolidated interim financial statements reflect all normal and recurring accruals and adjustments necessary for a fair presentation of our net income, financial position and cash flows for the interim periods. Net income for the three and nine months ended September 30, 2009 is not necessarily indicative of results that may be expected for the year ending December 31, 2009. We reviewed subsequent events through our Form 10-Q issuance date of October 30, 2009. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the audited 2008 consolidated financial statements and notes thereto, which are included in our Current Report on Form 8-K as filed with the SEC on May 1, 2009. Earnings Per Share (EPS) The following table presents our basic and diluted EPS calculations included on our Condensed Consolidated Statements of Income:
The assumed conversion of our share-based compensation does not affect net earnings for purposes of calculating diluted earnings per share. Options to purchase 612,916 and 146,900 shares of common stock were outstanding at September 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average quarter market price of the common shares and, therefore, the effect would be antidilutive. Variable Interest Entities The accounting guidance for “Variable Interest Entities” is a consolidation model that considers risk absorption of a variable interest entity (VIE), also referred to as variability. Entities are required to consolidate a VIE when it is determined that they are the primary beneficiary of that VIE, as defined by the accounting guidance for “Variable Interest Entities.” In determining whether we are the primary beneficiary of a VIE, we consider factors such as equity at risk, the amount of the VIE’s variability we absorb, guarantees of indebtedness, voting rights including kick-out rights, power to direct the VIE and other factors. We believe that significant assumptions and judgments were applied consistently. We are the primary beneficiary of Sabine, DHLC, JMG, DCC Fuel LLC (DCC Fuel) and a protected cell of EIS. We hold a significant variable interest in Potomac-Appalachian Transmission Highline, LLC West Virginia Series (West Virginia Series). In addition, we have not provided material financial or other support to Sabine, DHLC, DCC Fuel or EIS that was not previously contractually required. Refer to the discussion of JMG below for details regarding payments that were not contractually required. Sabine is a mining operator providing mining services to SWEPCo. SWEPCo has no equity investment in Sabine but is Sabine’s only customer. SWEPCo guarantees the debt obligations and lease obligations of Sabine. Under the terms of the note agreements, substantially all assets are pledged and all rights under the lignite mining agreement are assigned to SWEPCo. The creditors of Sabine have no recourse to any AEP entity other than SWEPCo. Under the provisions of the mining agreement, SWEPCo is required to pay, as a part of the cost of lignite delivered, an amount equal to mining costs plus a management fee. Based on these facts, management has concluded that SWEPCo is the primary beneficiary and is required to consolidate Sabine. SWEPCo’s total billings from Sabine for the three months ended September 30, 2009 and 2008 were $34 million and $31 million, respectively, and for the nine months ended September 30, 2009 and 2008 were $95 million and $79 million, respectively. See the tables below for the classification of Sabine’s assets and liabilities on our Condensed Consolidated Balance Sheets. DHLC is a wholly-owned subsidiary of SWEPCo. DHLC is a mining operator who sells 50% of the lignite produced to SWEPCo and 50% to Cleco Corporation, a nonaffiliated company. SWEPCo and Cleco Corporation share half of the executive board seats, with equal voting rights and each entity guarantees a 50% share of DHLC’s debt. SWEPCo and Cleco Corporation equally approve DHLC’s annual budget. The creditors of DHLC have no recourse to any AEP entity other than SWEPCo. As SWEPCo is the sole equity owner of DHLC it receives 100% of the management fee. Based on the structure and equity ownership, management has concluded that SWEPCo is the primary beneficiary and is required to consolidate DHLC. SWEPCo’s total billings from DHLC for the three months ended September 30, 2009 and 2008 were $12 million and $11 million, respectively, and for the nine months ended September 30, 2009 and 2008 were $31 million and $32 million, respectively. See the tables below for the classification of DHLC assets and liabilities on our Condensed Consolidated Balance Sheets. OPCo has a lease agreement with JMG to finance OPCo’s Flue Gas Desulfurization (FGD) system installed on OPCo’s Gavin Plant. The PUCO approved the original lease agreement between OPCo and JMG. JMG owns and leases the FGD to OPCo. JMG is considered a single-lessee leasing arrangement with only one asset. OPCo’s lease payments are the only form of repayment associated with JMG’s debt obligations even though OPCo does not guarantee JMG’s debt. The creditors of JMG have no recourse to any AEP entity other than OPCo for the lease payment. Based on the structure of the entity, management has concluded OPCo is the primary beneficiary and is required to consolidate JMG. In April 2009, OPCo paid JMG $58 million which was used to retire certain long-term debt of JMG. While this payment was not contractually required, OPCo made this payment in anticipation of purchasing the outstanding equity of JMG. In July 2009, OPCo purchased all of the outstanding equity ownership of JMG for $28 million resulting in an elimination of OPCo’s Noncontrolling Interest related to JMG and an increase in Common Shareholder’s Equity of $54 million. In August and September 2009, JMG reacquired $218 million of auction rate debt, funded by OPCo capital contributions to JMG. These reacquisitions were not contractually required. JMG is a wholly-owned subsidiary of OPCo with a capital structure of 85% equity, 15% debt. OPCo intends to cancel the lease and dissolve JMG in December 2009. The assets and liabilities of JMG will remain incorporated with OPCo’s business. OPCo’s total billings from JMG for the three months ended September 30, 2009 and 2008 were $1 million and $13 million, respectively, and for the nine months ended September 30, 2009 and 2008 were $50 million and $39 million, respectively. See the tables below for the classification of JMG’s assets and liabilities on our Condensed Consolidated Balance Sheets. EIS is a captive insurance company with multiple protected cells in which our subsidiaries participate in one protected cell for approximately ten lines of insurance. Neither AEP nor its subsidiaries have an equity investment in EIS. The AEP system is essentially this EIS cell’s only participant, but allows certain third parties access to this insurance. Our subsidiaries and any allowed third parties share in the insurance coverage, premiums and risk of loss from claims. Based on the structure of the protected cell, management has concluded that we are the primary beneficiary and we are required to consolidate the protected cell. Our insurance premium payments to EIS for the three months ended September 30, 2009 and 2008 were $13 million and $11 million, respectively, and for the nine months ended September 30, 2009 and 2008 were $30 million and $28 million, respectively. See the tables below for the classification of EIS’s assets and liabilities on our Condensed Consolidated Balance Sheets. In September 2009, I&M entered into a nuclear fuel sale and leaseback transaction with DCC Fuel. DCC Fuel was formed for the purpose of acquiring, owning and leasing nuclear fuel to I&M. DCC Fuel purchased the nuclear fuel from I&M with funds received from the issuance of notes to financial institutions. DCC Fuel is a single-lessee leasing arrangement with only one asset and is capitalized with all debt. Payments on the lease will be made semi-annually on April 1 and October 1, beginning in April 2010. As of September 30, 2009, no payments have been made by I&M to DCC Fuel. The lease was recorded as a capital lease on I&M’s balance sheet as title to the nuclear fuel transfers to I&M at the end of the 48 month lease term. Based on the structure, management has concluded that I&M is the primary beneficiary and is required to consolidate DCC Fuel. The capital lease is eliminated upon consolidation. See the tables below for the classification of DCC Fuel’s assets and liabilities on our Condensed Consolidated Balance Sheets. The balances below represent the assets and liabilities of the VIEs that are consolidated. These balances include intercompany transactions that would be eliminated upon consolidation. AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES VARIABLE INTEREST ENTITIES September 30, 2009 (in millions)
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES VARIABLE INTEREST ENTITIES December 31, 2008 (in millions)
In September 2007, we and Allegheny Energy Inc. (AYE) formed a joint venture by creating Potomac-Appalachian Transmission Highline, LLC (PATH). PATH is a series limited liability company and was created to construct a high-voltage transmission line project in the PJM region. PATH consists of the “Ohio Series,” the “West Virginia Series (PATH-WV),” both owned equally by AYE and AEP and the “Allegheny Series” which is 100% owned by AYE. Provisions exist within the PATH-WV agreement that make it a VIE. The “Ohio Series” does not include the same provisions that make PATH-WV a VIE. Neither the “Ohio Series” or “Allegheny Series” are considered VIEs. The other series is not considered a VIE. We are not required to consolidate PATH-WV as we are not the primary beneficiary, although we hold a significant variable interest in PATH-WV. Our equity investment in PATH-WV is included in Deferred Charges and Other Noncurrent Assets on our Condensed Consolidated Balance Sheets. We and AYE share the returns and losses equally in PATH-WV. Our subsidiaries and AYE’s subsidiaries provide services to the PATH companies through service agreements. At the current time, PATH-WV has no debt outstanding. However, when debt is issued, the debt to equity ratio in each series should be consistent with other regulated utilities. The entities recover costs through regulated rates. Given the structure of the entity, we may be required to provide future financial support to PATH-WV in the form of a capital call. This would be considered an increase to our investment in the entity. Our maximum exposure to loss is to the extent of our investment. The likelihood of such a loss is remote since the FERC approved PATH-WV’s request for regulatory recovery of cost and a return on the equity invested. Our investment in PATH-WV was:
Revenue Recognition – Traditional Electricity Supply and Demand Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services. We recognize the revenues on our Condensed Consolidated Statements of Income upon delivery of the energy to the customer and include unbilled as well as billed amounts. Most of the power produced at the generation plants of the AEP East companies is sold to PJM, the RTO operating in the east service territory. We purchase power from PJM to supply our customers. Generally, these power sales and purchases are reported on a net basis as revenues on our Condensed Consolidated Statements of Income. However, in 2009, there were times when we were a purchaser of power from PJM to serve retail load. These purchases were recorded gross as Purchased Electricity for Resale on our Condensed Consolidated Statements of Income. Other RTOs in which we operate do not function in the same manner as PJM. They function as balancing organizations and not as exchanges. Physical energy purchases, including those from RTOs, that are identified as non-trading, are accounted for on a gross basis in Purchased Electricity for Resale on our Condensed Consolidated Statements of Income. CSPCo and OPCo Revised Depreciation Rates Effective January 1, 2009, we revised book depreciation rates for CSPCo and OPCo generating plants consistent with a recently completed depreciation study. OPCo’s overall higher depreciation rates primarily related to shortened depreciable lives for certain OPCo generating facilities. In comparing 2009 and 2008, the change in depreciation rates resulted in a net increase (decrease) in depreciation expense of:
The net change in depreciation rates resulted in decreases to our net-of-tax, basic earnings per share of $0.02 and $0.06 for the three months ended September 30, 2009 and nine months ended September 30, 2009, respectively. Supplementary Information
Shown below are income statement amounts attributable to AEP common shareholders:
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| 10 | AMGEN INC | 1. Summary of significant accounting policies Business Amgen Inc. is a global biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Basis of presentation The financial information for the three and nine months ended September 30, 2009 and 2008 is unaudited but includes all adjustments (consisting of only normal recurring adjustments, unless otherwise indicated), which Amgen Inc., including its subsidiaries (referred to as “Amgen,” “the Company,” “we,” “our” or “us”), considers necessary for a fair presentation of the results of operations for those periods. Interim results are not necessarily indicative of results for the full fiscal year. The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2008. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification During the three months ended September 30, 2009, the FASB Accounting Standards Codification (“ASC” or “Codification”) became the authoritative source of accounting principles generally accepted in the United States (“GAAP”) recognized by the FASB. All existing FASB accounting standards and guidance were superseded by the ASC. Instead of issuing new accounting standards in the form of statements, FASB staff positions and Emerging Issues Task Force abstracts, the FASB now issues Accounting Standards Updates that update the Codification. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws continue to be additional sources of authoritative GAAP for SEC registrants. Change in method of accounting for convertible debt instruments Effective January 1, 2009, we adopted a new accounting standard that changed the method of accounting for convertible debt that may be partially or wholly settled in cash. As required by this new standard, we retrospectively applied this change in accounting to all prior periods for which we had applicable outstanding convertible debt. Under this method of accounting, the debt and equity components of our convertible notes are bifurcated and accounted for separately. The equity components of our convertible notes, including our 2011 Convertible Notes, 2013 Convertible Notes and 2032 Modified Convertible Notes, are included in “Common stock and additional paid-in capital” in the Condensed Consolidated Balance Sheets, with a corresponding reduction in the carrying values of these convertible notes as of the date of issuance or modification, as applicable. The reduced carrying values of our convertible notes are being accreted back to their principal amounts through the recognition of non-cash interest expense. This results in recognizing interest expense on these borrowings at effective rates approximating what we would have incurred had we issued nonconvertible debt with otherwise similar terms. See Note 2, “Change in method of accounting for convertible debt instruments” and Note 9, “Financing arrangements.” Principles of consolidation The condensed consolidated financial statements include the accounts of Amgen as well as its wholly owned subsidiaries. We do not have any significant interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation. Use of estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Fair value measurement We adopted a new accounting standard that defines fair value and establishes a framework for fair value measurements effective January 1, 2008 for financial assets and liabilities and effective January 1, 2009 for non-financial assets and liabilities that are not remeasured on a recurring basis. Under this standard, fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The adoption of this accounting standard did not have a material impact on our condensed consolidated results of operations, financial position or cash flows. During the three months ended June 30, 2009, we adopted a new accounting standard that modifies the guidance used in determining whether the impairment of a debt security is other-than-temporary. Under this accounting standard, the impairment of a debt security is considered other-than-temporary if an entity concludes that it intends to sell the impaired security, that it is more likely than not it will be required to sell the security before the recovery of its cost basis or that it does not otherwise expect to recover the entire cost basis of the security. This accounting standard also amends the presentation requirements of other-than-temporarily impaired debt securities and expands disclosure requirements in the financial statements for investments in both debt and equity securities. The adoption of this accounting standard did not have a material impact on our condensed consolidated results of operations, financial position or cash flows. During the three months ended June 30, 2009, we adopted two new accounting standards that require disclosures at each interim balance sheet date of the fair value of financial instruments and valuation techniques used to determine fair value. Previously, these disclosures were only required annually. One of these accounting standards also provides additional guidance in estimating fair value when the market volume and level of activity for an asset or liability have significantly decreased and identifying circumstances that indicate a transaction may not be orderly. The adoption of these two accounting standards did not have a material impact on our condensed consolidated results of operations, financial position or cash flows. See Note 11, “Fair value measurement.” Derivative instruments Effective January 1, 2009, we adopted a new accounting standard that requires disclosures about our derivative instruments and hedging activities. This standard requires that the objectives for using derivative instruments be disclosed to better convey the purpose of derivative use in terms of the risks that we are intending to manage. This standard also requires disclosure of how derivatives and related hedged items affect our financial statements. The adoption of this standard did not have a material impact on our condensed consolidated results of operations, financial position or cash flows. See Note 12, “Derivative instruments.” Inventories Inventories are stated at the lower of cost or market. Cost, which includes amounts related to materials, labor and overhead, is determined in a manner which approximates the first-in, first-out (“FIFO”) method. Property, plant and equipment, net Property, plant and equipment are recorded at historical cost, net of accumulated depreciation of $4.5 billion and $4.1 billion as of September 30, 2009 and December 31, 2008, respectively. Goodwill Goodwill principally relates to our 2002 acquisition of Immunex Corporation (“Immunex”). We perform an impairment test annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Product sales Product sales primarily consist of sales of Aranesp® (darbepoetin alfa), EPOGEN® (Epoetin alfa), Neulasta® (pegfilgrastim), NEUPOGEN® (Filgrastim) and Enbrel® (etanercept). Sales of our products are recognized when shipped and title and risk of loss have passed. Product sales are recorded net of accruals for estimated rebates, wholesaler chargebacks, discounts and other incentives (collectively “sales incentives”) and returns. Taxes assessed by government authorities on the sale of the Company’s products, primarily in Europe, are excluded from revenues.
We have the exclusive right to sell Epoetin alfa for dialysis, certain diagnostics and all non-human, non-research uses in the United States. We sell Epoetin alfa under the brand name EPOGEN®. We granted to Ortho Pharmaceutical Corporation (which has assigned its rights under the product license agreement to Ortho Biotech Products, L.P. (“Ortho Biotech”)), a subsidiary of Johnson & Johnson (“J&J”), a license relating to Epoetin alfa for sales in the United States for all human uses except dialysis and diagnostics. This license agreement, which is perpetual, may be terminated for various reasons, including upon mutual agreement of the parties, or default. The parties are required to compensate each other for Epoetin alfa sales that either party makes into the other party’s exclusive market, sometimes referred to as “spillover.” Accordingly, we do not recognize product sales we make into the exclusive market of J&J and do recognize the product sales made by J&J into our exclusive market. Sales in our exclusive market are derived from our sales to our customers, as adjusted for spillover. We are employing an arbitrated audit methodology to measure each party’s spillover based on estimates of and subsequent adjustments thereto of third-party data on shipments to end users and their usage. Research and development costs Research and development (“R&D”) costs are expensed as incurred and primarily include salaries, benefits and other staff-related costs; facilities and overhead costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs; information systems’ costs and amortization of acquired technology used in R&D with alternative future uses. R&D expenses also include costs incurred under R&D arrangements with our corporate partners, such as activities performed on behalf of Kirin-Amgen Inc. (“KA”), and costs and cost recoveries associated with collaborative R&D and in-licensing arrangements, including upfront fees and milestones paid to collaboration partners in connection with technologies that have no alternative future use. Net payment or reimbursement of R&D costs for R&D collaborations is recognized when the obligations are incurred or as we become entitled to the cost recovery. Selling, general and administrative costs Selling, general and administrative (“SG&A”) expenses are primarily comprised of salaries, benefits and other staff-related costs associated with sales and marketing, finance, legal and other administrative personnel; facilities and overhead costs; outside marketing, advertising and legal expenses and other general and administrative costs. SG&A expenses include costs and cost recoveries associated with certain collaborative arrangements. Net payment or reimbursement of SG&A costs for collaborations is recognized when the obligations are incurred or as we become entitled to the cost recovery. Subsequent events During the three months ended June 30, 2009, we adopted a new accounting standard that establishes general standards for the accounting and disclosing of events that occur after the balance sheet date that are not addressed elsewhere in the Codification. This standard requires entities to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued. We have evaluated subsequent events through the date of issuance of our financial statements in this Form 10-Q. Recent accounting pronouncements In June 2009, the FASB issued a new accounting standard which amends guidance regarding consolidation of variable interest entities to address the elimination of the concept of a qualifying special purpose entity. This standard also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of the variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, this standard requires any enterprise that holds a variable interest in a variable interest entity to make ongoing assessments of whether it has a controlling financial interest in the variable interest entity and to provide enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in the variable interest entity. This standard is effective for us for interim and annual reporting periods beginning on or after January 1, 2010. The adoption of this standard is not expected to have a material impact on our condensed consolidated results of operations, financial position or cash flows. In August 2009, the FASB issued a new accounting standard which clarifies guidance for determining the fair value of a liability when a quoted price in an active market for an identical liability is not available. This standard provides for the use of one or more valuation techniques including use of quoted prices of identical or similar liabilities when traded as assets, quoted prices of similar liabilities and other techniques consistent with the fair value measurement framework, such as the amount an entity would pay to transfer the identical liability or would receive to enter into the identical liability. This standard is effective for us for interim and annual periods beginning on or after October 1, 2009. The adoption of this standard is not expected to have a material impact on our condensed consolidated results of operations, financial position or cash flows. In October 2009, the FASB issued a new accounting standard which amends guidance on accounting for revenue arrangements involving the delivery of more than one element of goods and/or services. This standard addresses the unit of accounting for arrangements involving multiple deliverables and removes the previous separation criteria that objective and reliable evidence of fair value of any undelivered item must exist for the delivered item to be considered a separate unit of accounting. This standard also addresses how the arrangement consideration should be allocated to each deliverable. Finally, this standard expands disclosures related to multiple element revenue arrangements. This standard is effective for us for annual periods beginning on or after January 1, 2011. The adoption of this standard is not expected to have a material impact on our condensed consolidated results of operations, financial position or cash flows. |
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| 11 | ANADARKO PETROLEUM CORP | 1. Summary of Significant Accounting Policies General Anadarko Petroleum Corporation is engaged in the exploration, development, production, gathering, processing and marketing of natural gas, crude oil, condensate and natural gas liquids (NGLs). The Company also owns interests in the hard minerals business through its ownership of non-operated joint ventures and royalty arrangements. The terms “Anadarko” and “Company” refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. The information, as furnished herein, reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company’s consolidated financial position as of September 30, 2009 and December 31, 2008, the consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2009 and 2008, cash flows for the nine months ended September 30, 2009 and 2008, and the consolidated statement of equity for the nine months ended September 30, 2009. Certain amounts for prior periods have been reclassified to conform to the current-period presentation. In preparing financial statements in accordance with accounting principles generally accepted in the United States, management makes informed judgments and estimates that affect both the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Management reviews its estimates periodically, including those related to the carrying value of properties and equipment, proved reserves, goodwill, intangible assets, asset retirement obligations, litigation reserves, environmental liabilities, pension liabilities and costs, income taxes and fair values. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates. The accompanying financial statements and notes should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K. Oil and Gas Properties The Company uses the successful efforts method of accounting for oil and gas properties. The Company adopted the successful efforts method of accounting in the third quarter of 2007 and all periods presented reflect application of the successful efforts method of accounting. Earnings Per Share The Company’s basic earnings per share (EPS) amounts have been computed based on the average number of shares of common stock outstanding for the period and include the effect of any participating securities as appropriate. Diluted EPS includes the effect of the Company’s outstanding stock options, restricted stock awards, restricted stock units and performance-based stock awards if the inclusion of these items is dilutive. Diluted net loss per share for the nine months ended September 30, 2009, does not assume an increase in the average number of shares outstanding from future stock option exercises, unvested restricted stock or similar sources because the inclusion of shares attributable to these sources would have an anti-dilutive effect. See Note 9. Changes in Accounting Principles The Company adopted a new fair-value-measurement standard as of January 1, 2008. The standard defines fair value, establishes a framework for measuring fair value under existing accounting pronouncements that require fair value measurements and expands fair-value-measurement disclosures. The Company elected to implement the standard with the one-year deferral permitted for nonfinancial assets and nonfinancial liabilities, except those nonfinancial items recognized or disclosed at fair value on a recurring basis (at least annually). The deferral period ended on January 1, 2009. Accordingly, the Company now applies the fair-value framework to nonfinancial assets and nonfinancial liabilities initially measured at fair value, such as assets acquired in a business combination; impaired long-lived assets (asset groups); intangible assets and goodwill; and initial recognition of asset retirement obligations and exit or disposal costs. The Company adopted new accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of subsidiaries, effective January 1, 2009. Specifically, these standards require the recognition of noncontrolling interests (formerly referred to as minority interests) as a component of total equity. Prior to January 1, 2009, the share of a subsidiary’s net assets allocable to minority interest investors was reported outside of equity. Included in noncontrolling interests is approximately $90 million that will be transferred to paid-in capital if and when the Western Gas Partners, LP subordinated units convert to common units. These standards also establish a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. Dispositions of subsidiary stock are now required to be accounted for as equity transactions. Finally, consolidated net income and comprehensive income are presented to include amounts attributable to both the parent and noncontrolling interests. All prior periods have been conformed to the current-year presentation. The Company adopted a new standard for its derivative instruments and hedging activities, effective January 1, 2009. The standard does not change the Company’s accounting for derivatives, but requires enhanced disclosures regarding the Company’s methodology and purpose for entering into derivative instruments, accounting for derivative instruments and related hedged items (if any), and the impact of derivative instruments on the Company’s consolidated financial position, results of operations and cash flows. See Note 7. The Company adopted a new accounting standard for business combinations, effective January 1, 2009. The standard applies prospectively to the Company for future business combinations. The standard expands the definition of what qualifies as a business, thereby increasing the scope of transactions that qualify as business combinations. Furthermore, under the standard, changes in estimates of income tax liabilities existing at the date of, or arising in connection with, past business combinations are accounted for as adjustments to current period income as opposed to adjustments to goodwill. The adoption of the standard had no impact on the Company’s consolidated financial position, results of operations or cash flows. Effective January 1, 2009, the Company adopted a new standard on determining whether instruments granted in share-based payment transactions constitute participating securities. This standard addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore included in the allocation of earnings for purposes of computing EPS. Unvested share-based payment awards, whether paid or unpaid, that contain nonforfeitable rights to dividends or dividend equivalents constitute participating securities and are included in the computation of EPS. The Company’s restricted stock awards and restricted stock units contain nonforfeitable rights to dividends, thereby qualifying these instruments as participating securities and requiring the underlying securities to be taken into account for purposes of computing EPS. However, because the Company’s restricted stock awards and restricted stock units do not participate in losses, these instruments were not taken into account for purposes of calculating EPS for the nine months ended September 30, 2009. All prior periods have been conformed to the current year presentation. See Note 9. The Company adopted a new standard on subsequent events, effective April 1, 2009. The standard defines subsequent events as either recognized subsequent events (events that provide additional evidence about conditions at the balance sheet date) or nonrecognized subsequent events (events that provide evidence about conditions that arose after the balance sheet date). Recognized subsequent events are recorded in the financial statements for the current period presented, while nonrecognized subsequent events are not. Both types of subsequent events require disclosure in the consolidated financial statements if nondisclosure of such events causes the financial statements to be misleading. The Company is also required to disclose the date through which subsequent events have been evaluated. The adoption of this standard had no impact on the financial statements of the Company. The Company has evaluated subsequent events through November 2, 2009. During the second quarter of 2009, Anadarko adopted a standard that requires the Company to disclose the fair value of financial instruments quarterly rather than annually. During the third quarter of 2009, the Company changed its annual goodwill impairment testing date from January 1 to October 1 of each year. This change ensures the completion of the annual goodwill impairment test prior to the end of the annual reporting period, thereby aligning impairment testing procedures with year-end financial reporting. Accordingly, management considers this accounting change preferable. This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. The Company will complete its annual goodwill impairment test during the fourth quarter of 2009. Fair Value The carrying amount of cash and cash equivalents, accounts receivable and accounts payable reported on the balance sheet approximates fair value. The fair value of debt is the estimated amount the Company would have to pay to repurchase its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices or average valuations of similar debt instruments at the balance sheet date for those debt instruments for which quoted market prices are not available. See Note 8 for disclosures regarding the fair value of debt. See Note 7 for disclosures regarding the fair value of derivative instruments. Recently Issued Accounting Standards Not Yet Adopted In June 2009, the FASB issued amendments to the consolidation standard applicable to variable interest entities. The amendments significantly reduce the previously required quantitative consolidation analysis, and require ongoing reassessments of whether the Company is the primary beneficiary of a variable interest entity. This standard requires enhanced disclosures about an enterprise’s involvement with a variable interest entity. This standard is effective for the first annual reporting period beginning after November 15, 2009. The adoption of this standard will not have an impact on the Company’s consolidated financial statements, other than the expanded disclosures. |
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| 12 | ANNALY CAPITAL MANAGEMENT INC |
Annaly Capital Management, Inc. (“Annaly” or the “Company”) was incorporated in Maryland on November 25, 1996. The Company commenced its operations of purchasing and managing an investment portfolio of mortgage-backed securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital, and completed its initial public offering on October 14, 1997. The Company is a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. Fixed Income Discount Advisory Company (“FIDAC”) is a registered investment advisor and is a wholly owned taxable REIT subsidiary of the Company. During the third quarter of 2008, the Company formed RCap Securities, Inc. (“RCap”). RCap was granted membership in the Financial Industry Regulatory Authority (“FINRA”) on January 26, 2009, and operates as broker-dealer. RCap is a wholly owned taxable REIT subsidiary of the Company. On October 31, 2008, the Company acquired Merganser Capital Management, Inc. (“Merganser”). Merganser is a registered investment advisor and is a wholly owned taxable REIT subsidiary of the Company.
A summary of the Company’s significant accounting policies follows:
Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they may not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”).
The consolidated interim financial statements are unaudited; however, in the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the financial positions, results of operations, and cash flows have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of the Company, FIDAC, Merganser, RCap and an affiliated investment fund (the “Fund”). The Fund is a wholly owned subsidiary of the Company whose assets are subject to the administration of Lehman Brothers International (Europe) (“LBIE”) under English bankruptcy law.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and cash held in money market funds on an overnight basis.
Reverse Repurchase Agreements - The Company may invest its daily available cash balances via reverse repurchase agreements to provide additional yield on its assets. These investments will typically be recorded as short term investments and will generally mature daily. Reverse repurchase agreements are recorded at cost and are collateralized by mortgage-backed securities pledged by the counterparty to the agreement. Reverse repurchase agreements entered into by RCap are part of the subsidiary’s daily matched book trading activity. These reverse repurchase agreements are recorded on trade date at the contract amount, are collateralized by mortgage backed securities and generally mature within 90 days. Margin calls are made by RCap as appropriate based on the daily valuation of the underlying collateral versus the contract price. RCap generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Cash flows related to RCap’s matched book activity are included in cash flows from operating activity.
Mortgage-Backed Securities and Agency Debentures - The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans, and certificates guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Mortgage-Backed Securities”). The Company also invests in agency debentures issued by Federal Home Loan Banks (“FHLBs”), Freddie Mac and Fannie Mae. The Mortgage-Backed Securities and agency debentures are collectively referred to herein as “Investment Securities.”
The Company is required to classify its Investment Securities as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Investment Securities until maturity, it may, from time to time, sell any of its Investment Securities as part of its overall management of its portfolio. Accordingly, the Company classifies all of its Investment Securities as available-for-sale. All assets classified as available-for-sale are reported at estimated fair value, based on market prices from independent sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. The Company’s investment in Chimera Investment Corporation (“Chimera”) is accounted for as available-for-sale equity securities. The Company’s investment in CreXus Investment Corp. (“CreXus”) is accounted for under the equity method.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company determines if it (1) has the intent to sell the Investment Securities, (2) is more likely than not that it will be required to sell the securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the Investment Securities. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the statement of earnings, while the balance of impairment related to other factors will be recognized in other comprehensive income (“OCI”). For the quarters ended September 30, 2009 and 2008, the Company did not have unrealized losses on Investment Securities that were deemed other than temporary.
The estimated fair value of Investment Securities, available-for-sale equity securities, trading securities, trading securities sold, not yet purchased, receivable from prime broker and interest rate swaps is equal to their carrying value presented in the consolidated statements of financial condition. Cash and cash equivalents, reverse repurchase agreements, accrued interest and dividends receivable, receivable for securities sold, receivable for advisory and service fees, repurchase agreements with maturities shorter than one year, payable for Investment Securities purchased, dividends payable, accounts payable and other liabilities, and accrued interest payable, generally approximates fair value at September 30, 2009 due to the short term nature of these financial instruments. The estimated fair value of long term structured repurchase agreements is reflected in the Note 9 to the financial statements.
Interest income is accrued based on the outstanding principal amount of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized into interest income over the projected lives of the securities using the interest method. The Company’s policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus prepayment speeds, and current market conditions.
Investment Securities transactions are recorded on the trade date. Purchases of newly-issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are removed, generally shortly before settlement date. Realized gains and losses on sales of Investment Securities are determined on the specific identification method.
Derivative Financial Instruments/Hedging Activity - Prior to the fourth quarter of 2008, the Company designated interest rate swaps as cash flow hedges, whereby the swaps were recorded at fair value on the balance sheet as assets and liabilities with any changes in fair value recorded in OCI. In a cash flow hedge, a swap would exactly match the pricing date of the relevant repurchase agreement. Through the end of the third quarter of 2008 the Company continued to be able to effectively match the swaps with the repurchase agreements therefore entering into effective hedge transactions. However, due to the volatility of the credit markets, it was no longer practical to match the pricing dates of both the swaps and the repurchase agreements.
As a result, the Company voluntarily discontinued hedge accounting after the third quarter of 2008 through a combination of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges. The de-designation of cash flow hedges requires that the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated OCI, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. The Company continues to hold repurchase agreements in excess of swap contracts and has no indication that interest payments on the hedged repurchase agreements are in jeopardy of discontinuing. Therefore, the deferred losses related to these derivatives that have been de-designated will not be recognized immediately and will remain in OCI. These losses are reclassified into earnings during the contractual terms of the swap agreements starting as of October 1, 2008. Changes in the unrealized gains or losses on the interest rate swaps subsequent to September 30, 2008 are reflected in the Company’s statement of operations.
Credit Risk – The Company has limited its exposure to credit losses on its portfolio of Investment Securities by only purchasing securities issued by Freddie Mac, Fannie Mae, or Ginnie Mae and agency debentures issued by the FHLB, Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie Mac, and Fannie Mae Mortgage-Backed Securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae Mortgage-Backed Securities are backed by the full faith and credit of the U.S. government. Principal and interest on agency debentures are guaranteed by the agency issuing the debenture. All of the Company’s Investment Securities have an actual or implied “AAA” rating. The Company faces credit risk on the portions of its portfolio which are not Investment Securities.
Market Risk - The current weakness in the broader mortgage market could adversely affect one or more of the Company’s lenders and could cause one or more of the Company’s lenders to be unwilling or unable to provide additional financing. This could potentially increase the Company’s financing costs and reduce liquidity. If one or more major market participants fails, it could negatively impact the marketability of all fixed income securities, including agency mortgage backed securities. This could negatively impact the value of the securities in the Company’s portfolio, thus reducing its net book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its Investment Securities at an inopportune time when prices are depressed. Even with the current situation in the mortgage sector, the Company does not anticipate having difficulty converting its assets to cash or extending financing terms due to the fact that its Investment Securities have an actual or implied “AAA” rating and principal payment is guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae.
Repurchase Agreements - The Company finances the acquisition of its Investment Securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Repurchase agreements entered into by RCap are matched with reverse repurchase agreements and are recorded on trade date with the duration of such repurchase agreements mirroring those of the matched reverse repurchase agreements. The repurchase agreements are recorded at the contract amount and margin calls are filled by RCap as required based on any deficiencies in collateral versus the contract price. RCap generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the repurchase agreements. Intercompany transactions are eliminated in the statement of financial condition, statement of operations, and statement of cash flows. Cash flows related to RCap’s repurchase agreements are included in cash flows from operating activity.
Cumulative Convertible Preferred Stock - The Series B Preferred Stock contains fundamental change provisions that allow the holder to redeem the Series B Preferred Stock for cash if certain events occur. As redemption under these provisions is not solely within the Company’s control, the Company has classified the Series B Preferred Stock as temporary equity in the accompanying consolidated statements of financial condition. The Company has analyzed whether the embedded conversion option should be bifurcated and has determined that bifurcation is not necessary.
Income Taxes - The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), with respect thereto. Accordingly, the Company will not be subjected to federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met. The Company and each of its subsidiaries, FIDAC, Merganser, and RCap, have made separate joint elections to treat each subsidiary as a taxable REIT subsidiary of the Company. As such, each of the taxable REIT subsidiaries is taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Goodwill and Intangible assets - The Company’s acquisitions of FIDAC and Merganser were accounted for using the purchase method. Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. In addition, the costs of FIDAC and Merganser were allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired was recognized as goodwill. Goodwill and intangible assets are periodically (but not less frequently than annually) reviewed for potential impairment. Intangible assets with an estimated useful life are expected to amortize over a 10.6 year weighted average time period. During the quarters and nine months ended September 30, 2009 and 2008, there were no impairment losses.
Stock Based Compensation - The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The compensation cost should be reassessed based on the fair value of the equity instruments issued.
The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award). The Company estimated fair value using the Black-Scholes valuation model.
A Summary of Recent Accounting Pronouncements Follows:
General Principles
Generally Accepted Accounting Principles (ASC 105)
In June 2009, the Financial Accounting Standards Board (“FASB”) issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (Codification) which revises the framework for selecting the accounting principles to be used in the preparation of financial statements that are presented in conformity with Generally Accepted Accounting Principles (“GAAP”). The objective of the Codification is to establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB. Codification is effective for the Company for this September 30, 2009 Form 10-Q. In adopting the Codification, all non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. Codification requires any references within the Company’s consolidated financial statements be modified from FASB issues to ASC. However, in accordance with the FASB Accounting Standards Codification Notice to Constituents (v 2.0), the Company will not reference specific sections of the ASC but will use broad topic references.
The Company’s recent accounting pronouncements section has been reformatted to reflect the same organizational structure as the ASC. Broad topic references will be updated with pending content as they are released.
Assets
Investments in Debt and Equity Securities (ASC 320)
New guidance was provided to make impairment guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) on debt and equity securities in financial statements. This guidance was also the result of the Securities and Exchange Commission (“SEC”) mark-to-market study mandated under the Emergency Economic Stabilization Act of 2008 (“EESA”). The SEC’s recommendation was to “evaluate the need for modifications (or the elimination) of current OTTI guidance to provide for a more uniform system of impairment testing standards for financial instruments.” The guidance revises the OTTI evaluation methodology. Previously the analytical focus was on whether the company had the “intent and ability to retain its investment in the debt security for a period of time sufficient to allow for any anticipated recovery in fair value”. Now the focus is on whether the company (1) has the intent to sell the Investment Securities, (2) is more likely than not that it will be required to sell the Investment Securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the Investment Securities. Further, the security is analyzed for credit loss, (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the statement of operations, while the balance of impairment related to other factors will be recognized in OCI. This guidance became effective for all of the Company’s interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009 and the Company decided to early adopt. For the quarter ended September 30, 2009, the Company did not have unrealized losses in Investment Securities that were deemed other-than-temporary.
Broad Transactions
Business Combinations (ASC 805)
This guidance establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in a business combination at their fair value at acquisition date. ASC 805 alters the treatment of acquisition-related costs, business combinations achieved in stages (referred to as a step acquisition), the treatment of gains from a bargain purchase, the recognition of contingencies in business combinations, the treatment of in-process research and development in a business combination as well as the treatment of recognizable deferred tax benefits. ASC 805 is effective for business combinations closed in fiscal years beginning after December 15, 2008 and is applicable to business acquisitions completed after January 1, 2009. The Company did not make any business acquisitions during the quarter ended September 30, 2009. The adoption of ASC 805 did not have a material impact on the Company’s consolidated financial statements.
Consolidation (ASC 810)
On January 1, 2009, FASB amended the guidance concerning noncontrolling interests in consolidated financial statements, which requires the Company to make certain changes to the presentation of its financial statements. This guidance requires the Company to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net income and to include the accumulated amount of noncontrolling interests as part of stockholders’ equity. Similarly, in its presentation of stockholders’ equity, the Company distinguishes between equity amounts attributable to controlling interest and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of stockholders’ equity. In addition to these financial reporting changes, this guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in its controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are re-measured with the gain or loss reported in net earnings.
Effective January 1, 2010, the consolidation standards will be amended. The amendment was intended to improve an organization’s variable interest entity reporting. It will require an analysis to determine whether an entity has a controlling financial interest in a variable interest entity. The analysis will be used to identify the primary beneficiary of a variable interest entity. The holder of the variable interest will be defined as the primary beneficiary if it has both the power to influence the entity’s significant economic activities and the obligation to absorb significant losses or receive significant benefits. The Company is evaluating the effect of the amendments on the financial statements.
Derivatives and Hedging (ASC 815)
Effective January 1, 2009 and adopted by the Company prospectively, the FASB issued additional guidance attempting to improve the transparency of financial reporting by mandating the provision of additional information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This guidance changed the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosure about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To adhere to this guidance, qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts, gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements must be made. This disclosure framework is intended to better convey the purpose of derivative use in terms of the risks that an entity is intending to manage. The effect of the adoption of this guidance was an increase in footnote disclosures is discussed in Note 10.
Fair Value Measurements and Disclosures (ASC 820)
In response to the deterioration of the credit markets, FASB issued guidance clarifying how Fair Value Measurements should be applied when valuing securities in markets that are not active. The guidance provides an illustrative example, utilizing management’s internal cash flow and discount rate assumptions when relevant observable data do not exist. It further clarifies how observable market information and market quotes should be considered when measuring fair value in an inactive market. It reaffirms the notion of fair value as an exit price as of the measurement date and that fair value analysis is a transactional process and should not be broadly applied to a group of assets. The guidance was effective upon issuance including prior periods for which financial statements had not been issued. The implementation of this guidance did not have a material effect on the fair value of the Company’s assets as the Company continued using the methodologies used in previous quarters to value assets as defined under the original Fair Value standards.
In October 2008 the EESA was signed into law. Section 133 of the EESA mandated that the SEC conduct a study on mark-to-market accounting standards. The SEC provided its study to the U.S. Congress on December 30, 2008. Part of the recommendations within the study indicated that “fair value requirements should be improved through development of application and best practices guidance for determining fair value in illiquid or inactive markets”. As a result of this study and the recommendations therein, on April 9, 2009, the FASB issued additional guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities). The guidance gives specific factors to evaluate if there has been a decrease in normal market activity and if so, provides a methodology to analyze transactions or quoted prices and make necessary adjustments to fair value. The objective is to determine the point within a range of fair value estimates that is most representative of fair value under current market conditions. This guidance became effective for the Company’s interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption does not have a major impact on the manner in which the Company estimates fair value, nor does it have any impact on our financial statement disclosures.
In August 2009, FASB provided further guidance regarding the fair value measurement of liabilities. The guidance states that a quoted price for the identical liability when traded as an asset in an active market is a Level 1 fair value measurement. If the value must be adjusted for factors specific to the liability, then the adjustment to the quoted price of the asset shall render the fair value measurement of the liability a lower level measurement. This guidance has no material effect on the fair valuation of the Company’s liabilities.
Financial Instruments (ASC 820-10-50)
On April 9, 2009, the FASB issued guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The effective date of this guidance is for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption did not have any impact on financial reporting as all financial instruments are currently reported at fair value in both interim and annual periods.
Subsequent Events (ASC 855)
ASC 855 provides general standards governing accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 also provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions occurring after the balance sheet date. The Company adopted effective June 30, 2009, and adoption had no impact on the Company’s consolidated financial statements. The Company evaluated subsequent events through November 4, 2009.
Transfers and Servicing (ASC 860-10-50)
In February 2008 FASB issued guidance addressing whether transactions where assets purchased from a particular counterparty and financed through a repurchase agreement with the same counterparty can be considered and accounted for as separate transactions, or are required to be considered “linked” transactions and may be considered derivatives. This guidance requires purchases and subsequent financing through repurchase agreements be considered linked transactions unless all of the following conditions apply: (1) the initial purchase and the use of repurchase agreements to finance the purchase are not contractually contingent upon each other; (2) the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed; (3) the financial assets are readily obtainable in the market; and (4) the financial instrument and the repurchase agreement are not coterminous. This guidance was effective for the Company on January 1, 2009 and the implementation did not have a material effect on the financial statements of the Company. The accounting standards governing the transfer and servicing of financial assets were amended in June 2009 effective beginning January 1, 2010. The Company is currently assessing the effect the new standard will have on the financial statements. |
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| 13 | APACHE CORP |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of September 30, 2009, Apache’s significant accounting policies are consistent with those
discussed in Note 1 of its consolidated financial statements contained in the Annual Report on Form
10-K for the fiscal year ended December 31, 2008.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Significant estimates with
regard to these financial statements include the estimate of proved oil and gas reserves and
related present value estimates of future net cash flow therefrom, asset retirement obligations and
income taxes. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141 (Revised), “Business Combinations” (SFAS No. 141
(R)), which was amended by FASB Staff Position (FSP) FAS No. 141 (R)-1 in April 2009. This
guidance has been primarily codified into the FASB Accounting Standards Codification (ASC, also
known collectively as the Codification) Topic 805, “Business Combinations.” The guidance broadens
the definition of a business combination to include all transactions or other events in which
control of one or more businesses is obtained. Further, the standard establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling interests in the
acquiree and the goodwill acquired. The statement requires the acquiring entity in a business
combination to recognize the fair value of all the assets acquired and liabilities assumed in the
transaction. It also modifies disclosure requirements. Apache adopted this statement effective
January 1, 2009. However, since the Company did not close any material business combinations
during the nine months ended September 30, 2009, the adoption had a negligible impact on the
Company’s consolidated financial statements.
Also in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements,” which was primarily codified into ASC Topic 810, “Consolidations.” This
statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” This
guidance establishes accounting and reporting standards for the noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary, sometimes called a minority interest, is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial statements.
Additionally, the amounts of consolidated net income attributable to both the parent and the
noncontrolling interest must be reported separately on the face of the income statement. Apache
adopted this statement as of January 1, 2009. There were no noncontrolling interests at the
adoption date. Adoption did not impact the Company’s financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” which was primarily codified into ASC Topic 815, “Derivatives and Hedging.”
This guidance amends and expands the disclosure requirements of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and requires qualitative disclosures about
objectives and strategies for using derivative instruments, quantitative disclosures about fair
value of derivative instruments and related gains and losses, and disclosures about credit
risk-related contingent features in derivative agreements. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
Apache adopted this standard as of January 1, 2009. The statement provides only for enhanced
disclosures. Therefore, adoption of this standard had no impact on the Company’s financial
position or results of operations.
In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) Issue No. 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” which was primarily codified into ASC Topic 260, “Earnings Per Share.” This guidance
addresses whether instruments granted in share-based payment transactions should be considered
participating securities for the purposes of applying the two-class method of calculating earnings
per share (EPS) pursuant to FASB Statement No. 128, “Earnings Per Share,” also codified into ASC
Topic 260. This guidance concludes that unvested share-based payment awards that contain rights to
receive nonforfeitable dividends or dividend equivalents are participating securities prior to
vesting and, therefore, should be included in the earnings allocations in computing basic EPS under
the two-class method. Apache adopted this standard effective January 1, 2009. The number of
unvested shares subject to the two-class method had a negligible impact on Apache’s earnings per
share.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB Opinion No. 28-1, “Interim
Disclosures About Fair Value of Financial Instruments,” which was primarily codified into ASC Topic
825, “Financial Instruments.” This guidance requires quarterly fair value disclosures for
financial instruments that are not reflected on the Company’s Consolidated Balance Sheet at fair
value in interim financial statements effective for interim periods ending after June 15, 2009.
Apache adopted the new standard for the quarter ended June 30, 2009. Adoption had no impact on the
Company’s financial position or results of operations. See Note 9 — Fair Value Measurements of
this Form 10-Q for interim disclosures required by this statement.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was primarily codified
into ASC Topic 855, “Subsequent Events.” This guidance establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued. In particular, this statement sets forth:
This standard is effective for interim or annual periods ending after June 15, 2009, and is to
be applied prospectively. Apache adopted this statement as of June 30, 2009. For evaluation of
subsequent events, see Note 8 — Subsequent Events of this Form 10-Q.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles,” which has
been primarily codified into ASC Topic 105, “Generally Accepted Accounting Standards.” This
guidance establishes the FASB Accounting Standards Codification, which officially commenced July 1,
2009, to become the single source of authoritative U.S. GAAP recognized by the FASB to be applied
by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other
accounting literature excluded from the Codification is considered nonauthoritative. The
subsequent issuances of new standards will be in the form of Accounting Standards Updates that will
be included in the Codification. Generally, the Codification does not change U.S. GAAP. This
statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. Apache has adopted this standard for the quarter ending September 30, 2009.
The standard has had a minimal effect on the Company’s financial statement disclosures, as all
references to authoritative accounting literature are referenced in accordance with the
Codification.
New Pronouncements Issued But Not Yet Adopted
In December 2008, the FASB issued FSP FAS No. 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets,” which was primarily codified into ASC Topic 715, “Compensation
— Retirement Benefits.” This guidance requires additional disclosures about plan assets of a
defined benefit pension or other postretirement plan, including investment strategies, major
categories of plan assets, concentrations of risk within plan assets, inputs and valuation
techniques used to measure the fair value of plan assets and the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period. This standard is
effective for fiscal years ending after December 15, 2009, with earlier application permitted. The
statement provides only for enhanced disclosures and does not require additional interim
disclosures. Adoption will have no impact on the Company’s financial position or results of
operations.
In January 2009, the SEC issued Release No. 33-8995, “Modernization of Oil and Gas Reporting,”
amending oil and gas reporting requirements under Rule 4-10 of Regulation S-X and Industry Guide 2
in Regulation S-K and bringing full-cost accounting rules into alignment with the revised
disclosure requirements. The new rules include changes to the pricing used to estimate reserves,
the ability to include nontraditional resources in reserves, the use of new technology for
determining reserves and permitting disclosure of probable and possible reserves. In September
2009, the FASB issued Proposed Accounting Standards Update (ASU),
“Extractive Industries—Oil and
Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures” (Exposure Draft No. 1730-100), to
align the guidance in U.S. GAAP with the changes the SEC made in December 2008. The final rules
are effective for registration statements filed on or after January 1, 2010, and for annual reports
for fiscal years ending on or after December 31, 2009. The public comment period for the Proposed
ASU ended October 15, 2009; however, no final guidance has been issued by the FASB. The Company is
continuing to evaluate the impact of this release.
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| 14 | APPLE INC | Note 1 – Summary of Significant Accounting Policies Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) design, manufacture, and market personal computers, mobile communication devices, and portable digital music and video players and sell a variety of related software, third-party digital content and applications, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (“Mac”), iPhone and iPod compatible products including application software, printers, storage devices, speakers, headphones, and various other accessories and supplies through its online and retail stores. The Company sells to consumer, small and mid-sized business (“SMB”), education, enterprise, government and creative customers. Basis of Presentation and Preparation The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior year amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation. During the first quarter of 2009, the Company reclassified $2.4 billion of certain fixed-income securities from short-term marketable securities to long-term marketable securities in the September 27, 2008 Consolidated Balance Sheet. The reclassification resulted from a change in accounting presentation for certain investments based on contractual maturity dates, which more closely reflects the Company’s assessment of the timing of when such securities will be converted to cash. As a result of this change, marketable securities with maturities less than 12 months are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term. There have been no changes in the Company’s investment policies or practices associated with this change in accounting presentation. See Note 2, “Financial Instruments” of this Form 10-K for additional information. The Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2009, 2008 and 2007 ended on September 26, 2009, September 27, 2008 and September 29, 2007, respectively, and included 52 weeks each. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years or quarters refer to the Company’s fiscal years ended in September and the associated quarters of those fiscal years. In May 2009, the Financial Accounting Standards Board (“FASB”) established general accounting standards and disclosure for subsequent events. The Company adopted FASB Accounting Standards Codification (“ASC”) 855, Subsequent Events (formerly referenced as Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events), during the third quarter of 2009. The Company has evaluated subsequent events through the date and time the financial statements were issued on October 27, 2009. Financial Instruments Cash Equivalents and Marketable Securities All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s debt and marketable equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates the available-for-sale designations as of each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of less than 12 months are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term. These securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method. Derivative Financial Instruments During the second quarter of 2009, the Company adopted FASB ASC 815, Derivatives and Hedging (formerly referenced as SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133), which requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedged item affect the financial statements. The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in shareholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. The Company did not have a net gain or loss on these derivative instruments during 2009, 2008 and 2007. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this component are recognized in current earnings. Fair Value Measurements During the first quarter of 2009, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (formerly referenced as SFAS No. 157, Fair Value Measurements), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This new accounting standard does not require any new fair value measurements. The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. During the first quarter of 2009, the Company adopted FASB ASC 825, Financial Instruments (formerly referenced as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115), which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. The Company has not elected the fair value option for any eligible financial instruments. Inventories Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of the inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value. The Company’s inventories consist primarily of finished goods for all periods presented. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building, up to five years for equipment, and the shorter of lease terms or ten years for leasehold improvements. The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $577 million, $363 million and $249 million during 2009, 2008 and 2007, respectively. Asset Retirement Obligations The Company records obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company reviews legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. If it is determined that a legal obligation exists, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The difference between the gross expected future cash flow and its present value is accreted over the life of the related lease as an operating expense. All of the Company’s existing asset retirement obligations are associated with commitments to return property subject to operating leases to original condition upon lease termination. The Company’s asset retirement liability was $25 million and $21 million as of September 26, 2009 and September 27, 2008, respectively. Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets The Company reviews property, plant and equipment and certain identifiable intangibles, excluding goodwill, for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property, plant and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company did not record any material impairments during 2009, 2008 and 2007. The Company does not amortize goodwill and intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible asset impairment tests on or about August 31 of each year. The Company did not recognize any goodwill or intangible asset impairment charges in 2009, 2008 and 2007. The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit.
The Company amortizes its intangible assets with definite lives over their estimated useful lives and reviews these assets for impairment. The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from one to ten years. Foreign Currency Translation and Remeasurement The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are credited or charged to foreign currency translation included in accumulated other comprehensive income in shareholders’ equity. The Company’s subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property, and nonmonetary assets and liabilities at historical rates. Gains and losses from these remeasurements were insignificant and have been included in the Company’s results of operations. Revenue Recognition Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts. For any product within these groups that either is software, or is considered software-related (e.g., Mac computers, iPhones and iPod portable digital music and video players), the Company accounts for such products in accordance with the specific industry accounting guidance for software and software related transactions. The Company applies various revenue-related GAAP for products that are not software or software-related, such as digital content sold on the iTunes Store and certain Mac, iPhone and iPod supplies and accessories, which is described below. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met. Revenue from service and support contracts is deferred and recognized ratably over the service coverage periods. These contracts typically include extended phone support, repair services, web-based support resources, diagnostic tools, and extend the service coverage offered under the Company’s standard limited warranty. The Company sells software and peripheral products obtained from other companies. The Company generally establishes its own pricing and retains related inventory risk, is the primary obligor in sales transactions with its customers, and assumes the credit risk for amounts billed to its customers. Accordingly, the Company generally recognizes revenue for the sale of products obtained from other companies based on the gross amount billed. The Company accounts for multiple element arrangements that consist only of software or software-related products in accordance with industry specific accounting guidance for software and software related transactions. If a multiple-element arrangement includes deliverables that are neither software nor software-related, the Company applies various revenue-related GAAP to determine if those deliverables constitute separate units of accounting from the software or software-related deliverables. If the Company can separate the deliverables, the Company applies the industry specific accounting guidance to the software and software-related deliverables and applies other appropriate guidance to the non-software related deliverables. Revenue on arrangements that include multiple elements such as hardware, software and services is allocated to each element based on the relative fair value of each element. Each element’s allocated revenue is recognized when the revenue recognition criteria for that element have been met. Fair value is generally determined by vendor specific objective evidence (“VSOE”), which is based on the price charged when each element is sold separately. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. For both iPhone and Apple TV, the Company has indicated it may from time-to-time provide future unspecified features and additional software products free of charge to customers. Accordingly, iPhone handsets and Apple TV sales are accounted for under subscription accounting in accordance with GAAP. As such, the revenue and associated cost of sales are deferred at the time of sale, and are both recognized on a straight-line basis over the currently estimated 24-month economic life of these products, with any loss recognized at the time of sale. Costs incurred by the Company for engineering, sales, marketing and warranty are expensed as incurred. The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs, including reseller and end-user rebates, and other sales programs and volume-based incentives. The estimated cost of these programs is accrued as a reduction to revenue in the period the Company has sold the product and committed to a plan. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Generally, the Company does not offer specified or unspecified upgrade rights to its customers in connection with software sales or the sale of extended warranty and support contracts. When the Company does offer specified upgrade rights, the Company defers revenue for the fair value of the specified upgrade right until the future obligation is fulfilled or the right to the specified upgrade expires. A limited number of the Company’s software products are available with maintenance agreements that grant customers rights to unspecified future upgrades over the maintenance term on a when and if available basis. Revenue associated with such maintenance is recognized ratably over the maintenance term. Allowance for Doubtful Accounts The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions, and other factors that may affect customers’ ability to pay. Shipping Costs For all periods presented, amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are included in cost of sales. Warranty Expense The Company generally provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized. The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates. For products accounted for under subscription accounting, the Company recognizes warranty expense as incurred.
Software Development Costs Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed. In 2009 and 2008, the Company capitalized $71 million and $11 million, respectively, of costs associated with the development of Mac OS X Version 10.6 Snow Leopard (“Mac OS X Snow Leopard”), which was released during the fourth quarter of 2009. During 2007, the Company capitalized $75 million of costs associated with the development of Mac OS X Version 10.5 Leopard (“Mac OS X Leopard”) and iPhone software. The capitalized costs are being amortized to cost of sales on a straight-line basis over a three year estimated useful life of the underlying technology. Total amortization related to capitalized software development costs was $25 million, $27 million and $13 million in 2009, 2008 and 2007, respectively. Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $501 million, $486 million and $467 million for 2009, 2008 and 2007, respectively. Stock-Based Compensation The Company accounts for stock-based payment transactions in which the Company receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Stock-based compensation cost for restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period. The Company will recognize a benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law. In addition, the Company accounts for the indirect effects of stock-based compensation on the research tax credit, the foreign tax credit and the domestic manufacturing deduction through the income statement. Further information regarding stock-based compensation can be found in Note 7, “Shareholders’ Equity and Stock-Based Compensation.” Income Taxes The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. During 2008, the Company adopted FASB Accounting Standards Codification (“ASC”) 740, Income Taxes (formerly referenced as FASB Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109), which changed the framework for accounting for uncertainty in income taxes. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 6, “Income Taxes” for additional information, including the effects of adoption on the Company’s consolidated financial statements. Earnings Per Common Share Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the employee stock purchase plan and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. The following table sets forth the computation of basic and diluted earnings per common share for the three years ended September 26, 2009 (in thousands, except net income in millions and per share amounts):
Potentially dilutive securities representing 12.6 million, 10.3 million and 13.7 million shares of common stock for 2009, 2008 and 2007, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been antidilutive. Comprehensive Income Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges. Segment Information The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. Information about the Company’s products, major customers and geographic areas on a company-wide basis is also disclosed. |
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| 15 | ARCH COAL INC | New Accounting Pronouncements The Financial Accounting Standards Board (“FASB”) has established the FASB Accounting Standards Codification ™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the United States for financial statements of interim and annual periods ending after September 15, 2009. References to authoritative accounting principles after the effective date will reference the Codification and not the previous accounting guidance. On January 1, 2009, the Company changed its presentation of noncontrolling interests in subsidiaries, pursuant to new guidance in the Consolidation topic of the Codification, which requires that a noncontrolling interest (previously referred to as minority interest) in a consolidated subsidiary be displayed in the consolidated balance sheet as a separate component of equity and the amount of net income attributable to the noncontrolling interest be included in consolidated net income on the face of the consolidated statement of income. Because the noncontrolling interest in Arch Western is redeemable, it is presented in the “mezzanine” between liabilities and equity. This change resulted in a decrease in other liabilities of $8.9 million as of December 31, 2008 from what was previously reported for the reclassification of the noncontrolling interest in Arch Western. This change also resulted in an increase in other operating income, net and net income of $0.2 million for the three months ended September 30, 2008 from what was previously reported for the amount of income attributable to the noncontrolling interest in Arch Western. For the nine months ended September 30, 2008 this change resulted in an increase in other operating income, net and in net income of $0.7 million from what was previously reported for the amount of income attributable to the noncontrolling interest in Arch Western. On January 1, 2009, the Company adopted the new disclosure requirements of the Derivatives and Hedging topic of the Codification. The new disclosures include qualitative disclosures about objectives for using derivatives, tabular disclosures about the gross fair value of derivative instruments, gains and losses from derivative instruments by type of contract, and the locations of these amounts in the interim and annual financial statements. See Note 7, “Derivatives” for the disclosures required. New authoritative guidance related to the accounting for assets acquired and liabilities assumed in business combinations was effective on January 1, 2009 for business combinations occurring after that date. The new provisions of the Business Combinations topic of the Codification clarify and amend the accounting guidance for the acquirer’s recognition and measurement of the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. Also, assets acquired and liabilities assumed in a business combination that arise from pre-acquisition contingencies are to be recognized at fair value and new disclosures are required to include changes in the range of possible outcomes for both recognized and reasonably possible unrecognized pre-acquisition contingencies. On January 1, 2009, the Company adopted amendments to the Earnings Per Share topic of the Codification. The amendments clarify whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method. The amendments require retrospective adjustments to prior-period financial statements, however the amendments had no effect on basic or diluted earnings per share for the three and nine months ended September 30, 2009 and September 30, 2008. Beginning January 1, 2009, the provisions of the Fair Value Measurements and Disclosures topic of the Codification are applicable prospectively to fair value measurements other than those that are recognized or disclosed at fair value in the financial statements on a recurring basis. There was no transition impact upon initial adoption; however, the provisions of the Fair Value Measurements and Disclosures topic of the Codification are effective for all fair value measurements prescribed by generally accepted accounting principles for nonfinancial assets and nonfinancial liabilities after the date of adoption. |
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| 16 | AVON PRODUCTS INC | 1. ACCOUNTING POLICIES Basis of Presentation We prepare our unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”). We consistently applied the accounting policies described in our 2008 Annual Report on Form 10-K (“2008 Form 10-K”) in preparing these unaudited financial statements. In our opinion, we made all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of results for a full year. You should read these unaudited interim consolidated financial statements in conjunction with our consolidated financial statements contained in our 2008 Form 10-K. When used in these notes, the terms “Avon,” “Company,” “we” or “us” mean Avon Products, Inc. For interim consolidated financial statement purposes, we compute our tax provision on the basis of our estimated annual effective income tax rate, and provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense. New Accounting Standards Implemented Effective January 1, 2009, we adopted the fair value measurement provisions as required by the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Codification (“Codification”), as it relates to non-recurring, nonfinancial assets and liabilities. The adoption of these provisions did not have an impact on our Consolidated Financial Statements. Effective January 1, 2009, we adopted enhanced disclosures about how and why we use derivative instruments, how they are accounted for, and how they affect our financial performance as required by the Derivatives and Hedging Topic of the Codification. See Note 12, Derivative Instruments and Hedging Activities. Effective January 1, 2009, we adopted the provisions required by the Earnings Per Share (“EPS”) Topic of the Codification. The specific provisions address whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method. Prior periods EPS was adjusted retrospectively which caused the nine month ended September 30, 2008 basic EPS to be adjusted from $1.51 to $1.50. See Note 2, Earnings Per Share and Share Repurchases. Effective January 1, 2009, we adopted the provisions relating to the accounting for business combinations as required by the Business Combinations Topic of the Codification. These provisions will impact our financial statements both on the acquisition date and in subsequent periods and will be applied prospectively. The impact of adopting these provisions will depend on the nature and terms of future acquisitions. Effective January 1, 2009, we adopted the provisions for the accounting and reporting of noncontrolling interests in a subsidiary in consolidated financial statements as required by the Consolidations Topic of the Codification. These provisions recharacterize minority interests as noncontrolling interests and require noncontrolling interests to be classified as a component of shareholders’ equity. These provisions require retroactive adoption of the presentation and disclosure requirements for existing minority interests. As a result of the adoption of these provisions, we reclassified minority interest liabilities of $37.4 from other liabilities to shareholders’ equity on the Consolidated Balance Sheet for the year ended December 31, 2008. Effective June 30, 2009, we adopted the interim disclosure provisions about the fair value of financial instruments as required by the Fair Value Measurements and Disclosures Topic of the Codification. These provisions require disclosures about the fair value of financial instruments, previously only required in annual financial statements, to be included in interim financial statements. See Note 11, Fair Value.
Effective June 30, 2009, we adopted the subsequent event provisions of the Codification. These provisions provide guidance on management’s assessment of subsequent events. Management evaluated subsequent events through October 28, 2009, which is the date the financial statements were available to be issued. The adoption of these provisions did not have an impact on our Consolidated Financial Statements. Effective September 30, 2009, we adopted the Codification. The Codification identifies the source of accounting principles and the framework for selecting the principles used in the preparation of financial statements. The adoption of the Codification did not have an impact on our Consolidated Financial Statements. New Accounting Standards to be Implemented In December 2008, the Financial Accounting Standards Board (“FASB”) issued provisions related to employer’s disclosures about postretirement benefit plan assets. These provisions will require additional disclosures about the major categories of plan assets and concentrations of risk, as well as disclosure of fair value levels. The enhanced disclosures about plan assets must be provided in our 2009 Annual Report on Form 10-K. |
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| 17 | BLACKROCK INC. |
2. Significant Accounting Policies Basis of Presentation These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Non-controlling interests include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009 and the Company’s Current Report on Form 8-K, which updated the financial information in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on September 17, 2009. The interim financial information at September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain prior year amounts have been revised or reclassified to conform to the 2009 presentation including those required by the retrospective adoption of the applicable paragraphs within Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options issued (“ASC 470-20”) (FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)), ASC 260-10, Earnings per Share (“ASC 260-10”) (FSP Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities) and ASC 810-10, Consolidation (“ASC 810-10”) (Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51). Fair Value Measurements BlackRock adopted the applicable provisions of ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”)(SFAS No. 157, Fair Value Measurements), as of January 1, 2008, which require, among other things, enhanced disclosures about assets and liabilities that are measured and reported at fair value. The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide enhanced disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories: Level 1 Inputs—Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. Level 1 assets include listed mutual funds, equities and certain debt securities. Level 2 Inputs—Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Assets which generally are included in this category may include short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds, certain limited partnership interests in hedge funds in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs, as well as restricted public securities valued at a discount. Level 3 Inputs—Unobservable inputs for the valuation of the asset or liability. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Assets included in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds and certain held for sale real estate assets. Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds as well as market indices. The various partnerships are investment companies which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals, from third party sources, however, in some instances current valuation information, for illiquid securities or securities in markets that are not active, may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances fund management may perform model-based analytical valuations that may be used to value these investments. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. Classification and Measurement of Redeemable Securities The provisions of ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) (EITF Topic No. D-98, Classification and Measurement of Redeemable Securities), require temporary equity classification for instruments that are currently redeemable or convertible for cash or other assets at the option of the holder. At September 30, 2009 and December 31, 2008, the Company determined that $9 and $266, respectively, of non-controlling interests related to certain consolidated sponsored investment funds were redeemable for cash or other assets, resulting in temporary equity classification on the condensed consolidated statements of financial condition. The amount of temporary equity related to convertible instruments is measured as the excess of the amount of cash required to be exchanged in a hypothetical settlement, as of the balance sheet date, over the current carrying amount of the liability component. During the nine months ended September 30, 2009, the 2.625% convertible debentures became convertible at the option of the holders into cash and shares of the Company’s common stock. The amount of cash required to be paid out in a hypothetical settlement exceeded the current carrying amount of the liability component by $1, which was classified as temporary equity-convertible debentures on the condensed consolidated statement of financial condition. Assets and Liabilities to be Disposed of by Sale In the course of the business of establishing real estate and other alternative investment funds, the Company may purchase land, properties and other assets while incurring liabilities directly associated with the assets, together a disposal group, with the intention to sell the disposal group to sponsored investment funds upon their launch. In accordance with the provisions of ASC 360-10, Property, Plant and Equipment (“ASC 360-10”) (SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets), the Company treats these assets and liabilities as a “disposal group”, measured at the lower of the carrying amount or fair value. Losses are recognized for any initial or subsequent write-down to fair value and gains are recognized for any subsequent increase in fair value, but not in excess of the cumulative loss previously recognized. At September 30, 2009, the Company held disposal group assets of $50 and related liabilities of $48 in other assets and other liabilities, respectively, on its condensed consolidated statement of financial condition. Disposal group liabilities include approximately $47 of borrowings directly associated with the disposal group assets. During the three and nine months ended September 30, 2009, the Company recorded a net loss of $0 and $1, respectively, within non-operating income (expense) on its condensed consolidated statement of income related to the disposal group. Accounting Policies Adopted in the Nine Months Ended September 30, 2009 Non-Controlling Interests In December 2007, the FASB issued new requirements within ASC 810-10, which established accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, separate from the parent’s equity, in the consolidated financial statements. In addition, consolidated net income should be adjusted to include the net income attributed to the non-controlling interests. The Company adopted the applicable guidance of ASC 810-10 on January 1, 2009, which required retrospective adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of ASC 810-10 are applied prospectively. The adoption of the applicable provisions of ASC 810-10 did not impact BlackRock’s stockholders’ equity on the condensed consolidated statements of financial condition. Convertible Debt Instruments In May 2008, the FASB issued new requirements within ASC 470-20, which specify that for convertible debt instruments that may be settled in cash upon conversion, issuers of such instruments should separately account for the liability and equity components in the statement of financial condition. The excess of the initial proceeds of the convertible debt instrument over the amount allocated to the liability component creates a debt discount which should be amortized as interest expense over the expected life of the liability. The applicable provisions of ASC 470-20 are effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and is to be applied retrospectively. At December 31, 2008, the Company had $249 principal amount of convertible debentures outstanding, which were issued in February 2005, bear interest at a rate of 2.625%, and are due in 2035. The Company retrospectively adopted the required paragraphs of ASC 470-20 on January 1, 2009 resulting in a total cumulative impact of a $9 reduction to retained earnings at December 31, 2008. The effective borrowing rate for nonconvertible debt at the time of issuance of the 2.625% convertible debentures was estimated to be 4.3%, which resulted in $18 of the $250 aggregate principal amount of the debentures issued, or $12 after tax, being attributable to equity. At December 31, 2008 and September 30, 2009, $4 and $1, respectively, of the initial $18 debt discount remained unamortized, and is expected to be amortized to the first put date of the convertible debentures in February 2010. As a result, the Company recognized approximately $1 of additional interest expense in each of the three months ended September 30, 2009 and 2008 and $3 of additional interest expense in each of the nine months ended September 30, 2009 and 2008. See below for retrospective EPS impact of adopting required guidance within ASC 470-20 for the three and nine months ended September 30, 2008. Earnings Per Share In June 2008, the FASB issued new requirements within ASC 260-10 (SFAS No. 128, Earnings per Share) which specify that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method as defined in ASC 260-10. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior period EPS data presented must be adjusted retrospectively. Prior to 2009, the Company awarded restricted stock and restricted stock units with nonforfeitable dividend equivalent rights. Restricted stock and restricted stock units awarded in 2009 are not considered participating securities as dividend equivalents are subject to forfeiture prior to vesting of the award. The Company adopted FSP EITF 03-6-1 on January 1, 2009. See below for the retrospective EPS impact of adopting FSP EITF 03-6-1 for the three and nine months ended September 30, 2008. EPS Impact of Adoption of required guidance within ASC 470-20, ASC 260-10 and ASC 810-10 The following table illustrates the effect on net income attributable to BlackRock, Inc. and earnings per share upon retrospective application of the required guidance within ASC 470-20, ASC 260-10 and ASC 810-10 during the three and nine months ended September 30, 2008.
Fair Value Measurements In February 2008, the FASB issued new guidance within ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) (FSP FAS 157-2, Effective Date of FASB Statement No. 157), which delayed the effective date of the application of ASC 820-10 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. Non-recurring non-financial assets and liabilities include goodwill, indefinite-lived and finite-lived intangible assets and long-lived assets each measured at fair value for purposes of impairment testing, asset retirement and guarantee obligations initially measured at fair value, and those assets and liabilities initially measured at fair value in a business combination or asset purchase. The adoption of the provisions of ASC 820-10 on January 1, 2009 for non-recurring non-financial assets and liabilities did not have a material impact on the Company’s condensed consolidated financial statements. Fair Value Measurements Disclosures and Impairments of Securities: In April 2009, the FASB issued the following three provisions intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities: ASC 320-10-65-1, Investments—Debt and Equity Securities (“ASC 320-10-65-1”) (FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), amend current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Under ASC 320-10-65-1, an other-than-temporary impairment is triggered if (1) an entity has the intent to sell the security, (2) it is more likely than not that an entity will be required to sell the security before recovery, or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity does not intend to sell a security and it is not more likely than not that the entity will be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated into the credit loss component, which is recorded in earnings, and the remainder is recorded in other comprehensive income. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. ASC 820-10-65-4, Fair Value Measurements and Disclosures (“ASC 820-10-65-4”) (FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), provides additional guidance on determining when the volume and level of activity for an asset or liability has significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 825-10-65-1, Financial Instruments (“ASC 825-10-65-1”) (FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments), amends ASC 825-10-50 (SFAS No. 107, Disclosures about Fair Value of Financial Instruments), to expand the required qualitative and quantitative disclosures about fair value of financial instruments to interim reporting periods for publicly traded entities. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting (ASC 270-10, Interim Reporting), to require those disclosures in summarized financial information at interim reporting periods. The adoption of all three new provisions as of April 1, 2009, did not materially impact the Company’s condensed consolidated financial statements. Business Combinations In December 2007, the FASB issued new guidance within ASC 805, Business Combinations (“ASC 805”) (SFAS No. 141 (revised), Business Combinations), and in April 2009, the FASB issued additional guidance within ASC 805 (FSP 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies). ASC 805 retains the fundamental requirements that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The new provisions within ASC 805 further define the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as business combinations. Additionally, the new requirements within ASC 805 change the fair value measurement provisions for assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer generally be expensed as incurred. Liabilities for unrecognized tax benefits related to tax positions assumed in business combinations that settled prior to the adoption of the new requirements within ASC 805 affected goodwill. If such liabilities reverse subsequent to the adoption of the new requirements within ASC 805, such reversals will affect the income tax provision in the period of reversal. The new requirements within ASC 805 apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the new requirements within ASC 805 on January 1, 2009. The adoption of the new requirements within ASC 805 impacted the Company’s condensed consolidated financial statements in the nine months ended September 30, 2009 as certain acquisition related costs in connection with the BGI Transaction have been expensed as incurred. See Note 17, Pending Transaction. Useful Life of Intangible Assets In April 2008, the FASB issued additional guidance within ASC 350-30, General Intangibles Other than Goodwill (“ASC 350-30”) (FSP FAS 142-3, Determination of the Useful Life of Intangible Assets). The required provisions within ASC 350-30 amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the prior guidance within ASC 350 Intangibles—Goodwill and Other (SFAS No. 142, Goodwill and Other Intangible Assets). ASC 350-30 requires that an entity shall consider its own experience in renewing similar arrangements. ASC 350-30 is intended to improve the consistency between the useful life of an intangible asset determined under prior requirements within ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other GAAP. The new requirements of ASC 350-30 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption on January 1, 2009 of the new requirements within ASC 350-30 did not materially impact the Company’s condensed consolidated financial statements. Disclosures about Derivative Instruments In March 2008, the FASB issued new guidance within ASC 815-10, Derivatives and Hedging (“ASC 815-10”)(SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133). ASC 815-10 expands the disclosure requirements for derivative instruments and hedging activities. ASC 815-10 specifically requires enhanced disclosures addressing: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under ASC 815 (SFAS No. 133) and its related interpretations and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. ASC 815-10 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption on January 1, 2009 of the additional disclosure requirements of ASC 815-10 did not materially impact the Company’s condensed consolidated financial statements. Meaning of Indexed to a Company’s Own Stock In June 2008, the FASB issued new guidance within ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”) (EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. The new requirements of ASC 815-40 provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. To meet the definition of “indexed to its own stock,” an instrument’s contingent exercise provisions must not be based on an observable market other than the market for the issuer’s stock, and its settlement amount must be based only on those variables that are inputs to the fair value of a “fixed-for-fixed” forward or option on an entity’s equity shares. The required provisions of ASC 815-40 were adopted on January 1, 2009 and did not change the classification or measurement of the Company’s financial instruments. Subsequent Events In May 2009, the FASB issued ASC 855-10, Subsequent Events (“ASC 855-10”) (SFAS No. 165, Subsequent Events), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 is effective for interim or fiscal periods ending after June 15, 2009. The Company adopted ASC 855-10 on June 30, 2009. The adoption of ASC 855-10 did not materially impact the Company’s condensed consolidated financial statements. See Note 18, Subsequent Events, for further discussion. The FASB Accounting Standards Codification In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-1, Amendments Based on SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“ASU 2009-1”). ASU 2009-1 established the FASB ASC as the single source of authoritative GAAP to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature not included in the ASC will become nonauthoritative. ASU 2009-1 is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company adopted ASU 2009-1 on September 30, 2009. As ASU 2009-1 does not change GAAP, its adoption did not impact amounts recorded or disclosures required as part of the Company’s condensed consolidated financial statements. Recent Accounting Developments New Consolidation Guidance for Variable Interest Entities: In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance for variable interest entities under FIN 46(R). The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a variable interest entity (“VIE”), which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company does not expect the adoption of SFAS No. 167 to impact net income attributable to BlackRock, Inc. or its stockholders’ equity, however, it is currently evaluating the impact to its condensed consolidated financial statements as a result of consolidating the assets and liabilities and net income (loss) of certain VIEs in addition to a corresponding non-controlling interest liability and allocation of net income (loss) to non-controlling interests. Measuring Fair Value of Certain Alternative Investments In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2009-12”). ASU 2009-12 amends ASC 820-10 to provide guidance on measuring the fair value of certain alternative investments. The amendments in this ASU permit, as a practical expedient, a reporting entity to use the investment’s net asset value per share (“NAV”) to measure the fair value of the investment provided that the NAV is calculated as of the reporting entity’s measurement date. ASU 2009-12 also requires enhanced disclosures by major investment category about the attributes of the investments within the scope, such as the nature of the restrictions, the amount of the unfunded commitments and the description of the investment strategies of the investees. ASU 2009-12 is effective for the interim and annual reporting periods ending after December 15, 2009. In the period of adoption, an entity must disclose any change in valuation technique and related inputs and quantify the total effect, if practicable. The Company will adopt this ASU in fourth quarter 2009 and is currently evaluating the impact of the adoption on its consolidated financial statements. |
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| 18 | BOSTON PROPERTIES INC | 2. Basis of Presentation and Summary of Significant Accounting Policies Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in the Operating Partnership, nor does it have employees of its own. The Operating Partnership, not Boston Properties, Inc., executes all significant business relationships. All majority-owned subsidiaries and affiliates over which the Company has financial and operating control and variable interest entities (“VIE”s) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Company’s share of the earnings of these joint ventures and companies is included in consolidated net income. The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosure required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report in the Company’s Form 10-K for its fiscal year ended December 31, 2008. Revenue Recognition Contractual rental revenue is reported on a straight-line basis over the terms of the Company’s respective leases. Accrued rental income as reported on the Consolidated Balance Sheets represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements. During 2008, the Company had established an allowance for the full amount of the Lehman Brothers, Inc. accrued straight-line rent balance. The accrued rental income balance at September 30, 2009 as compared to December 31, 2008 reflects a reduction of the allowance totaling approximately $13.3 million due to the termination of the Company’s lease with Lehman Brothers, Inc. On April 30, 2009, Lehman Brothers, Inc., the Company’s tenth largest tenant (by square feet) with approximately 437,000 net rentable square feet in its 399 Park Avenue property, rejected its lease in bankruptcy and the Company wrote-off the accrued rental income balance and corresponding allowance. Reclassifications and Adoption of New Accounting Pronouncements Certain prior year amounts have been reclassified to conform to the current year presentation. In addition, certain prior year amounts have been revised as a result of the adoption on January 1, 2009 of (1) Accounting Standards Codification (“ASC”) 470-20 “Debt with Conversion and Other Options” (“ASC 470-20”) (formerly known as FASB Staff Position (“FSP”) No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”)) (See Note 6), (2) the guidance included in ASC 810 “Consolidation” (“ASC 810”) (formerly known as SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”)) and ASC 480-10-S99 “Distinguishing Liabilities from Equity” (“ASC 480-10-S99”) (formerly known as EITF Topic No. D-98 “Classification and Measurement of Redeemable Securities” (Amended)) (See Note 8) and (3) the guidance included in ASC 260-10 “Earnings Per Share” (“ASC 260-10”) (formerly known as FSP EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-06-1”)) (See Note 10). In April 2009, the FASB issued ASC 825-10-65 “Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10-65”) (formerly known as FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. FAS 107-1”)). ASC 825-10-65 requires disclosures about fair-value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements. ASC 825-10-65 requires those disclosures in summarized financial information at interim reporting periods. ASC 825-10-65 was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. For purposes of financial reporting disclosures, the Company calculates the fair value of mortgage notes payable, unsecured senior notes and unsecured exchangeable senior notes. The Company discounts the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, the Company adds its estimation of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to its debt. Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair value of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate. The following table presents the aggregate carrying value of the Company’s indebtedness and the Company’s corresponding estimate of fair value as of September 30, 2009 (in thousands):
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| 19 | BOSTON PROPERTIES LTD PARTNERSHIP | 2. Basis of Presentation and Summary of Significant Accounting Policies Boston Properties, Inc. does not have any other significant assets, liabilities or operations, other than its investment in the Company, nor does it have employees of its own. The Company, not Boston Properties, Inc., executes all significant business relationships. All majority-owned subsidiaries and affiliates over which the Company has financial and operating control and variable interest entities (“VIE”s) in which the Company has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Company’s share of the earnings of these joint ventures and companies is included in consolidated net income. The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of the financial statements for these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosure required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report in the Company’s Form 10-K for its fiscal year ended December 31, 2008. Revenue Recognition Contractual rental revenue is reported on a straight-line basis over the terms of the Company’s respective leases. Accrued rental income as reported on the Consolidated Balance Sheets represents rental income recognized in excess of rent payments actually received pursuant to the terms of the individual lease agreements. During 2008, the Company had established an allowance for the full amount of the Lehman Brothers, Inc. accrued straight-line rent balance. The accrued rental income balance at September 30, 2009 as compared to December 31, 2008 reflects a reduction of the allowance totaling approximately $13.3 million due to the termination of the Company’s lease with Lehman Brothers, Inc. On April 30, 2009, Lehman Brothers, Inc., the Company’s tenth largest tenant (by square feet) with approximately 437,000 net rentable square feet in its 399 Park Avenue property, rejected its lease in bankruptcy and the Company wrote-off the accrued rental income balance and corresponding allowance. Reclassifications and Adoption of New Accounting Pronouncements Certain prior year amounts have been reclassified to conform to the current year presentation. In addition, certain prior year amounts have been revised as a result of the adoption on January 1, 2009 of (1) Accounting Standards Codification (“ASC”) 470-20 “Debt with Conversion and Other Options” (“ASC 470-20”) (formerly known as FASB Staff Position (“FSP”) No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”)) (See Note 6), (2) the guidance included in ASC 810 “Consolidation” (“ASC 810”) (formerly known as SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”)) and ASC 480-10-S99 “Distinguishing Liabilities from Equity” (“ASC 480-10-S99”) (formerly known as EITF Topic No. D-98 “Classification and Measurement of Redeemable Securities” (Amended)) (See Note 8) and (3) the guidance included in ASC 260-10 “Earnings Per Share” (“ASC 260-10”) (formerly known as FSP EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-06-1”)) (See Note 10). In April 2009, the FASB issued ASC 825-10-65 “Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10-65”) (formerly known as FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. FAS 107-1”)). ASC 825-10-65 requires disclosures about fair-value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements. ASC 825-10-65 requires those disclosures in summarized financial information at interim reporting periods. ASC 825-10-65 was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. For purposes of financial reporting disclosures, the Company calculates the fair value of mortgage notes payable, unsecured senior notes and unsecured exchangeable senior notes. The Company discounts the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt and unsecured notes based on a current market rate. In determining the current market rate, the Company adds its estimation of a market spread to the quoted yields on federal government treasury securities with similar maturity dates to its debt. Because the Company’s valuations of its financial instruments are based on these types of estimates, the actual fair value of its financial instruments may differ materially if the Company’s estimates do not prove to be accurate. The following table presents the aggregate carrying value of the Company’s indebtedness and the Company’s corresponding estimate of fair value as of September 30, 2009 (in thousands):
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| 20 | BROADCOM CORP |
1. Summary of Significant Accounting Policies
Our Company
Broadcom Corporation (including our subsidiaries, referred to collectively in these unaudited
condensed consolidated financial statements as “Broadcom”, “we”, “our” and “us”) is a major
technology innovator and global leader in semiconductors for wired and wireless communications. Our
products enable the delivery of voice, video, data and multimedia to and throughout the home, the
office and the mobile environment. Broadcom provides one of the industry’s broadest portfolios of
state-of-the-art system-on-a-chip and software solutions to manufacturers of computing and
networking equipment, digital entertainment and broadband access products, and mobile devices. Our
diverse product portfolio includes solutions for digital cable, satellite and Internet Protocol
(IP) set-top boxes and media servers; high definition television (HDTV); high definition DVD
players and personal video recording (PVR) devices; cable and DSL modems and residential gateways;
high-speed transmission and switching for local, metropolitan, wide area and storage networking;
server solutions; broadband network and security processors; wireless and personal area networking;
cellular communications; global positioning system (GPS) applications; mobile multimedia and
applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway
and telephony systems.
Basis of Presentation
The interim unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Securities and Exchange Commission, or SEC, Form
10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. Therefore,
these financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the year ended December 31, 2008, included in our Annual Report on
Form 10-K filed with the SEC February 4, 2009.
The interim condensed consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in the opinion of
management, are necessary to present fairly our consolidated financial position at September 30,
2009 and December 31, 2008, and our consolidated results of operations and cash flows for the three
and nine months ended September 30, 2009 and 2008. The results of operations for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results to be expected for
future quarters or the full year.
In June 2009 the Financial Accounting Standards Board, or FASB, established the Accounting
Standards Codification, or Codification, as the source of authoritative GAAP recognized by the
FASB. The Codification is effective in the first interim and annual periods ending after September
15, 2009 and had no effect on our unaudited condensed consolidated financial statements.
Certain prior period amounts in the unaudited condensed consolidated statements of income have
been reclassified to conform with the current period presentation of product and licensing revenue.
We have evaluated subsequent events through October 22, 2009, the date of issuance of the
unaudited condensed consolidated financial statements. During this period we did not have any
material subsequent events.
Foreign Currency Translation
The functional currency for most of our international operations is the U.S. dollar. The
functional currency for a small number of our foreign subsidiaries is the local currency. Assets
and liabilities denominated in foreign currencies are translated using the exchange rates on the
balance sheet dates. Revenues and expenses are translated
using the average exchange rates prevailing during the year. Any translation adjustments
resulting from this process are shown separately as a component of accumulated other comprehensive
income (loss) within shareholders’ equity in the unaudited condensed consolidated balance sheets.
Foreign currency transaction gains and losses are reported in other income (expense), net in the
unaudited condensed consolidated statements of income.
Use of Estimates
The preparation of financial statements in accordance with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the dates of the financial statements and the
reported amounts of total net revenue and expenses in the reporting periods. We regularly evaluate
estimates and assumptions related to revenue recognition, rebates, allowances for doubtful
accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based
compensation expense, goodwill and purchased intangible asset valuations, strategic investments,
deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies,
self-insurance, restructuring costs (reversals), litigation and other loss contingencies. These
estimates and assumptions are based on current facts, historical experience and various other
factors that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities and the recording of
revenue, costs and expenses that are not readily apparent from other sources. The actual results we
experience may differ materially and adversely from our estimates. To the extent there are material
differences between the estimates and actual results, our future results of operations will be
affected.
Revenue Recognition
Our product revenue consists principally of sales of semiconductor devices and, to a lesser
extent, software licenses and royalties, development, support and maintenance agreements, data
services and cancellation fees. Our licensing revenue is generated from the licensing of
intellectual property. The majority of our product sales occur through the efforts of our direct
sales force. The remaining balance of product sales occurs through distributors.
The following table presents details of our total net revenue:
The following table presents details of our product revenue:
We recognize product revenue when all of the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is
fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured. These
criteria are usually met at the time of product shipment. However, we do not recognize revenue when
any significant obligations remain. We record reductions of revenue for estimated product returns
and pricing adjustments, such as competitive pricing programs and rebates, in the same period that
the related revenue is recorded. The amount of these reductions is based on historical sales
returns, analysis of credit memo data, specific criteria included in rebate agreements, and
other factors known at the
time. We accrue 100% of potential rebates at the time of sale and do not
apply a breakage factor. We reverse the accrual for unclaimed rebate amounts as specific rebate
programs contractually end or when we believe unclaimed rebates are no longer subject to payment
and will not be paid. See Note 2 for a summary of our rebate activity.
A portion of our product sales is made through distributors under agreements allowing for
pricing credits and/or rights of return. These pricing credits and/or right of return provisions
prevent us from being able to reasonably estimate the final price of the inventory to be sold and
the amount of inventory that could be returned pursuant to these agreements. As a result, the
criterion listed in (iii) in the paragraph above has not been met at the time we deliver products
to our distributors. Accordingly, product revenue from sales made through these distributors is not
recognized until the distributors ship the product to their customers. We also maintain inventory,
or hubbing, arrangements with certain of our customers. Pursuant to these arrangements we deliver
products to a customer or a designated third party warehouse based upon the customers’ projected
needs, but do not recognize product revenue unless and until the customer reports that it has
removed our product from the warehouse to be incorporated into its end products.
In arrangements that include a combination of semiconductor products and software, where
software is considered more-than-incidental and essential to the functionality of the product being
sold, we account for the entire arrangement as a sale of software and software-related items and
allocate the arrangement consideration based on vendor-specific objective evidence, or VSOE.
In arrangements that include a combination of semiconductor products, software and/or
services, where software is not considered more-than-incidental to the product being sold, we
allocate the arrangement consideration based on each element’s relative fair value.
In the arrangements described above, both the semiconductor products and software are
delivered concurrently and post-contract customer support is not provided. Therefore, we recognize
revenue upon shipment of the semiconductor product, assuming all other basic revenue recognition
criteria are met, as both the semiconductor products and software are considered delivered elements
and no undelivered elements exist. In limited instances where there are undelivered elements, we
allocate revenue based on the relative fair value of the individual elements. If there is no
established fair value for an undelivered element, the entire arrangement is accounted for as a
single unit of accounting, resulting in a deferral of revenue and costs for the delivered element
until the undelivered element has been fulfilled. In cases where the undelivered element is a data
or support service, the revenue and costs applicable to both the delivered and undelivered elements
are recorded ratably over the respective service period or estimated product life. If the
undelivered element is essential to the functionality of the delivered element, no revenue or costs
are recognized until the undelivered element is delivered.
Revenue from software licenses is recognized when all revenue recognition criteria are met
and, if applicable, when VSOE exists to allocate the total license fee to each element of
multiple-element software arrangements, including post-contract customer support. Post-contract
support is recognized ratably over the term of the related contract. When a contract contains
multiple elements wherein the only undelivered element is post-contract customer support and VSOE
of the fair value of post-contract customer support does not exist, revenue from the entire
arrangement is recognized ratably over the support period. Software royalty revenue is recognized
based upon reports received from licensees during the period, unless collectibility is not
reasonably assured, in which case revenue is recognized when payment is received from the licensee.
Revenue from cancellation fees is recognized when cash is received from the customer.
Revenue from the licensing of intellectual property is recognized based upon either the
performance period of the license or upon receipt of licensee reports as applicable in our various
intellectual property arrangements. See Note 2 for additional details of the licensing of
intellectual property.
We record deferred revenue when advance payments are received from customers before
performance obligations have been completed and/or services have been performed. Deferred revenue
does not include amounts from products delivered to distributors that the distributors have not yet
sold through to their end customers.
Cost of Product Revenue
Cost of product revenue comprises the cost of our semiconductor devices, which consists of the
cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated
with our purchase of assembly, test and quality assurance services and packaging materials for
semiconductor products, as well as royalties paid to vendors for use of their technology. Also
included in cost of product revenue is the amortization of purchased technology, and manufacturing
overhead, including costs of personnel and equipment associated with manufacturing support, product
warranty costs, provisions for excess and obsolete inventories, and stock-based compensation
expense for personnel engaged in manufacturing support.
Concentration of Credit Risk
We sell the majority of our products throughout North America, Asia and Europe. Sales to our
recurring customers are generally made on open account while sales to occasional customers are
typically made on a prepaid or letter of credit basis. We perform periodic credit evaluations of
our recurring customers and generally do not require collateral. An allowance for doubtful accounts
is maintained for potential credit losses, which losses historically have not been significant.
We invest our cash in U.S. Treasury instruments and in deposits and money market funds with
major financial institutions. It is our policy to invest in instruments that have a final maturity
of no longer than three years, with a portfolio weighted average maturity of no longer than 18
months.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, short- and
long-term marketable securities, accounts receivable and accounts payable. Marketable securities
consist of available-for-sale securities that are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income (loss), a component
of shareholders’ equity, net of tax. The fair value of our cash equivalents and marketable
securities is determined based on “Level 1” inputs, which consist of quoted prices in active
markets for identical assets. We believe that the recorded values of all of our other financial
instruments approximate their current fair values because of their nature and respective relatively
short maturity dates or durations.
Cash and Cash Equivalents
We consider all highly liquid investments that are readily convertible into cash and have an
original maturity of three months or less at the time of purchase to be cash equivalents.
Marketable Securities
Broadcom defines marketable securities as income yielding securities that can be readily
converted into cash. Examples of marketable securities include U.S. Treasury and agency
obligations, commercial paper, corporate notes and bonds, time deposits, foreign notes and
certificates of deposit.
We account for our investments in debt and equity instruments as available-for-sale.
Management determines the appropriate classification of such securities at the time of purchase and
re-evaluates such classification as of each balance sheet date. Cash equivalents and marketable
securities are reported at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax. We
assess whether our investments with unrealized loss positions are other than temporarily impaired.
Unrealized gains and losses and declines in value judged to be other than temporary are determined
based on the specific identification method and are reported in other income (expense), net in the
unaudited condensed consolidated statements of income.
Inventory
Inventory consists of work in process and finished goods and is stated at the lower of cost
(first-in, first-out) or market. We establish inventory reserves for estimated obsolete or
unmarketable inventory equal to the difference between the cost of inventory and the estimated net
realizable value based upon assumptions about future demand and market conditions. Shipping and
handling costs are classified as a component of cost of product revenue in the unaudited condensed
consolidated statements of income. Inventory acquired through business combinations is recorded at
its acquisition date fair value which is the net realizable value less a normal profit margin
depending on the stage of inventory completion.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are calculated using
the straight-line method over the assets’ estimated remaining useful lives, ranging from one to ten
years. Depreciation and amortization of leasehold improvements are computed using the shorter of
the remaining useful lives or lease terms.
Goodwill and Long-Lived Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the net tangible and intangible assets acquired. We test
goodwill for impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis in the fourth quarter or more frequently if we believe
indicators of impairment exist. The performance of the test involves a two-step process. The first
step of the impairment test involves comparing the fair values of the applicable reporting units
with their aggregate carrying values, including goodwill. We generally determine the fair value of
our reporting units using the income approach methodology of valuation that includes the discounted
cash flow method as well as other generally accepted valuation methodologies. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of
the goodwill impairment test to determine the amount of impairment loss. The second step of the
goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s
goodwill with the carrying value of that goodwill.
We account for the impairment of long-lived assets, including other purchased intangible
assets, when indicators of impairment, such as reductions in demand or significant economic
slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether
the carrying value of an asset is impaired, based on comparisons to undiscounted expected future
cash flows. If this comparison indicates that there is impairment, the impaired asset is written
down to fair value, which is typically calculated using: (i) quoted market prices or (ii)
discounted expected future cash flows utilizing an appropriate discount rate. Impairment is based
on the excess of the carrying amount over the fair value of those assets.
Warranty
Our products typically carry a one to three year warranty. We establish reserves for estimated
product warranty costs at the time revenue is recognized based upon our historical warranty
experience, and additionally for any known product warranty issues. If actual costs differ from our
initial estimates, we record the difference in the period it is identified. Actual claims are
charged against the warranty reserve. See Note 2 for a summary of our warranty activity.
Guarantees and Indemnifications
In some agreements to which we are a party, we have agreed to indemnify the other party for
certain matters such as product liability. We include intellectual property indemnification
provisions in our standard terms and conditions of sale for our products and have also included
such provisions in certain agreements with third parties. We have and will continue to evaluate and
provide reasonable assistance for these other parties. This may include certain levels of financial
support to minimize the impact of the litigation in which they are involved. To date, there have
been no known events or circumstances that have resulted in any material costs related to these
indemnification provisions and no liabilities have been recorded in the accompanying unaudited
condensed consolidated financial
statements. However, the maximum potential amount of the future payments we could be required
to make under these indemnification obligations could be significant.
We also have obligations to indemnify certain of our present and former directors, officers
and employees to the maximum extent not prohibited by law. Under these obligations, Broadcom is
required to indemnify (subject to certain exceptions) each such director, officer and employee
against expenses, including attorneys’ fees, judgments, fines and settlements, paid by such
individual in connection with our currently outstanding securities litigation and related
government investigations described in Note 9. The potential amount of the future payments we could
be required to make under these indemnification obligations could be significant. We maintain
directors’ and officers’ insurance policies that may limit our exposure and enable us to recover a
portion of the amounts paid with respect to such obligations. However, certain of our insurance
carriers have reserved their rights under their respective policies, and in the third quarter of
2008 one of our insurance carriers notified us that coverage was not available and that it intended
to suspend payment to us. As a result, we ceased receiving reimbursements under these policies for
our expenses related to the matters described above. However, in January 2009 we entered into an
agreement with that insurance carrier and certain of our other insurance carriers pursuant to
which, without prejudicing our rights or the rights of such insurers, we have received payments
from these insurers under these insurance policies. In August 2009 we entered into a proposed
settlement with our directors and officers insurance carriers as part of a partial settlement of
the federal derivative action. We recognize reimbursements from our directors’ and officers’
insurance carriers on a cash basis, pursuant to which we record a reduction of selling, general and
administrative expense only when cash is received from our insurance
carriers. In the nine months ended
September 30, 2009, we recovered legal expenses of $16.6 million under these insurance policies.
From inception of the securities litigation and related government investigations through September
30, 2009, we have recovered legal expenses of $43.3 million under these insurance policies. These
amounts have been recorded as a reduction of selling, general and administrative expense.
In certain limited circumstances, all or portions of the amounts recovered from our insurance
carriers may be required to be repaid. We regularly evaluate the need to record a liability for
potential future repayments. As of September 30, 2009 we have not recorded a liability in
connection with these potential insurance repayment provisions. In connection with our currently
outstanding securities litigation and related government investigations described in Note 9, as of
September 30, 2009, we had advanced $79.0 million to certain former officers for attorney and
expert fees for which we did not receive reimbursement from our insurance carriers, which amount
has been expensed. If our coverage under these policies is reduced or eliminated, or if the
proposed partial settlement does not receive final court approval, our potential financial exposure
in the pending securities litigation and related government investigations would be increased.
See Note 9 for a summary of our currently outstanding securities litigation and related
government investigations, an update regarding future reimbursements related to our insurance
polices, as well as a further discussion of our litigation matters.
Income Taxes
We utilize the asset and liability method of accounting for income taxes, under which deferred
taxes are determined based on the temporary differences between the financial statement and tax
basis of assets and liabilities using tax rates expected to be in effect during the years in which
the basis differences reverse. A valuation allowance is recorded when it is more likely than not
that some of the deferred tax assets will not be realized.
Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
Income tax positions that previously failed to meet the more-likely-than-not threshold are
recognized in the first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not threshold are
derecognized in the first subsequent financial reporting period in which that threshold is no
longer met. We recognize potential accrued interest and penalties related to unrecognized tax
benefits within the unaudited condensed consolidated statements of income as income tax expense.
Stock-Based Compensation
Broadcom has in effect stock incentive plans under which incentive stock options have been
granted to employees and restricted stock units and non-qualified stock options have been granted
to employees and non-employee members of the Board of Directors. We also have an employee stock
purchase plan for all eligible
employees. We are required to estimate the fair value of share-based awards on the date of
grant. The value of the award is principally recognized as expense ratably over the requisite
service periods. The fair value of our restricted stock units is based on the closing market price
of our Class A common stock on the date of grant. We have estimated the fair value of stock options
and stock purchase rights as of the date of grant or assumption using the Black-Scholes option
pricing model, which was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model considers, among
other factors, the expected life of the award and the expected volatility of our stock price. We
evaluate the assumptions used to value stock options and stock purchase rights on a quarterly
basis. The fair values generated by the Black-Scholes model may not be indicative of the actual
fair values of our equity awards, as it does not consider other factors important to those awards
to employees, such as continued employment, periodic vesting requirements and limited
transferability.
Litigation and Settlement Costs
Legal costs are expensed as incurred. We are involved in disputes, litigation and other legal
actions. We record a charge equal to at least the minimum estimated liability for a loss
contingency when both of the following conditions are met: (i) information available prior to
issuance of the financial statements indicates that it is probable that an asset had been impaired
or a liability had been incurred at the date of the financial statements and (ii) the loss or range
of loss can be reasonably estimated.
Net Income (Loss) Per Share
Net income (loss) per share (basic) is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the year. Net income per share
(diluted) is calculated by adjusting outstanding shares, assuming any dilutive effects of options
and restricted stock units calculated using the treasury stock method. Under the treasury stock
method, an increase in the fair market value of our Class A common stock results in a greater
dilutive effect from outstanding options, stock purchase rights and restricted stock units.
Additionally, the exercise of employee stock options and stock purchase rights and the vesting of
restricted stock units results in a further dilutive effect on net income per share.
Business Enterprise Segments
Our Chief Executive Officer, who is considered to be our chief operating decision maker,
reviews financial information presented on an operating segment basis for purposes of making
operating decisions and assessing financial performance. Although we have four operating segments,
under current aggregation criteria, which includes similar economic characteristics, nature of products,
production processes, type or class of products and distribution methods, we operate in only one
reportable operating segment, wired and wireless broadband communications.
Self-Insurance
We are self-insured for certain healthcare benefits provided to our U.S. employees. The
liability for the self-insured benefits is limited by the purchase of stop-loss insurance. The
stop-loss coverage provides payment for aggregate claims exceeding $0.3 million per covered person
for any given year.
Accruals for losses are made based on our claim experience and actuarial estimates based on
historical data. Actual losses may differ from accrued amounts. Should actual losses exceed the
amounts expected and if the recorded liabilities are insufficient, an additional expense will be
recorded.
Recent Accounting Pronouncements
In December 2007 the FASB issued Accounting Standard, or AS, Topic 805, Business Combinations,
or AS 805, which established principles and requirements for the acquirer of a business to
recognize and measure in its financial statements the identifiable assets (including in-process
research and development and defensive assets) acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. AS 805 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Prior to the adoption of AS 805, in-process
research and development costs were immediately expensed and acquisition costs were
capitalized. Under AS 805 all acquisition costs are expensed as incurred. The standard also
provides guidance for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of financial statements to evaluate the
nature and financial effects of the business combination. In April 2009 the FASB updated AS 805 to
amend the provisions for the initial recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising from contingencies in business
combinations. This update also eliminates the distinction between contractual and non-contractual
contingencies. We expect AS 805 will have an impact on our consolidated financial statements, but
the nature and magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after the January 1, 2009 effective date.
In September 2009 the FASB reached a consensus on Accounting Standards Update, or ASU,
2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements, or ASU
2009-13 and ASU 2009-14, Software (Topic 985) – Certain Revenue Arrangements That Include Software
Elements, or ASU 2009-14. ASU 2009-13 modifies the requirements that must be met for an entity to
recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement
when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all
undelivered elements must have either: i) VSOE or ii) third-party evidence, or TPE, before an
entity can recognize the portion of an overall arrangement consideration that is attributable to
items that already have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element arrangement, entities
will be required to estimate the selling prices of those elements. Overall arrangement
consideration will be allocated to each element (both delivered and undelivered items) based on
their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or
TPE or are based on the entity’s estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue
recognition guidance to exclude from its scope tangible products that contain both software and
non-software components that function together to deliver a product’s essential functionality.
These new updates are effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently
evaluating the impact that the adoption of these ASUs will have on our consolidated financial
statements.
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| 21 | CAPITAL ONE FINANCIAL CORP | Note 1 Significant Accounting Policies Business Capital One Financial Corporation (the “Corporation”) is a diversified financial services company whose banking and non-banking subsidiaries market a variety of financial products and services. The Corporation’s principal subsidiaries are:
On February 27, 2009, the Corporation acquired Chevy Chase Bank, F.S.B. (“Chevy Chase Bank”) for $475.9 million comprised of cash of $445.0 million and 2.56 million shares of common stock valued at $30.9 million. Chevy Chase Bank has the largest retail branch presence in the Washington D.C. region. See Note 2 for more information regarding the acquisition. On July 30, 2009 the Company merged Chevy Chase Bank with and into CONA. During the third quarter of 2009, the Company realigned its business segment reporting structure to better reflect the manner in which the performance of the Company’s operations are evaluated. The Company now reports the results of its business through three operating segments: Credit Card, Commercial Banking and Consumer Banking. Segment and sub-segment results where presented have been recast for all periods presented. The three segments consist of the following:
The segment reorganization includes the allocation of Chevy Chase Bank to the appropriate segments. Chevy Chase Bank’s operations are included in the Commercial Banking and Consumer Banking segments beginning in the second quarter 2009. Chevy Chase Bank’s operations for the first quarter of 2009 remain in the Other category due to the short duration since acquisition. The Other category includes GreenPoint originated consumer mortgages originated for sale but held for investment since originations were suspended in 2007, the results of corporate treasury activities, including asset-liability management and the investment portfolio, the net impact of transfer pricing, brokered deposits, certain unallocated expenses, gains/losses related to the securitization of assets, and restructuring charges related to the Company’s cost initiative and to the Chevy Chase Bank acquisition. During 2008, the Corporation completed several reorganizations and consolidations to streamline operations and regulatory relationships. On January 1, Capital One Auto Finance Inc. (“COAF”) moved from a direct subsidiary of the Corporation to become a direct operating subsidiary of CONA. In connection with the COAF move, one of COAF’s direct operating subsidiaries, Onyx Acceptance Corporation (“Onyx”), became a direct subsidiary of the Corporation. On March 1, the Corporation converted Capital One Bank from a Virginia-state chartered bank to a national association called Capital One Bank (USA), National Association (“COBNA”). On March 8, Superior Savings of New England, N.A. (“Superior”) merged with and into CONA. Both COBNA and CONA are primarily regulated by the Office of the Comptroller of the Currency (the “OCC”). In May 2008, we consolidated the business and operations of two registered broker-dealers, Capital One Securities, LLC (dba Capital One Investments, LLC) and Capital One Investment Services Corporation (formerly NFB Investment Services Corporation), into Capital One Investments Services Corporation. In addition, in May 2008, we consolidated the business and operations of three insurance agencies, Capital One Agency Corp., GreenPoint Agency, Inc. and Hibernia Insurance Agency, LLC into Green Point Agency, Inc., which is now known as Capital One Agency LLC. The Corporation and its subsidiaries are hereafter collectively referred to as the “Company”.
CONA and COBNA are hereafter collectively referred to as the “Banks”. Basis of Presentation The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) that require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The Consolidated Financial Statements include the accounts of the Company in which it has a controlling financial interest. Investments in unconsolidated entities where we have the ability to exercise significant influence over the operations of the investee are accounted for using the equity method of accounting. This includes interests in variable interest entities (“VIEs”) where we are not the primary beneficiary. Investments not meeting the criteria for equity method accounting are accounted for using the cost method of accounting. Investments in unconsolidated entities are included in other assets, and our share of income or loss is recorded in other non-interest income. All significant intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2009 presentation. All amounts in the following notes, excluding per share data, are presented in thousands unless noted otherwise. During the second quarter of 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“ASC 105-10-65/SFAS 168”). This standard establishes the Accounting Standards Codification for the FASB (“Codification” or “ASC”) as the single source of authoritative U.S. GAAP. The Codification does not change GAAP, but rather how the guidance is organized and presented to users. Effective July 1, 2009, changes to the source of authoritative U.S. GAAP are communicated through an Accounting Standards Update (“ASU”). ASUs will be published for all authoritative U.S. GAAP promulgated by the FASB, regardless of the form in which such guidance may have been issued prior to release of the FASB Codification (e.g., FASB Statements, EITF Abstracts, FASB Staff Positions, etc.). ASUs also will be issued for amendments to the SEC content in the FASB Codification as well as for editorial changes. Subsequently, the Codification will require companies to change how they reference GAAP throughout the financial statements. The Company has adopted the Codification for the third quarter of 2009 and has provided the pre-Codification references along with the related ASC references to allow readers an opportunity to see the impact of the Codification on our financial statements and disclosures. Special Purpose Entities and Variable Interest Entities Special purpose entities (“SPEs”) are broadly defined as legal entities structured for a particular purpose. There are two different accounting frameworks applicable to SPEs: the qualifying SPE (“QSPE”) framework under Statement of Financial Accounting Standard (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“ASC 860-10/SFAS 140”) and the VIE framework under Financial Accounting Standards Board Interpretation No. 46 (Revised 2003), Consolidation of Variable Interest Entities (“VIE”), (“ASC 810-10/FIN 46(R)”). QSPEs are passive entities that are commonly used in mortgage, credit card, auto and installment loan securitization transactions. ASC 860-10/SFAS 140 establishes the criteria an entity must satisfy to be a QSPE which includes restrictions on the types of assets a QSPE may hold, limits on repurchase of assets, the use of derivatives and financial guarantees, and the level of discretion a servicer may exercise to collect receivables. SPEs that meet the criteria for QSPE status are not required to be consolidated. The Company uses the QSPE model to conduct off-balance sheet securitization activities. See Note 14 for more information on the Company’s off-balance sheet securitization activities. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, An Amendment of FASB Statement No. 140 (“SFAS 166”), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 166 removes the concept of a qualifying special-purpose entity (“QSPE”) from SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“ASC 810-10/FIN 46(R)”), to variable interest entities that are qualifying special-purpose entities. SFAS 167 retains the scope of FIN 46(R) with the addition of entities previously considered qualifying special-purpose entities. SFAS 166 and SFAS 167 are effective for the Company’s annual reporting period beginning January 1, 2010. The adoption of SFAS 166 and SFAS 167 could have a significant impact on the Company’s consolidated financial statements because the Company expects it will be required to consolidate at least some of its special purpose entities to which pools of loan receivables have been transferred in transactions previously qualifying as sales. Holding more of these assets on the Company’s balance sheet may require it to take various actions, including raising additional capital, in order to meet regulatory capital requirements. Such capital may not be available on terms favorable to the Company, if at all, and could have a negative impact on the Company’s financial results. As of September 30, 2009, the Company had approximately $44.3 billion of credit card receivables held by QSPEs of which $41.3 billion are backed securities held by external investors; and $4.8 billion in mortgage receivables that are considered at risk for consolidation. Additionally, the Company has mortgage loans, HELOC’s and manufactured housing loans serviced for others that the Company does not believe will be consolidated under the new guidance.
VIEs Special purpose entities that are not QSPEs are considered for consolidation in accordance with ASC 810-10/FIN 46(R), which defines a VIE as an entity that (1) lacks sufficient equity to finance its activities without additional subordinated financial support; (2) has equity owners that lack the ability to make significant decisions about the entity; or (3) has equity owners that do not have the obligation to absorb expected losses or the right to receive expected returns. In general, a VIE may be formed as a corporation, partnership, limited liability corporation, or any other legal structure used to conduct activities or hold assets. A VIE often holds financial assets, including loans or receivables, real estate or other property. The Company consolidates a VIE if the Company is considered to be its primary beneficiary. The primary beneficiary is subject to absorbing the majority of the expected losses from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both. The Company, in the ordinary course of business, has involvement with or retains interests in VIEs in connection with some of its securitization activities, servicing activities and the purchase or sale of mortgage-backed and other asset-backed securities in connection with its investment portfolio. The Company also makes loans to VIEs that hold debt, equity, real estate or other assets. In certain instances, the Company provides guarantees to VIEs or holders of variable interests in VIEs. The adoption of SFAS 167 could have an impact on the Company’s consolidated financial statements because the Corporation expects it will consolidate certain VIE’s as a result of applying the qualitative considerations called for in SFAS 167 versus the quantitative requirements under FIN 46(R). We are currently assessing the impact of SFAS 167 on our VIE structures at this time. See Note 11—Mortgage Servicing Rights; Note 14—Securitizations; Note 15—Commitments, Contingencies and Guarantees; and Note 16—Other Variable Interest Entities for more detail on the Company’s involvement and exposure related to non-consolidated VIEs. Derivative Instruments and Hedging Activities The Company recognizes all of its derivative instruments as either assets or liabilities in the balance sheet at fair value. These instruments are recorded in other assets or other liabilities on the Consolidated Balance Sheets and in the operating section of the Statements of Cash Flows as increases (decreases) of other assets and other liabilities. The Company’s policy is not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under netting arrangements. As of September 30, 2009 the Company had recorded $343.9 million for the right to reclaim cash collateral and $406.9 million for the obligation to return cash collateral under master netting arrangements. Loans Acquired Loans acquired in connection with acquisitions are accounted for under SFAS 141(R), Business Combinations (“ASC 805-10/SFAS 141(R)”) or Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“ASC 310-10/SOP 03-3”) if the loan has experienced a deterioration of credit quality at the time of acquisition. Under both statements, acquired loans are recorded at fair value and the carry-over of the related allowance for loan and lease losses is prohibited. Fair value of the loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. During the evaluation of whether a loan was considered impaired under ASC 310-10/SOP 03-3 or performing under ASC 805-10/SFAS 141(R), the Company considered a number of factors, including the delinquency status of the loan, payment options and other loan features (i.e. reduced documentation or stated income loans, interest only, or negative amortization features), the geographic location of the borrower or collateral, the loan-to-value ratio and the risk rating assigned to the loans. Based on the criteria, the Company considered the entire Chevy Chase Bank option arm portfolio to be impaired and accounted for under ASC 310-10/SOP 03-3. Portions of the Chevy Chase Bank commercial loan portfolio, HELOC portfolio and the fixed mortgage portfolio were also considered impaired. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require the Company to evaluate the need for an additional allowance for loan and lease losses. Subsequent improvement in cash flows will result in the reversal of the nonaccretable difference which will then get reclassified as accretable yield and have a positive impact on interest income. In addition, net charge-offs on such loans are applied to the nonaccretable difference recorded at acquisition for the estimated future credit losses. Loans acquired that were previously classified as nonaccrual are considered performing, regardless of whether the customer is contractually delinquent. The Company expects to fully collect the new carrying value of the loans. As such, the Company no longer considers the loans to be nonaccrual or nonperforming because we will continue to accrue interest on these loans because of the establishment of an accretable yield in accordance with ASC 805-10/SFAS 141(R) and ASC 310-10/SOP 03-3.
Securities Available for Sale The Company considers debt securities in its investment portfolio as available for sale. These securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of cumulative other comprehensive income. The fair values of securities is based on quoted market prices, or if quoted market prices are not available, then the fair value is estimated using the quoted market prices for similar securities, pricing models or discounted cash flow analyses, using observable market data where available. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization or accretion is included in interest income. Realized gains and losses on sales of securities are determined using the specific identification method. The Company evaluates its unrealized loss positions for impairment in accordance with ASC 320-10/SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, as amended by FSP No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment. As such, when there is other-than-temporary impairment, the Company recognizes credit related impairments in earnings while other impairments are recorded in other comprehensive income. See Note 6 for additional details. Income Taxes The Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes (“ASC740-10/SFAS 109”), recognizing the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. The Company recorded income tax expense of $158.2 million and $190.2 million for the three and nine month periods ended September 30, 2009. The related effective income tax rates were 25.2% and 23.7% for the three month and nine month periods ended September 30, 2009, respectively, compared to 35.6% and 34.7% for the same periods in the prior year. The decrease in the tax rates were primarily due to increases in permanent tax preferences, including tax-exempt interest and business tax credits, relative to the lower net income before tax in 2009. On September 21, 2009, the U.S. Tax Court issued a decision with respect to certain tax issues for the years 1995-1999, with both parties prevailing on certain issues. At issue were proposed adjustments by the IRS with respect to the timing of recognition of items of income and expense derived from the Company’s credit card business in various tax years. As a result of the Tax Court decision, the Company reduced the amount of unrecognized tax benefits by approximately $69.3 million. The time period for an appeal by each party of the Tax Court decision is pending and the ultimate outcome may also impact tax years after 1999. It is reasonably possible that a settlement related to these timing issues may be made within twelve months of the reporting date. At this time, an estimate of the potential change to the amount of unrecognized tax benefits resulting from such a settlement cannot be made. Also during the third quarter of 2009, the IRS concluded its examination of the Company’s federal income tax returns for the years 2005 and 2006 and the Company made cash payments to the IRS related to these concluded examinations which resulted in a reduction of approximately $220.6 million to the balance of net unrecognized tax benefits. Primarily as a result of the U.S. Tax Court decision, the Company recorded a $30.3 million discrete tax benefit during the third quarter. Recent Accounting Pronouncements In September 2009, the FASB issued ASU No. 2009-08, Earnings per Share- Amendments to Section 260-10-S99 (SEC Update) (“ASU 2009-08”), which provided corrections to various parts of the Codification regarding EPS. ASU 2009-08 is effective immediately upon being issued. The initial adoption of ASU 2009-08 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references. In September 2009, the FASB issued ASU No. 2009-07, Accounting for Various Topics- Technical Corrections to SEC Paragraphs (SEC Update) (“ASU 2009-07”), which provided corrections to various parts of the Codification including Regulation S-X. ASU 2009-07 is effective immediately upon being issued. The initial adoption of ASU 2009-07 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references. In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820)- Measuring Liabilities at Fair Value (“ASU 2009-05”), which provided additional details on calculating the fair value of liabilities. ASU 2009-05 is effective immediately upon being issued. The initial adoption of ASU 2009-05 did not have an impact on the consolidated earnings or financial position of the Company as the Company already uses the prescribed valuation techniques within ASU 2009-05.
In August 2009, the FASB issued ASU No. 2009-03, SEC Update- Amendments to Various Topics Containing SEC Staff Accounting Bulletins (SEC Update) (“ASU 2009-03”), which provided corrections to various parts of the Codification. ASU 2009-03 is effective immediately upon being issued. The initial adoption of ASU 2009-03 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references. On June 30, 2009, the FASB issued ASU No. 2009-02, Omnibus Update- Amendments to Various Topics for Technical Corrections (“ASU 2009-02”), which provided corrections to various parts of the Codification. ASU 2009-02 is effective immediately upon being issued. The initial adoption of ASU 2009-02 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references. On June 30, 2009, the FASB issued ASU No. 2009-01, Topic 105- Generally Accepted Accounting Principles- amendments based on- Statement of Financial Accounting Standards No. 168- The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles (“ASU 2009-01”), which made the Codification effective for interim and annual periods ending after September 15, 2009, and will supersede all existing non-SEC accounting and reporting standards. All non-grandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Once ASU 2009-01 is effective, the FASB will no longer issue updates in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; rather it will issue ASUs. The initial adoption of the FASB’s Accounting Standards Codification did not have an impact on the consolidated earnings or financial position of the Company because it only amends the referencing to existing accounting standards. On June 12, 2009, the FASB issued SFAS No. 167, Determining Amendments to FASB Interpretation No. 46(R), which provides additional guidance on how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 will be effective for interim and annual reporting periods beginning after November 15, 2009, and early adoption is prohibited. On June 12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”), which will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 will be effective for interim and annual reporting periods beginning after November 15, 2009, and early adoption is prohibited. The adoption of SFAS 166 and SFAS 167 could have a significant impact on the Company’s consolidated financial statements because the Company expects it will be required to consolidate at least some of its special purpose entities to which pools of loan receivables have been transferred in transactions previously qualifying as sales. Holding more of these assets on the Company’s balance sheet may require it to take various actions, including raising additional capital, in order to meet regulatory capital requirements. Such capital may not be available on terms favorable to the Company, if at all, and could have a negative impact on the Company’s financial results. As of September 30, 2009, the Company had approximately $44.3 billion of credit card receivables held by QSPEs of which $41.3 billion are backed securities held by external investors; and $4.8 billion in mortgage receivables that are considered at risk for consolidation. Additionally, the Company has mortgage loans, HELOC’s and manufactured housing loans serviced for others that the Company does not believe will be consolidated. On May 28, 2009, the FASB issued SFAS No. 165, Subsequent Events (“ASC 855-10/SFAS 165”). This Statement establishes general standards of accounting for and disclosing events that occur after the balance sheet date, but prior to the issuance of financial statements. The Statement requires companies to disclose subsequent events as defined within ASC 855-10/SFAS 165 and disclose the date through which subsequent events have been evaluated. The Statement is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 855-10/SFAS 165 occurred during the second quarter of 2009 and did not have a material effect on consolidated earnings or financial position of the Company. See Note 17 for additional details. On April 9, 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-4, Determining Whether a Market Is Not Active and a Transaction is Not Distressed (“ASC 820-10-65-4/FSP 157-4”), which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under SFAS No. 157, Fair Value Measurements (“ASC 820-10/SFAS 157”). The adoption of ASC 820-10-65-4/FSP 157-4 occurred during the second quarter of 2009, and did not have a material effect on the consolidated earnings and financial position of the Company. On April 9, 2009, the FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment (“ASC 320-10-65/FSP 115-2 and FAS 124-2”), which eliminates the Company’s requirement to assert its intent and ability to hold an investment until its forecasted recovery to avoid recognizing an impairment loss. The FSP requires the Company to recognize an other-than-temporary impairment when the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery. Credit related impairments are recorded in income while other impairments are recorded in other comprehensive income. ASC 320-10-65/FSP 115-2 and FAS 124-2are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ASC 320-10-65/FSP 115-2 and FAS 124-2occurred during the second quarter of 2009. See Note 6 for additional detail. On April 9, 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“ASC 825-10-65/FSP 107-1 and APB 28-1”), which will require the Company to include fair value disclosures of financial instruments for each interim and annual period that financial statements are prepared. ASC 825-10-65/FSP 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ASC 825-10-65/FSP 107-1 and APB 28-1 occurred during the second quarter of 2009, and did not have a material effect on the consolidated earnings and financial position of the Company because it only amends the disclosure requirements. See Note 7 for additional details.
In January 2009, the FASB issued FASB Staff Position No. EITF 99-20-1, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets“ (“ASC 325-40-65/FSP EITF 99-20”). The FSP was issued to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,“ (“ASC 320-10/SFAS 115”) and other related guidance. ASC 325-40-65/FSP EITF 99-20 emphasizes that any other-than-temporary impairment resulting from the application of ASC 320-10/SFAS 115 or ASC 325-40-65/FSP EITF 99-20 shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. ASC 325-40-65/FSP EITF 99-20 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of ASC 325-40-65/FSP EITF 99-20 did not have impact on consolidated earnings or financial position of the Company. In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities“ (“ASC 260-10-65/FSP EITF 03-6-1”) The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share“ (“ASC 260-10/SFAS 128”). The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The adoption of ASC 260-10-65/FSP EITF 03-6-1 did not have a material effect on our results of operations or earnings per share. In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“ASC 815-10/FSP FAS 133-1 and FIN 45-4”). ASC 815-10/FSP FAS 133-1 and FIN 45-4 requires enhanced disclosures about credit derivatives and guarantees and amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others“ (“ASC 460-10/FIN 45”) to exclude credit derivative instruments accounted for at fair value under SFAS 133. The FSP is effective for financial statements issued for reporting periods ending after November 15, 2008. The adoption of ASC 815-10/FSP FAS 133-1 and FIN 45-4 did not have a material impact on the consolidated earnings or financial position of the Company. ASC 460-10/FIN 45 only requires additional disclosures concerning guarantees, which did not have an impact on the consolidated earnings or financial position of the Company because it only amends the disclosure requirements. See Note 15 for additional detail. Effective January 1, 2008, the Company adopted ASC 820-10/SFAS 157 for all financial assets and liabilities measured at fair value; and for nonfinancial assets and liabilities measured at fair value on a recurring basis. ASC 820-10/SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The initial adoption of ASC 820-10/SFAS 157 did not have a material impact on the consolidated earnings and financial position of the Company. There are no material assets or liabilities recognized or disclosed at fair value for which the Company has not applied the provisions of SFAS 157. See Note 7 for additional detail. Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“ASC 825-10/SFAS 159”). ASC 825-10/SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value with changes in fair value included in current earnings. The election is made on specified election dates, can be made on an instrument by instrument basis, and is irrevocable. The initial adoption of ASC 825-10/SFAS 159 did not have a material impact on the consolidated earnings and financial position of the Company. See Note 7 for additional detail. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, (“ASC 815-10-65/SFAS 161”). This Statement changes the disclosure requirements for derivative and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815-10-65/SFAS 161 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The adoption of ASC 815-10-65/SFAS 161 did not have an impact on the consolidated earnings or financial position of the Company because it only amends the disclosure requirements for derivatives and hedged items. See Note 13 for derivatives disclosures under ASC 815-10-65/SFAS 161. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51, (“ASC 810-10-65/SFAS 160”). This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement amends ASC810-10/ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of ASC 810-10-65/SFAS 160 did not have a material impact on the consolidated earnings or financial position of the Company. In December 2007, the FASB issued ASC 805-10/SFAS No. 141(R), which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This Statement replaces SFAS 141, Business Combinations. It retains the fundamental requirements in SFAS 141; however, the scope is broader than that of SFAS 141 by applying to all transactions and other events in which one entity obtains control over one or more other businesses. ASC 805-10/SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with limited exceptions, thereby replacing SFAS 141’s cost-allocation process. This Statement also changes the requirements for recognizing acquisition related costs, restructuring costs, and assets acquired and liabilities assumed arising from contingencies. It also changes the accounting for step acquisitions. The Company applied the provisions of ASC 805-10/SFAS No. 141(R) to the Chevy Chase Bank acquisition. |
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| 22 | CARDINAL HEALTH INC | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Spin-Off of CareFusion Corporation Effective August 31, 2009, Cardinal Health, Inc. (the “Company”) completed the distribution to its shareholders of approximately 81% of the then outstanding common stock of CareFusion Corporation (“CareFusion”), with the Company retaining 41.4 million shares of CareFusion common stock (the “Spin-Off”). Per the requirements of the Private Letter Ruling obtained from the Internal Revenue Service, the Company is required to dispose of the retained shares of CareFusion common stock within five years of the Spin-Off. While Cardinal Health is a party to a separation agreement and various other agreements relating to the separation, including a transition services agreement, a tax matters agreement, an employee matters agreement, intellectual property agreements and certain other commercial agreements, the Company has determined that it has no significant continuing involvement in the operations of CareFusion. Accordingly, the net assets of CareFusion are presented separately in these condensed consolidated financial statements as assets from businesses held for sale and discontinued operations and the operating results of CareFusion are presented within discontinued operations for all periods presented through the date of the Spin-Off. The Company retained certain surgical and exam gloves, surgical drapes and apparel and fluid management businesses previously within the Clinical and Medical Products segment following the Spin-Off. For fiscal 2009, the Company had three reportable segments — Healthcare Supply Chain Services, Clinical and Medical Products and All Other. Effective July 1, 2009, the Company changed its reportable segments to: Pharmaceutical, Medical and CareFusion. The Pharmaceutical segment encompasses the businesses previously within the Healthcare Supply Chain Services segment that distributed pharmaceutical, radiopharmaceutical and over-the-counter healthcare products as well as the businesses previously within the All Other segment. The Medical segment encompasses the remaining businesses within the Healthcare Supply Chain Services segment as well as certain surgical and exam gloves, surgical drapes and apparel and fluid management businesses previously within the Clinical and Medical Products segment. The CareFusion segment encompasses the businesses previously within the Clinical and Medical Products segment excluding the above-referenced surgical and exam gloves, surgical drapes and apparel and fluid management businesses and includes all businesses included in the Spin-Off. In connection with the Spin-Off, the Company reorganized its reportable segments into two segments: Pharmaceutical and Medical. See Note 14 for information about these segments. Basis of Presentation The condensed consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries and all significant intercompany amounts have been eliminated. References to the “Company” or “Cardinal Health” in these condensed consolidated financial statements shall be deemed to be references to Cardinal Health, Inc. and its majority-owned subsidiaries unless the context otherwise requires. The condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions to Quarterly Reports on Form 10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Actual amounts may differ from these estimated amounts. In addition, operating results presented for this fiscal 2010 interim period are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2010. Beginning in the first quarter of fiscal 2010, the Company changed the presentation of certain items on the condensed consolidated statements of earnings. Prior periods have been adjusted to confirm with this new presentation. These condensed consolidated financial statements are unaudited and are presented pursuant to the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2009 (the “FY2009 Financial Statments”). Note 1 of the “Notes to Consolidated Financial Statements” from the FY2009 Financial Statements is specifically incorporated in this Form 10-Q by reference. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Except as disclosed elsewhere in this Form 10-Q, all such adjustments are of a normal and recurring nature. Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue is recognized net of sales returns and allowances. Pharmaceutical. This segment recognizes distribution revenue when title transfers to its customers and the business has no further obligation to provide services related to such merchandise. Revenue within this segment includes revenue from bulk customers. Most deliveries to bulk customers consist of product shipped in the same form as the product is received from the manufacturer. Bulk customers have the ability to process large quantities of products in central locations and self distribute these products to their individual retail stores or customers. Revenue from bulk customers is recorded when title transfers to the customer and the Company has no further obligation to provide services related to such merchandise. Revenue for deliveries that are directly shipped to customer warehouses from the manufacturer whereby the Company acts as an intermediary in the ordering and delivery of products is recorded gross in accordance with accounting standards addressing reporting revenue on a gross basis as a principal versus on a net basis as an agent. This revenue is recorded on a gross basis since the Company incurs credit risk from the customer, bears the risk of loss for incomplete shipments and does not receive a separate fee or commission for the transaction and, as such, is the primary obligor. Radiopharmaceutical revenue is recognized upon delivery of the product to the customer. Service-related revenue, including fees received for analytical services or sales and marketing services, is recognized upon the completion of such services. Pharmacy management and other service revenue is recognized as the services are rendered according to the contracts established. A fee is charged under such contracts through a capitation fee, a dispensing fee, a monthly management fee or an actual costs-incurred arrangement. Under certain contracts, fees for services are guaranteed by the Company not to exceed stipulated amounts or have other risk-sharing provisions. Revenue is adjusted to reflect the estimated effects of such contractual guarantees and risk-sharing provisions. Through its Medicine Shoppe International, Inc. and Medicap Pharmacies Incorporated franchise operations (collectively, “Medicine Shoppe”), the Company has apothecary-style pharmacy franchisees in which it earns franchise and origination fees. Franchise fees represent monthly fees that are either fixed or based upon franchisees’ sales and are recognized as revenue when they are earned. Origination fees from signing new franchise agreements are recognized as revenue when the new franchise store is opened. Medical. This segment recognizes distribution revenue when title transfers to its customers and the business has no further obligation to provide services related to such merchandise. Revenue from the sale of medical products and supplies is recognized when title and risk of loss transfers to its customers, which is typically upon delivery. Multiple Segments or Business Units. Arrangements involving multiple segments or business units containing no software or software which is incidental to the functionality of the product or service are accounted for as revenue arrangements with multiple deliverables. If the deliverable meets the criterion of a separate unit of accounting, the arrangement revenue is allocated to each element based upon its relative fair value and recognized in accordance with the applicable revenue recognition criteria for each element. Recent Financial Accounting Standards In September 2006, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This guidance is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Refer to Note 11 for additional information regarding the Company’s adoption of this new accounting guidance.
In December 2007, the FASB issued new accounting guidance on the accounting and reporting for business combinations and minority interests in consolidated financial statements. This guidance is effective for fiscal years beginning after December 15, 2008. The adoption of this new accounting guidance in the first quarter of fiscal 2010 did not have a material impact on the Company’s financial position or results of operations; however, it may have an impact on the Company’s accounting and disclosure practices for future business combinations. In June 2008, the FASB issued new accounting guidance addressing whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the computation of earnings per share. This guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this new accounting guidance in the first quarter of fiscal 2010 did not have a material impact on the Company’s financial position or results of operations. In June 2009, the FASB issued new accounting guidance on the accounting for transfers of financial assets. This guidance improves the relevance, representational faithfulness and comparability of information provided about a transfer of financial assets, the effects of a transfer of financial assets on an entity’s financial statements, and a transferor’s continuing involvement, if any, in financial assets transferred. This guidance is effective for fiscal years beginning after November 15, 2009. The Company is in the process of determining the impact of adopting this new accounting guidance. In June 2009, the FASB issued new accounting guidance regarding the consolidation of variable interest entities. This guidance improves the financial reporting by enterprises involved with variable interest entities. This guidance is effective for fiscal years beginning after November 15, 2009. The Company is in the process of determining the impact of adopting this new accounting guidance. In June 2009, the FASB issued the Accounting Standards Codification (the “Codification”), which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities effective July 1, 2009. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Effective July 1, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. The adoption of this new accounting guidance in the first quarter of fiscal 2010 did not have a material impact on the Company’s financial position or results of operations. |
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| 23 | CBS CORP |
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| 24 | CELGENE CORP /DE/ |
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1 of the Notes to the
Consolidated Financial Statements included in the 2008 Annual Report on Form 10-K.
New Accounting Pronouncements: In June 2009, the Financial Accounting Standards Board, or FASB,
established the FASB Accounting Standards CodificationTM, or ASC, as the source of
authoritative accounting principles recognized by the FASB to be applied by nongovernmental
entities in preparation of financial statements in conformity with generally accepted accounting
principles in the United States. All other accounting literature not included in the ASC is now
nonauthoritative. The ASC was effective for financial statements issued for interim and annual
periods ending after September 15, 2009 and its adoption did not have any impact on the Company’s
consolidated financial statements. The ASC is updated through the FASB’s issuance of Accounting
Standard Updates, or ASUs. Summarized below are recently issued accounting pronouncements as
described under the new ASC structure.
In September 2006, the FASB issued ASC No. 825, “Fair Value Measurements,” or ASC 825, which
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The FASB partially deferred the effective date of ASC 825 for non-financial assets
and liabilities that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis to fiscal years beginning after November 15, 2008. The Company’s adoption of
ASC 825 related to non-financial assets beginning January 1, 2009 did not have any impact on the
Company’s consolidated financial statements.
In December 2007, the FASB ratified ASC No. 808, “Accounting for Collaborative Arrangements Related
to the Development and Commercialization of Intellectual Property,” which provides guidance for ASC
No. 730, or ASC 730, related to how the parties to a collaborative agreement should account for
costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a
collaboration agreement should be presented in the income statement and certain related disclosure
requirements. The guidance for ASC 730 was effective for the Company beginning January 1, 2009 on
a retrospective basis and did not have any impact on the Company’s consolidated financial
statements.
In December 2007, the FASB issued ASC No. 805, “Business Combinations,” or ASC 805, which requires
an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. Previously, post-acquisition adjustments to a business combination
related to deferred tax asset valuation allowances and liabilities related to uncertain tax
positions were required to be recorded as an increase or decrease to goodwill. ASC 805 does not
permit this accounting and generally requires any such changes to be recorded in current period
income tax expense. After the adoption of ASC 805, all changes to valuation allowances and
liabilities related to uncertain tax positions from an acquisition must be recognized in current
period income tax expense. ASC 805 was effective for the Company beginning January 1, 2009 and the
Company will account for future business combinations in accordance with its provisions.
In December 2007, the FASB issued an amendment to ASC No. 810, entitled “Noncontrolling Interests
in Consolidated Financial Statements,” which changes the accounting for and reporting of
noncontrolling interests (formerly known as minority interests) in consolidated financial
statements. The amendment was effective for the Company beginning January 1, 2009 and did not have
any impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued an amendment to ASC No. 815, entitled “Disclosures about Derivative
Instruments and Hedging Activities,” or ASC 815, which is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position, financial
performance and cash flows. The amendment was effective for the Company beginning January 1, 2009
and the expanded disclosures are included in Note 8.
In April 2008, the FASB issued an amendment to ASC No. 350 entitled “Determination of the Useful
Life of Intangible Assets,” which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible
asset. The amendment was effective for the Company beginning January 1, 2009 and did not have any
impact on the Company’s consolidated financial statements.
In May 2008, the FASB issued an amendment to ASC No. 470 entitled “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” which
requires separate accounting for the debt and equity components of convertible debt issuances that
have a cash settlement feature permitting settlement partially or fully in cash upon conversion. A
component of such debt issuances that is representative of the approximate fair value of the
conversion feature at inception should be bifurcated and recorded to equity, with the resulting
debt discount amortized to interest expense in a manner that reflects the issuer’s nonconvertible,
unsecured debt borrowing rate. The requirements for separate accounting must be applied
retrospectively to previously issued convertible debt issuances as well as prospectively to newly
issued convertible debt issuances, negatively affecting both net income and earnings per share, in
financial statements issued for fiscal years beginning after December 15, 2008. Since the
Company’s past convertible debt issuance did not include a cash settlement feature, the amendment
did not have any impact on its consolidated financial statements.
In June 2008, the FASB issued ASC No. 260, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities,” or ASC 260. The ASC addresses whether
instruments granted in share-based payment transactions are participating securities prior to
vesting and therefore need to be included in the earnings allocation in calculating earnings per
share under the two-class method and requires companies to treat unvested share-based payment
awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of
securities in calculating earnings per share. ASC 260 was effective for the Company beginning
January 1, 2009. Since the Company’s past share-based payment awards did not include
non-forfeitable rights to dividends or dividend equivalents, the adoption of ASC 260 did not have
any impact on its consolidated financial statements.
In November 2008, the FASB ratified ASC No. 323, “Equity Method Investment Accounting
Considerations,” or ASC 323, which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. ASC 323 was effective for the Company
beginning January 1, 2009 and did not have any impact on the Company’s consolidated financial
statements.
In November 2008, the FASB ratified an amendment to ASC No. 350, entitled “Accounting for Defensive
Intangible Assets,” which clarifies the accounting for certain separately identifiable intangible
assets which an acquirer does not intend to actively use but intends to hold to prevent its
competitors from obtaining access to them. The amendment requires an acquirer in a business
combination to account for a defensive intangible asset as a separate unit of accounting, which
should be amortized to expense over the period the asset diminishes in value. The amendment was
effective for the Company beginning January 1, 2009 and the Company will account for defensive
intangible assets acquired in future business combinations in accordance with its provisions.
In April 2009, the FASB issued an amendment to ASC No. 820, entitled “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly,” or ASC 820. This amendment provides additional
guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity
for the asset or liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value measurements. This
amendment shall be applied prospectively with retrospective application not permitted. This
amendment was effective for interim and annual periods ending after June 15, 2009. The adoption
did not have any impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued an amendment to ASC 320, entitled “Recognition and Presentation of
Other-Than-Temporary Impairments.” This amendment was issued to make the other-than-temporary
impairments guidance more operational and to improve the presentation of other-than-temporary
impairments in the financial statements. This amendment replaces the existing requirement that the
entity’s management assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security before recovery of
its cost basis. This amendment provides increased disclosure about the credit and noncredit
components of impaired debt securities that are not expected to be sold and also requires increased
and more frequent disclosures regarding expected cash flows, credit losses and an aging of
securities with unrealized losses. Although this amendment does not result in a change in the
carrying amount of debt securities, it does require that the portion of an other-than-temporary
impairment not related to a credit loss for a held-to-maturity security be recognized in a new
category of other comprehensive income and be amortized over the remaining life of the debt
security as an increase in the carrying value of the security. This amendment was effective for
interim and annual periods ending after June 15, 2009. The adoption of this amendment did not have
any impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued an amendment to ASC 825, entitled “Interim Disclosures About Fair
Value of Financial Instruments,” to require disclosures about fair value of financial instruments
not measured on the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this amendment, fair values for these assets and liabilities
were only disclosed annually. This amendment applies to all financial instruments within the scope
of ASC 825 and requires all entities to disclose the method(s) and significant assumptions used to
estimate the fair value of financial instruments. This amendment was effective for interim periods
ending after June 15, 2009. This amendment does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In periods after initial adoption, this
amendment requires comparative disclosures only for periods ending after initial adoption. The
adoption did not have any impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued an amendment to ASC No. 805, entitled “Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This
amendment clarifies application issues associated with initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination. This amendment was effective for the Company beginning
January 1, 2009 and the Company will account for assets or liabilities arising from contingencies
acquired in future business combinations in accordance with its provisions.
In May 2009, the FASB issued ASC No. 855, “Subsequent Events,” or ASC 855, which established
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued. It sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events or transactions that
occur for potential recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. ASC 855 was effective for financial
statements issued for interim and annual periods ending after June 15, 2009 and did not have any
impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued an amendment to ASC No. 860, entitled “Accounting for Transfers of
Financial Assets,” which eliminates the concept of a “qualifying special-purpose entity,” changes
the requirements for derecognizing financial assets and requires additional disclosures. This
amendment clarifies the determination whether a transferor and all of the entities included in the
transferor’s financial statements being presented have surrendered control over transferred
financial assets. It also enhances
information reported to users of financial statements by providing greater transparency about
transfers of financial assets and a company’s continuing involvement in transferred financial
assets. This amendment will be effective at the start of a company’s first fiscal year beginning
after November 15, 2009. The Company is currently evaluating the impact, if any, that the adoption
of this amendment will have on its consolidated financial statements.
In June 2009, the FASB issued an amendment to ASC 810, entitled “Consolidation of Variable Interest
Entities,” which changes how a company determines when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated. The determination
of whether a company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. This amendment requires ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and
will require a company to provide additional disclosures about its involvement with variable
interest entities, any significant changes in risk exposure due to that involvement and how its
involvement with a variable interest entity affects the company’s financial statements. This
amendment will be effective at the start of a company’s first fiscal year beginning after
November 15, 2009. The Company is currently evaluating the impact, if any, that the adoption of
this amendment will have on its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value,” or ASU
2009-05, which amends ASC 820 to provide clarification of a circumstances in which a quoted price
in an active market for an identical liability is not available. A reporting entity is required to
measure fair value using one or more of the following methods: 1) a valuation technique that uses
a) the quoted price of the identical liability when traded as an asset or b) quoted prices for
similar liabilities (or similar liabilities when traded as assets) and/or 2) a valuation technique
that is consistent with the principles of ASC 820. ASU 2009-05 also clarifies that when estimating
the fair value of a liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. The adoption of this ASU did
not have an impact on the Company’s consolidated financial statements.
In September 2009, the FASB issued ASU No. 2009-12, “Fair Value Measurements and Disclosure,” or
ASU 2009-12, which provides additional guidance on using the net asset value per share, provided by
an investee, when estimating the fair value of an alternate investment that does not have a readily
determinable fair value and enhances the disclosures concerning these investments. ASU 2009-12 is
effective for interim and annual periods ending after December 15, 2009. The Company is currently
evaluating the impact, if any, that the adoption of this amendment will have on its consolidated
financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements,” or
ASU 2009-13, which amends existing revenue recognition accounting pronouncements that are currently
within the scope of ASC 605. This guidance eliminates the requirement to establish the fair value
of undelivered products and services and instead provides for separate revenue recognition based
upon management’s estimate of the selling price for an undelivered item when there is no other
means to determine the fair value of that undelivered item. ASU 2009-13 is effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. The Company is currently evaluating the impact, if any, that the adoption of this
amendment will have on its consolidated financial statements.
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| 25 | CF Industries Holdings, Inc. |
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| 26 | CITRIX SYSTEMS INC |
2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial statements and accompanying notes, the actual amount of such estimates, when known, will vary from these estimates. Investments Short-term and long-term investments at September 30, 2009 and December 31, 2008 primarily consist of agency securities, corporate securities, municipal securities, government securities and commercial paper. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in accumulated other comprehensive loss. Investments classified as trading securities are stated at fair value with unrealized gains and losses reported in earnings. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance. In April 2009, the Financial Accounting Standards Board (the “FASB”) amended the existing guidance on determining whether an impairment for investments in debt securities is other-than-temporary. The Company adopted the new guidance in the second quarter of 2009 and there was no impact to the Company’s results of operations upon adoption. The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on valuation models that use market quotes and, for certain investments, assumptions as to the creditworthiness of the entities issuing those underlying instruments.
Inventory Inventories are stated at the lower of cost or market on an average cost method and primarily consist of finished goods as of September 30, 2009 and December 31, 2008. Revenue Recognition The Company markets and licenses products primarily through multiple channels such as value-added resellers, channel distributors, system integrators, independent software vendors, its Websites and original equipment manufacturers. The Company’s product licenses are generally perpetual. The Company also separately sells license updates and services, which may include product training, technical support and consulting services, as well as online services. The Company’s revenue recognition policies are in compliance with the FASB’s authoritative guidance governing software revenue recognition and because the Company’s Online Services provide applications as an online service, the Company also follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred or the service has been provided and the Company has no remaining obligations; the fee is fixed or determinable; and collectability is probable. Net revenues include the following categories: Product Licenses, License Updates, Online Services and Technical Services. Product Licenses revenues primarily represent fees related to the licensing of the Company’s software and hardware appliance products. These revenues are reflected net of sales allowances, cooperative advertising agreements and provisions for returns. License Updates revenues consist of fees related to the Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12-24 months. Subscription Advantage is a renewable program that provides subscribers with immediate access to software upgrades, enhancements and maintenance releases when and if they become available during the term of the contract. Online Services revenues consist primarily of fees related to online service agreements, which are recognized ratably over the contract term. In addition, Online Services revenues may also include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer. Technical Services revenues are comprised of fees from technical support services, which are recognized ratably over the contract term, as well as revenues from product training and certification, and consulting services revenue related to implementation of the Company’s products, which is recognized as the services are provided. The Company licenses most of its software products bundled with a one year contract for license updates that provide the end-user with unspecified enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase subscriptions for license updates, when not bundled with the initial product purchase. Technical support, product training or consulting services may be purchased separately by the customer. Online services are sold separately. The Company allocates revenue to license updates and any other undelivered elements of the arrangement based on vendor specific objective evidence (“VSOE”) of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenues, net of any discounts inherent in the arrangement, is recognized at the outset of the arrangement using the residual method as the product licenses are delivered. In the normal course of business, the Company is not obligated to accept product returns from its distributors under any conditions, unless the product item is defective in manufacture, but the Company does provide most of its distributors with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to the Company up to the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of its other products prior to the last day of the same fiscal quarter. Price protection rights require that the Company grants retroactive price adjustments for inventories of its products held by distributors or resellers if it lowers its prices for such products. Product items returned to the Company under the stock balancing program must be in new, unused and unopened condition. The Company establishes provisions for estimated returns, as well as other sales allowances, concurrently with the recognition of revenue. Allowances for estimated product returns amounted to approximately $1.5 million and $1.6 million at September 30, 2009 and December 31, 2008, respectively. Accounting for Stock-Based Compensation Plans The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its consolidated financial statements using a fair value method. See Note 7 for further information regarding the Company’s stock-based compensation plans. |
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| 27 | Clorox Co /DE/ | NOTE 1. INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim condensed consolidated financial statements for the three months ended September 30, 2009 and 2008, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated results of operations, financial position and cash flows of The Clorox Company and its subsidiaries (the Company) for the periods presented. Certain prior period amounts have been reclassified in the condensed consolidated financial statements to conform to the current period presentation. The results for the interim period ended September 30, 2009, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010, or for any future period. The Company’s condensed consolidated financial statements were evaluated for subsequent events after the balance sheet date through November 3, 2009, the date the consolidated financial statements were issued.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The information in this report should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2009, which includes a complete set of footnote disclosures, including the Company’s significant accounting policies.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from estimates and assumptions made.
New Accounting Pronouncements
Recently adopted pronouncements
On July 1, 2009, the Company adopted a new accounting standard which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities that must be included in the computation of earnings per share pursuant to the two-class method. These payment awards were previously not considered participating securities. Accordingly, the Company’s unvested performance units, restricted stock awards and restricted stock units that provide such nonforfeitable rights are now considered participating securities in the calculation of net earnings per share (EPS). The Company’s share-based payment awards granted in fiscal year 2010 are not participating securities. The new standard requires the retrospective adjustment of the Company’s earnings per share data. The retrospective adoption of the new accounting standard resulted in a $0.01 decrease in the previously reported basic and diluted EPS for the three months ended September 30, 2008, and a $0.04 and $0.02 decrease in the previously reported basic and diluted EPS, respectively, for the fiscal year 2009. The calculation of EPS under the new standard is disclosed in Note 6.
On July 1, 2009, the Company adopted a new accounting standard which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, including contingent liabilities, and any noncontrolling interest in an acquired business. The new standard also provides for recognizing and measuring the goodwill acquired in a business combination and requires disclosure of information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. There was no impact to the condensed consolidated financial statements.
On July 1, 2009, the Company adopted a new accounting standard which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interest) and for the deconsolidation of a subsidiary. The new standard establishes accounting and reporting standards that require the noncontrolling interest to be reported as a component of equity. Changes in a parent’s ownership interest while the parent retains its controlling interest will be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary will be initially measured at fair value. There was no material impact to the condensed consolidated financial statements.
On July 1, 2009, the Company adopted a new accounting standard requiring disclosures about fair value of financial instruments in interim financial information (See Note 3). The new standard requires those disclosures for interim reporting periods. The Company already complies with the provisions of this accounting standard for its annual reporting.
On July 1, 2009, the Company adopted the provisions of the accounting standard on fair value measurements that apply to nonfinancial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis. The adoption of these provisions did not have an impact on the condensed consolidated financial statements.
On September 30, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (the Codification). The Codification is the single official source of authoritative US GAAP (other than the SEC's views), superseding all other accounting literature except that issued by the SEC. The adoption of the Codification had no impact to the condensed consolidated balance sheets, statements of operations or cash flows.
Pronouncements to be adopted
On December 30, 2008, the FASB issued an accounting standard that will require additional disclosures about the major categories of plan assets and concentrations of risk for an employer’s plan assets of a defined benefit pension or other postretirement plan, as well as disclosure of fair value levels, similar to the disclosure requirements of the fair value measurements accounting standard. These enhanced disclosures about plan assets must be provided in the Company’s 2010 Annual Report on Form 10-K.
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| 28 | CONAGRA FOODS INC /DE/ |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information reflects all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results of operations, financial position, and
cash flows for the periods presented. The adjustments are of a normal recurring nature, except as
otherwise noted. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the ConAgra Foods, Inc.
(the “Company,” “we,” “us,” or “our”) annual report on Form 10-K for the fiscal year ended May 31,
2009.
The results of operations for any quarter or a partial fiscal year period are not necessarily
indicative of the results to be expected for other periods or the full fiscal year.
Basis
of Consolidation – The condensed consolidated financial statements include the accounts of
ConAgra Foods, Inc. and all majority-owned subsidiaries. In addition, the accounts of all variable
interest entities for which we have been determined to be the primary beneficiary are included in
our condensed consolidated financial statements from the date such determination is made. All
significant intercompany investments, accounts, and transactions have been eliminated.
Investments
in Unconsolidated Affiliates – The investments in and the operating results of
50%-or-less-owned entities not required to be consolidated are included in the condensed
consolidated financial statements on the basis of the equity method of accounting or the cost
method of accounting, depending on specific facts and circumstances.
We review our investments in unconsolidated affiliates for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the investments may not be fully
recoverable. Evidence of a loss in value that is other than temporary might include the absence of
an ability to recover the carrying amount of the investment, the inability of the investee to
sustain an earnings capacity which would justify the carrying amount of the investment, or, where
applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the
investment. Management’s assessment as to whether any decline in value is other than temporary is
based on our ability and intent to hold the investment and whether evidence indicating the carrying
value of the investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. Management generally considers our investments in equity method investees to be
strategic long-term investments. Therefore, management completes its assessments with a long-term
viewpoint. If the fair value of the investment is determined to be less than the carrying value and
the decline in value is considered to be other than temporary, an appropriate write-down is
recorded based on the excess of the carrying value over the best estimate of fair value of the
investment.
Cash
and Cash Equivalents – Cash and all highly liquid investments with an original maturity of
three months or less at the date of acquisition, including short-term time deposits and government
agency and corporate obligations, are classified as cash and cash equivalents.
Shipping
and Handling – Amounts billed to customers related to shipping and handling are included
in net sales. Shipping and handling costs are included in cost of goods sold.
Comprehensive
Income – Comprehensive income includes net income, currency translation adjustments,
certain derivative-related activity, changes in the value of available-for-sale investments, and
changes in prior service cost and net actuarial gains (losses) from pension and postretirement
health care plans. We generally deem our foreign investments to be essentially permanent in nature
and we do not provide for taxes on currency translation adjustments arising from converting the
investment in a foreign currency to U.S. dollars. When we determine that a foreign investment, as
well as undistributed earnings, are no longer permanent in nature, estimated taxes are provided for
the related deferred tax liability (asset), if any, resulting from currency translation
adjustments. We reclassified $2.0 million of foreign currency translation net losses to net income
due to the disposal or substantial liquidation of foreign subsidiaries in the first quarter of
fiscal 2009.
The following details the income tax expense (benefit) on components of other comprehensive
income:
Accounting Changes – In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements, an Amendment of ARB No. 51(“SFAS No. 160”). This statement
amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest
(minority interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
requires that noncontrolling interests in subsidiaries be reported as a component of stockholders’
equity in the condensed consolidated balance sheets. However, pursuant to EITF Topic D-98,
securities of an issuer that are redeemable at the option of the holder continue to be classified
outside stockholders’ equity. The noncontrolling interest holder in the potato processing venture,
Lamb Weston BSW, LLC (“Lamb Weston BSW” or the “venture”), has the contractual right to put its
equity interest to us at a future date. Accordingly, the noncontrolling interest in this venture
is classified within other noncurrent liabilities in our condensed consolidated balance sheets.
SFAS No. 160 also requires that earnings or losses attributed to the noncontrolling interests be
reported as part of consolidated earnings and not as a separate component of income or expense and
requires disclosure of the attribution of consolidated earnings to the controlling and
noncontrolling interests on the face of the condensed consolidated statement of earnings. We
adopted the provisions of this standard on a prospective basis, except for the presentation and
disclosure requirements, as of the beginning of our fiscal 2010. We adopted the presentation and
disclosure requirements of this standard retrospectively in the first quarter of fiscal 2010.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer in a
business combination recognizes and measures the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree. The provisions of SFAS No. 141(R) are effective for our
business combinations occurring on or after June 1, 2009.
In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB
Statement No. 157 (“FSP 157-2”), which delayed the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). We adopted the
provisions of FSP 157-2 related to nonfinancial assets and liabilities effective in the first
quarter of our fiscal 2010. The adoption of the provisions of SFAS 157 related to nonfinancial
assets and nonfinancial liabilities did not have a material impact on our condensed consolidated
financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1
provides that unvested share-based payment awards that contain nonforfeitable rights to dividends
or dividend equivalents are participating securities and must be included in the computation of
earnings per share under the two-class method. FSP EITF 03-6-1 was effective as of the beginning
of our fiscal 2010. The adoption of this FSP did not have a material impact on our financial
statements.
Recently Issued Accounting Pronouncements – In June 2009, the FASB issued SFAS No. 167, Amendments
to FASB Interpretation No. 46(R) (“SFAS No. 167”). This statement amends FASB Interpretation No.
46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s
variable interest or interests give it a controlling financial interest in a variable interest
entity. This analysis identifies the primary beneficiary of a variable interest entity as the
enterprise that has both of the following characteristics: the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic performance, and the
obligation to absorb losses of the entity that could potentially be significant to the variable
interest entity or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. The provisions of this statement are effective as of
the beginning of our fiscal 2011. Earlier application is prohibited. We are currently evaluating
the impact of adopting SFAS No. 167.
Use of Estimates – Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. These estimates and
assumptions affect reported amounts of assets, liabilities, revenues, and expenses as reflected in
the condensed consolidated financial statements. Actual results could differ from these estimates.
Reclassifications – Certain prior year amounts have been reclassified to conform with current year
presentation.
Subsequent Events – We have performed an evaluation of subsequent events through October 7, 2009,
the date we issued these financial statements. Based on our evaluation, no material events have
occurred requiring disclosure.
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| 29 | CONSOLIDATED EDISON INC | Note A—Summary of Significant Accounting Policies Revenues The Utilities and Con Edison Solutions recognize revenues for electric, gas and steam service on a monthly billing cycle basis. The Utilities defer over a 12-month period net interruptible gas revenues, other than those authorized by the New York State Public Service Commission (PSC) to be retained by the Utilities, for refund to firm gas sales and transportation customers. O&R and Con Edison Solutions accrue revenues at the end of each month for estimated energy service not yet billed to customers. Prior to March 31, 2009, Con Edison of New York did not accrue revenues for estimated energy service not yet billed to customers except for certain unbilled gas revenues accrued in 1989. Effective March 31, 2009, the PSC authorized Con Edison of New York to accrue unbilled electric, gas and steam revenues. The adoption of this accounting for unbilled revenues had no effect on net income. See Note A to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q. Unbilled revenues included in Con Edison’s balance sheet at September 30, 2009 and December 31, 2008 were $494 million (including $347 million for Con Edison of New York) and $131 million, respectively.
Earnings Per Common Share Reference is made to “Earnings Per Common Share” in Note A to the financial statements included in Item 8 of the Form 10-K. For the three and nine months ended September 30, 2009 and 2008, Con Edison’s basic and diluted EPS are calculated as follows:
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| 30 | Cooper Industries plc |
Note 1. Accounting Policies
Basis of Presentation - The consolidated financial statements of Cooper Industries plc
(formerly Cooper Industries, Ltd.), an Irish company (“Cooper”), have been prepared in accordance
with generally accepted accounting principles in the United States.
In June 2009, our Board of Directors approved moving Cooper’s place of incorporation from
Bermuda to Ireland. This move is part of a reorganization that created a newly formed Irish
company, Cooper Industries plc. We completed the first step in this reorganization by establishing
our tax residency in Ireland in December 2008. At a Special Shareholders Meeting on August 31,
2009, shareholders voted in favor of completing the reorganization pursuant to which all Cooper
Industries, Ltd. Class A common shares held by public shareholders would be cancelled and all
holders of such shares would receive ordinary shares of Cooper Industries plc on a one-for-one
basis. The reorganization transaction was completed on September 8, 2009, following approval from
the Supreme Court of Bermuda, at which time Cooper Industries plc replaced Cooper Industries, Ltd.
as the ultimate parent company. Shares of the Irish company, Cooper Industries plc, began trading
on the New York Stock Exchange on September 9, 2009 under the symbol CBE, the same symbol under
which Cooper Industries, Ltd. shares were previously traded.
The financial information presented as of any date other than December 31 has been prepared
from the books and records without audit. Financial information as of December 31 has been derived
from Cooper’s audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the financial
information for the periods indicated, have been included. Further, in connection with preparation
of the consolidated financial statements, Cooper evaluated subsequent events after the balance
sheet date of September 30, 2009 through November 5, 2009, which is the date these financial
statements were issued. For additional information regarding Cooper’s accounting policies, refer
to the Consolidated Financial Statements and related notes for the year ended December 31, 2008
included in Part IV of Cooper’s 2008 Annual Report on Form 10-K.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 168 — The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.
SFAS No. 168 made the FASB Accounting Standards Codification (“ASC” or the “Codification”) the
single source of U.S. GAAP used by nongovernmental entities in the preparation of financial
statements, except for rules and interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative accounting guidance for SEC registrants. The
Codification was developed to organize GAAP pronouncements by accounting topics within a consistent
structure so that users can more easily access authoritative accounting guidance; its purpose is
not to create new accounting and reporting guidance. The Codification is effective July 1,
2009. All accounting references have therefore been updated and SFAS references have been replaced
with ASC references.
ASC Topic 820, Fair Value Measurements and Disclosures, was revised to provide enhanced
guidance for using fair value to measure assets and liabilities. ASC Topic 820 clarifies the
principle that fair value should be based on the assumptions market participants would use when
pricing assets or liabilities and establishes a hierarchy that prioritizes the information used to
develop those assumptions. ASC Topic 820 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. On February 12, 2008, the FASB delayed the
effective date of ASC Topic 820 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Cooper implemented the provisions of ASC Topic 820 as of January 1,
2008 for those assets and liabilities not subject to the deferral described above. The
implementation of ASC Topic 820 as of January 1, 2009 for assets and liabilities previously
subject to the deferral described above did not have a material impact on Cooper’s results of
operations, financial position or cash flows. See Note 15 of the Notes to the Consolidated
Financial Statements.
Effective prospectively to business combinations completed on or after January 1, 2009, ASC
Topic 805, Business Combinations, was revised to provide enhanced guidance related to the
measurement of identifiable assets acquired, liabilities assumed and disclosure of information
related to business combinations. This guidance, together with the International Accounting
Standards Board’s (“IASB”) IFRS 3, Business Combinations, completed a joint effort by the FASB and
IASB to improve financial reporting about business combinations and promotes the international
convergence of accounting standards. Cooper implemented the revised guidance prospectively to
business combinations completed on or after January 1, 2009. Cooper recognizes acquisition-related
costs in the period in which such costs are incurred as required by the guidance.
Effective January 1, 2009, ASC Topic 810, Consolidation, was revised to provide enhanced
guidance related to the disclosure of information regarding noncontrolling interests in a
subsidiary. This guidance, together with the IASB’s IAS 27, Consolidated and Separate Financial
Statements, concluded a joint effort by the FASB and IASB to improve the accounting for and
reporting of noncontrolling interests in consolidated financial statements and promotes
international convergence of accounting standards. Cooper did not apply the disclosure provisions
of ASC Topic 810 regarding noncontrolling interests in a subsidiary as the information is
immaterial to the consolidated financial statements.
Effective January 1, 2009, the disclosure provisions of ASC Topic 815, Derivatives and
Hedging, were revised to provide greater transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items are accounted for
under Topic 815, and (c) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations, and cash flows. Cooper implemented the revised guidance
as of January 1, 2009 and has provided the additional disclosures required.
Effective for fiscal years ending after December 15, 2009, ASC Topic 715, Compensation -
Retirement Benefits, was revised to require additional disclosures about assets held in an
employer’s defined benefit pension or other postretirement plan, primarily related to categories
and fair value measurements of plan assets. The revised guidance is effective for Cooper’s 2009
year end and will only impact the disclosures related to Cooper’s pension assets.
Effective for interim periods ending after June 15, 2009, ASC Topic 825, Financial
Instruments, was revised to extend the annual disclosure requirements of Topic 825 to interim
financial statements. Cooper has implemented the revised guidance and has provided the additional
disclosures required.
Reclassification - Certain amounts in the Consolidated Statements of Cash Flows in 2008 have
been reclassified to conform to the 2009 presentation.
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| 31 | CORNING INC /NY | 1. Significant Accounting Policies
Basis of Presentation
In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and subsidiary companies.
Effective September 30, 2009, the Financial Accounting Standards Board (FASB) established The FASB Accounting Standards Codification™ (ASC) as the source of authoritative accounting to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Except for newly issued standards which have not been codified, references to codified literature have been updated to reflect this change.
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with GAAP for interim financial information. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. These interim consolidated financial statements should be read in conjunction with Corning’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). Corning evaluates all events or transactions that occur after the balance sheet date through the date of issuance of our financial statements. For the period ending September 30, 2009, subsequent events were evaluated through November 2, 2009.
The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. Certain amounts for prior periods have been reclassified to conform to the 2009 presentation. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
Effective January 1, 2009, the Company adopted ASC 810-10-65-1 “Transition Related to SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements.” A noncontrolling interest, previously called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Under this standard, noncontrolling interests in subsidiaries are now included as a component of equity in the consolidated statements of financial position. This guidance also provides the required accounting treatment for changes in ownership of noncontrolling interests. As required, the related presentation and disclosure provisions have been applied retrospectively. For the three and nine months ended September 30, 2009, and 2008, net income attributable to noncontrolling interests was not significant ($6 million and $1 million for the nine months ended September 30, 2009 and 2008, respectively) and therefore, was not presented separately on the consolidated statements of income.
Effective January 1, 2009, the Company changed the presentation of equity in earnings of affiliated companies in the Consolidated Statements of Income from below ”Benefit for income taxes” to above “Income before income taxes.” The change in presentation reflects the strategic nature and economic importance of the Company’s investments accounted for under the equity method of accounting. There was no effect on the Company’s consolidated results of operation, financial condition, or cash flows as a result of this change.
Effective April 1, 2009, the Company adopted the following: · ASC 320-10-65-1 “Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments” which changes the method for determining whether an other-than temporary impairment exists for debt securities and for determining the amount of an impairment charge to be recorded in earnings; · ASC 820-10-65-4 “Transition Related to FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” which provides guidance addressing the determination of (a) when a market for an asset or a liability is active or inactive and (b) when a particular transaction is distressed; and · ASC 825-10-65-1 “Transition Related to FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments” which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.
The impact of adopting these fair value standards was not significant.
Equity Method Investments
Our equity investments are accounted for under the equity method of accounting for investments as required by ASC 323 “Investments—Equity Method and Joint Ventures.”
Our equity method investments are reviewed for impairment on a periodic basis or if an event occurs or circumstances change that indicate the carrying amount may be impaired. This assessment is based on a review of the equity investments’ performance and a review of indicators of impairment to determine if there is evidence of a loss in value of an equity investment. Factors we consider include:
· Absence of our ability to recover the carrying amount; · Inability of the equity affiliate to sustain an earnings capacity which would justify the carrying amount of the investment; and · Significant litigation, bankruptcy or other events that could impact recoverability.
For an equity investment with impairment indicators, we measure fair value on the basis of discounted cash flows or other appropriate valuation methods, depending on the nature of the company involved. If it is probable that we will not recover the carrying amount of our investment, the impairment is considered other-than-temporary and recorded in earnings, and the equity investment balance is reduced to its fair value accordingly. We require our equity method affiliates to provide audited financial statements in accordance with GAAP. Consequently, required assessments of asset recoverability are included in their results. We also include these financial statements in our recoverability assessment.
Property, Net of Accumulated Depreciation
Land, buildings, and equipment, including precious metals, are recorded at cost. Depreciation is based on estimated useful lives of properties using the straight-line method. Except as described in Note 2 (Restructuring, Impairment and Other Charges and (Credits)) related to accelerated depreciation arising from restructuring programs and Note 11 (Property, Net of Accumulated Depreciation) related to the depletion of precious metals, the estimated useful lives range from 10 to 40 years for buildings and 2 to 20 years for equipment.
Included in the subcategory of equipment are the following types of assets:
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. These assets are not depreciated because they have very low physical losses and are repeatedly reclaimed and reused in our manufacturing process over a very long useful life. We treat the physical loss of precious metals in the manufacturing and reclamation process as depletion and account for these losses as a period expense based on actual units lost. Precious metals are integral to many of our glass production processes. They are only acquired to support our operations and are not held for trading or other purposes.
Fair Value Measurements
The company applies ASC 820 “Fair Value Measurements and Disclosures” (ASC 820) to all assets and liabilities that are measured and reported on a fair value basis. Major categories of financial assets and liabilities, including short-term investments, other assets and derivatives are measured at fair value on a recurring basis. Certain assets and liabilities including long-lived assets, goodwill, asset retirement obligations, and cost and equity investments are measured at fair value on a nonrecurring basis.
ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
Other Income (Expense), Net
“Other income (expense), net” in Corning’s consolidated statements of income includes the following (in millions):
New Accounting Standards
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46 (R) (SFAS 167). SFAS 167 revises the consolidation guidance for variable interest entities. SFAS 167 modifies the approach for determining the primary beneficiary of a variable interest entity (VIE). Under SFAS 167, the primary beneficiary is the variable interest holder that has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. In addition, SFAS 167 provides guidance on shared power and joint venture relationships, removes the scope exemption for qualified special purpose entities, revises the definition of a VIE, and requires additional disclosures. SFAS 167 is effective for fiscal years beginning after November 15, 2009. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.
In October 2009, the FASB issued Accounting Standard Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.
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| 32 | Covance Inc. |
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| 33 | CROWN CASTLE INTERNATIONAL CORP |
The significant accounting policies used in the preparation of the Company’s consolidated financial statements are disclosed in the Company’s 2008 Form 10-K with the exception of acquisition and integration costs and restricted cash disclosed below. Additional information regarding the Company’s accounting for long-lived assets is also discussed below. Restricted Cash Restricted cash represents the cash held in reserve by the indenture trustees pursuant to the indenture governing certain of the Company’s debt instruments as well as any other cash whose use is limited by contractual provisions. The restriction of all rental cash receipts is a critical feature of these debt instruments, due to the applicable indenture trustee’s ability to utilize the restricted cash for the payment of (1) debt service costs, (2) ground rents, (3) real estate and personal property taxes, (4) insurance premiums related to towers, (5) other assessments by governmental authorities and potential environmental remediation costs and (6) reserves for a portion of advance rents from customers. The restricted cash in excess of required reserve balances is subsequently released to the Company in accordance with the terms of the indentures. The increases and decreases in restricted cash have aspects of cash flows from financing as well as cash flows from operating activities and, as such, could be classified as either on the consolidated statement of cash flows. The Company has classified the increases and decreases in restricted cash held by the indenture trustees as cash flows from financing activities based on consideration of the terms of the related indebtedness. The Company has classified the change in the other remaining restricted cash as cash flows from operating activities on the consolidated statement of cash flows and was an outflow of $3.8 million and $0 for the nine months ended September 30, 2009 and 2008, respectively. Acquisition and Integration Costs Prior to the adoption of certain amendments of ASC 805 (formerly SFAS No. 141(R)) on January 1, 2009, direct out-of-pocket or incremental costs that were directly related to a business combination were included in the cost of the acquired enterprise. Costs that were previously included in the cost of the acquired enterprise include finder’s fees or other fees paid to outside consultants for accounting, legal, engineering reviews or appraisals. Certain incremental costs directly related to the integration of the acquired enterprise’s operations and tower portfolio were and continue to be expensed as incurred and are classified as “acquisition and integration costs” in the Company’s consolidated statement of operations and comprehensive income (loss). Prospectively from January 1, 2009, all direct or incremental costs related to a business combination are expensed as incurred. These business combination costs are included in “acquisition and integration costs” on the Company’s consolidated statement of operations and comprehensive income (loss). Intangible Assets Intangible assets are included in “other intangible assets, net” on the Company’s consolidated balance sheet and predominately consist of the estimated fair value of the following items recorded in conjunction with acquisitions: (1) site rental customer contracts and customer relationships, (2) below-market leases for land under the acquired towers, (3) term easement rights for land under the acquired towers, and (4) trademarks. The site rental customer contracts and customer relationships intangible assets are comprised of (1) the current term of the in-place contracts, (2) the expected exercise of the renewal provisions contained within the existing current contracts, which automatically occur under contractual provisions, and (3) any associated relationships that are expected to generate value following the expiration of all renewal periods under current contracts. Deferred credits related to above-market leases for land under its towers recorded in conjunction with acquisitions are recorded at the estimated fair value and are included in “other liabilities” on the Company’s consolidated balance sheet. The useful lives of intangible assets are estimated based on the period for which the intangible assets will benefit the Company and gives consideration to the expected useful life of other assets to which the useful life may relate. Amortization expense for intangible assets is computed using the straight-line method over the estimated useful lives of each of the intangible assets. The useful life of the site rental contracts and customer relationships intangible asset is limited by the maximum depreciable life of the tower (20 years), as a result of the interdependency of the tower and site rental contracts and customer relationships. In contrast, the site rental contracts and customer relationships are estimated to provide economic benefits for several decades because of the low rate of customer cancellations and high rate of renewals experienced to date. Thus, while site rental contracts are valued based upon the fair value of the site rental contracts, which includes assumptions regarding both (1) customers’ exercise of optional renewals contained in the acquired contracts and (2) renewals of the acquired contracts past the contractual term including exercisable options, the site rental contracts are amortized over a period not to exceed 20 years as a result of the useful life being limited by the depreciable life of the tower.
The carrying value of other intangible assets with finite useful lives will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company has a dual grouping policy for purposes of determining the unit of account for testing impairment of the site rental contracts and customer relationships intangible assets. First, the Company pools the site rental contracts and customer relationships with the related tower assets into portfolio groups for purposes of determining the unit of account for impairment testing. Secondly, and separately, the Company evaluates the site rental contracts and customer relationships by significant customer or by customer grouping for individually insignificant customers, as appropriate. If the sum of the estimated future cash flows (undiscounted) expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. |
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| 34 | CSX CORP | Background CSX Corporation (“CSX”) together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation suppliers. The Company’s rail and intermodal businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers. CSX’s principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. CSX Intermodal, Inc. (“Intermodal”), one of the nation’s largest coast-to-coast intermodal transportation providers, is a stand-alone, integrated intermodal company linking customers to railroads via trucks and terminals. Other entities In addition to CSXT, the rail segment includes non-railroad subsidiaries Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries. TDSI serves the automotive industry with distribution centers and storage locations, while Transflo provides logistical solutions for transferring products from rail to trucks. Technology and other support services are provided by CSX Technology and other subsidiaries. CSX’s other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company’s real estate sales, leasing, acquisition and management and development activities. These activities are classified in other income – net because they are not considered by the Company to be operating activities and results may fluctuate with the timing of real estate sales. In May 2009, CSX sold the stock of a subsidiary that indirectly owned Greenbrier Hotel Corporation, owner of The Greenbrier resort. For more information, see Note 11, Discontinued Operations. Basis of Presentation In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:
NOTE 1. Nature of Operations and Significant Accounting Policies, continued In addition, management has evaluated and disclosed all material events occurring subsequent to the date of the financial statements up to the date this quarterly report is filed on Form 10-Q. Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted from these interim financial statements. CSX suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in CSX's most recent Annual Report on Form 10-K, its subsequent Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. Fiscal Year CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:
Except as otherwise specified, references to “third quarter(s)” or “nine months” indicate CSX’s fiscal periods ending September 25, 2009 or September 26, 2008, and references to year-end indicate the fiscal year ended December 26, 2008. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (i.e., issuance of equity securities and dividends). Generally, for CSX, total comprehensive earnings equals net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of related tax effects and were $300 million and $383 million for third quarters 2009 and 2008, respectively, and $860 million and $1.1 billion for nine months 2009 and 2008, respectively. NOTE 1. Nature of Operations and Significant Accounting Policies, continued While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. For CSX, AOCI is primarily the cumulative balance related to the pension and other post-retirement adjustments and reduced overall equity by $728 million and $741 million as of September 2009 and December 2008, respectively. Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts on uncollectible accounts related to freight receivables, public projects (work done by CSX on behalf of a government agency), claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. Allowance for doubtful accounts of $55 million and $70 million is included in the Consolidated Balance Sheets as of September 2009 and December 2008. Capital Expenditures Property additions, which are classified as investing activities on the consolidated cash flow statements, consisted of $1 billion and $1.3 billion for nine months 2009 and 2008, respectively. Total capital expenditures for nine months 2009 also include approximately $160 million of new assets purchased using seller financing, which are included in other financing activities on the consolidated cash flow statements. There were no purchases of new assets under seller financing agreements during 2008. For 2009, the Company plans to spend $1.6 billion for total capital expenditures. New Accounting Pronouncements and Changes in Accounting Policy In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in third quarter 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references. NOTE 1. Nature of Operations and Significant Accounting Policies, continued Effective beginning second quarter 2009, the Financial Instruments Topic, ASC 825-10-65-1(a), requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports. For CSX, this statement applies to certain investments and long-term debt. (See Note 12, Fair Value Measurements.) Effective beginning first quarter 2009, the Consolidation Topic, ASC 810-10-45-16, revised the accounting treatment for noncontrolling minority interests of partially-owned subsidiaries. Noncontrolling minority interests represent the portion of earnings that is not within the parent company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet. This change resulted in a $20 million reclassification from other long-term liabilities to shareholders’ equity on the December 2008 consolidated balance sheet and are primarily related to CSX’s investments in Four Rivers Transportation Inc. and The Indiana Rail Road Company. Additionally, this statement requires net income from noncontrolling minority interests to be shown separately on the consolidated income statements. These amounts are not material for CSX and therefore are not shown separately. |
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| 35 | CVS CAREMARK CORP | Note 1 – Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements of CVS Caremark Corporation and its wholly-owned subsidiaries (the “Company”) have been prepared, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in Exhibit 13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 Form 10-K”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full fiscal year. On December 23, 2008, the Board of Directors of the Company approved a change in the Company’s fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect the Company’s position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. The third quarter of 2009 and 2008 include 92 days and 91 days, respectively, and the nine months ended September 30, 2009 and September 27, 2008 both include 273 days. Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. Recently Adopted Accounting Pronouncements In the third quarter of 2009, the Company adopted the FASB Accounting Standards Codification (“ASC”) as the source of authoritative GAAP for nongovernmental entities. The ASC does not change GAAP but rather takes the numerous individual pronouncements that previously constituted GAAP and reorganizes them into approximately 90 accounting topics, and displays all topics using a consistent structure. Citing particular content in the ASC involves specifying the unique numeric path to the content. The adoption of ASC did not have any effect on the Company’s consolidated results of operations, financial position or cash flows. During the second quarter of 2009, the Company adopted ASC 855 Subsequent Events (formerly Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events”) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but prior to the issuance of the financial statements. In response to this guidance, management has evaluated subsequent events through November 5, 2009, which is the date that the Company’s condensed consolidated financial statements were filed.
During the first quarter of 2009, the Company adopted ASC 805 Business Combinations (“ASC 805”) (formerly SFAS No. 141 (R), “Business Combinations”). ASC 805 establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of business combinations. ASC 805 requires that income tax benefits related to business combinations that are not recorded at the date of acquisition are recorded as an income tax benefit in the statement of operations when subsequently recognized. Previously, unrecognized income tax benefits related to business combinations were recorded as an adjustment to the purchase price allocation when recognized. During the third quarter of 2009, the Company recognized approximately $140.9 million of previously unrecognized income tax benefits related to business combinations (after considering the federal benefit of state taxes), plus interest, due to the expiration of various statutes of limitations and settlements with tax authorities. As of September 30, 2009, the Company had approximately $25.7 million of unrecognized tax benefits (after considering the federal benefit of state taxes), plus interest, related to business combinations that would have been treated as an adjustment to the purchase price allocation if they would have been recognized under the previous business combination guidance. The Company anticipates that income tax examinations will conclude and statutes of limitations for open years will expire over the next twelve months, which may cause a utilization or recognition of a portion of these previously unrecognized tax benefits. In April 2009, the FASB issued further guidance as it relates to ASC 805 (formerly FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”) to address the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. This guidance also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or liabilities be developed depending on their nature. The adoption of this guidance may have an impact on the accounting for future business combinations, but the effect is dependant upon acquisitions at that time. During the first quarter of 2008, the Company adopted additional guidance within ASC 715-60 Defined Contribution Plans-Other Postretirement (formerly Emerging Issues Task Force (“EITF”) No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” and EITF No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements”). The application of this guidance requires a company to recognize a liability for the discounted value of the future premium benefits that a company will incur through the death of the underlying insured and provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. The adoption of the content within ASC 715-60 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows. Recent Accounting Pronouncement Not Yet Effective In June 2009, the FASB issued SFAS No. 167 (not yet codified in ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”). The standard amends the content within ASC 810 Consolidations (formerly FASB Interpretations (“FIN”) No. 46 (R)) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. The determination of whether a company is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and a company’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Additional disclosures are required to identify a company’s involvement with the VIE and any significant changes in risk exposure due to such involvement. SFAS 167 is effective for all new and existing VIEs as of the beginning of the first fiscal year that begins after November 15, 2009. The Company does not believe the adoption of SFAS 167 will have a material impact on the Company’s consolidated results of operations, financial position or cash flows. |
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| 36 | DENTSPLY INTERNATIONAL INC /DE/ | NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Company, as applied in the interim condensed consolidated financial statements presented herein are substantially the same as presented in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008, except as indicated below: Accounts and Notes Receivable-Trade Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $21.8 million and $19.4 million at September 30, 2009 and December 31, 2008, respectively. Business Acquisitions During the first quarter of 2009, the Company adopted the new accounting guidance for business combinations. The new guidance establishes principles and requirements for transactions that represent business combinations to be accounted for under the acquisition method. It provides guidance regarding the recognition and measurement of assets acquired, liabilities assumed, goodwill, noncontrolling interest in the acquiree and financial statement disclosure requirements. Additionally, it provides guidance for identifying a business combination, measuring the acquisition date and defining the measurement period for adjusting provisional amounts recorded. The implementation of this standard did not impact the Company’s net income attributable to DENTSPLY International. Noncontrolling Interests On January 1, 2009, the Company adopted the new accounting guidance for reporting noncontrolling interest (“NCI”) in a subsidiary. As a result, the Company reported NCI as a separate component of Stockholders’ Equity in the Condensed Consolidated Balance Sheet. Additionally, the Company reported the portion of net income and comprehensive income (loss) attributed to the Company and NCI separately in the Condensed Consolidated Statement of Operations. The Company also included a separate column for NCI in the Consolidated Statement of Changes in Equity. All related disclosures have been adjusted accordingly. Prior year amounts associated with NCI in the financial statements and accompanied footnotes have been retrospectively adjusted to conform to the adoption. The implementation of this new standard did not impact the Company’s net income attributable to DENTSPLY International in the current or prior period. Fair Value Measurement During the first quarter of 2009, the Company adopted the new guidance for fair value measurement. The new guidance changed the effective date for recognizing and disclosing the fair value for non-financial assets and liabilities except for items recognized or disclosed in the financial statements on a recurring basis. The implementation of this new guidance did not impact the Company’s financial statements in the current or prior periods. The new guidance also required additional disclosure about the fair value of financial instruments for interim reporting periods in addition to annual financial statements. The Company has disclosed the required information in Note 13, Financing Arrangements. FASB Accounting Standards Codification In June 2009, the FASB issued The FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has updated all of its disclosures to be consistent with the Codification and has determined that the implementation of the Codification did not have a significant impact on its financial results. Subsequent Events In May 2009, a new accounting guidance was issued for disclosures about subsequent events. The new guidance requires the Company to disclose the date through which it has evaluated subsequent events and whether the date represents the date the financial statements were issued or were available to be issued. The Company has evaluated subsequent events through October 29, 2009, which is the date the financial statements have been filed with the SEC. Recent Accounting Pronouncements In December 2008, the Financial Accounting Standards Board (“FASB”) issued new guidance for disclosures about postretirement benefit plans (“the Plans”). The objective of this new guidance is to provide financial statement users additional information concerning the Plans’ investment policies and strategies and how allocation decisions are made. Additionally, disclosures are to be made concerning categories of the Plans’ assets, the valuation technique used in regard to the fair value measurement of the Plans’ assets and concentrations of risk within the Plans’ assets. The new guidance is effective for fiscal years ending after December 15, 2009 with early application permitted. The revised disclosures are not required to be applied to earlier periods that are presented for comparative periods. The Company is currently evaluating the impact of adopting this standard on its disclosures. In June 2009, the FASB issued new accounting guidance for the transfer of financial assets and the effects of a transfer on its financial position, financial performance and cash flows. The new guidance eliminates the use of qualified special purpose entities, clarifies the derecognition criteria for a transfer accounted for as a sale, and expands the disclosure requirements among other things. The new guidance is effective for fiscal years beginning after November 15, 2009 and must be applied prospectively to new transfers of financial assets. The Company believes this new guidance will not have a material impact on its financial statements. In June 2009, the FASB issued new accounting guidance for variable interest entities. The new guidance includes: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a variable interest entity (“VIE”), which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess who should consolidate a VIE. The new guidance is effective for annual reporting periods that begin after November 15, 2009 and applies to all existing and new VIEs. The Company is currently evaluating the impact of adopting this new guidance. Revisions in Classification Certain revisions in classification have been made to prior years' data in order to conform to current year presentation. |
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| 37 | DISH Network CORP |
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States (“GAAP”) and with the
instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.
Accordingly, these statements do not include all of the information and notes required for complete
financial statements prepared under GAAP. In our opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009. For further information, refer to the
Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2008 (“2008 10-K”). Certain prior period amounts have been
reclassified to conform to the current period presentation. In addition, the “Income tax
(provision) benefit, net” was reduced by prior period adjustments totaling $25 million for each of
the three and nine months ended September 30, 2009. Further, in connection with preparation of the
condensed consolidated financial statements, we have evaluated subsequent events through the
issuance of these financial statements on November 9, 2009.
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162” (“SFAS 168”).
SFAS 168 establishes the FASB Accounting Standards Codification (the
“Codification”)
as the single source of authoritative accounting principles
recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial statements in conformity
with GAAP. The Codification does not change current GAAP, but is intended to simplify user access
to all authoritative GAAP by providing all the authoritative literature in one place related to a
particular topic. We were required to implement the Codification during the third quarter of 2009. The
Codification did not have any impact on our consolidated financial position or results of
operations. However, it affects the way we reference authoritative accounting literature in our
Condensed Consolidated Financial Statements. Accordingly, this Quarterly Report on Form 10-Q and
all subsequent applicable public filings will reference the Codification as the source of
authoritative literature.
Principles of Consolidation
We consolidate all majority owned subsidiaries, investments in entities in which we have
controlling influence and variable interest entities where we have been determined to be the
primary beneficiary. Non-majority owned investments are accounted for using the equity method when
we have the ability to significantly influence the operating decisions of the investee. When we do
not have the ability to significantly influence the operating decisions of an investee, the cost
method is used. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses for each reporting period. Estimates are used in accounting for, among other things,
allowances for doubtful accounts, inventory allowances, self-insurance obligations, deferred taxes
and related valuation allowances, uncertain tax positions, loss contingencies, fair value of
financial instruments, fair value of options granted under our stock-based compensation plans, fair
value of assets and liabilities acquired in business combinations, capital leases, asset
impairments, useful lives of property, equipment and intangible assets, retailer incentives,
programming expenses, subscriber lives and royalty obligations. Illiquid credit markets and
general downward economic conditions have increased the inherent uncertainty in the estimates and
assumptions indicated above. Actual results may differ from previously estimated amounts, and such
differences may be material to the Condensed Consolidated Financial Statements. Estimates and
assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in
the period they occur.
Fair Value of Financial Instruments
As of September 30, 2009 and December 31, 2008, the carrying value of our cash and cash
equivalents, marketable investment securities, trade accounts receivable, net of allowance for
doubtful accounts, and current liabilities is equal to or approximates fair value due to their
short-term nature. See Note 7 for the fair value of our long-term debt.
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| 38 | DOMINION RESOURCES INC /VA/ | Note 2. Significant Accounting Policies As permitted by the rules and regulations of the SEC, our accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in our Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009. In our opinion, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly our financial position as of September 30, 2009, our results of operations for the three and nine months ended September 30, 2009 and 2008 and our cash flows for the nine months ended September 30, 2009 and 2008. Such adjustments are normal and recurring in nature unless otherwise noted. We make certain estimates and assumptions in preparing our Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates. Our accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, our accounts and those of our majority-owned subsidiaries. In accordance with GAAP, we report certain contracts and instruments at fair value. See Note 9 for further information on fair value measurements. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, electric fuel and other energy-related purchases, purchased gas expenses and other factors.
Certain amounts in our 2008 Consolidated Financial Statements and Notes have been recast to conform to the 2009 presentation. We have evaluated subsequent events through November 2, 2009, the date our Consolidated Financial Statements were issued. |
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| 39 | Dupont E I De Nemours & Co | Note 1. Summary of Significant Accounting Policies Interim Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the company's Annual Report on Form 10-K for the year ended December 31, 2008, collectively referred to as the ‘2008 Annual Report’. The Consolidated Financial Statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained, as well as variable interest entities in which DuPont is considered the primary beneficiary. Certain reclassifications of prior year's data have been made to conform to current year classifications.
The company’s management has evaluated the period from October 1, 2009 through October 26, 2009, the date the financial statements herein were issued, for subsequent events requiring recognition or disclosure in the financial statements. Effective October 1, 2009, the company has redefined its external reporting to the following aggregated segments: Agriculture & Nutrition, Electronics & Communications, Performance Coatings, Performance Materials, Safety & Protection, Performance Chemicals and Pharmaceuticals. The company will begin reporting under the redefined structure in its 2009 Annual Report on Form 10-K. No additional material subsequent events were identified.
In December 2008, the Financial Accounting Standards Board (FASB) issued authoritative guidance on employer’s disclosures about postretirement benefit plan assets, which is effective for fiscal years ending after December 15, 2009. The new requirement expands disclosures for assets held by employer pension and other postretirement benefit plans. This requirement will not affect the company’s financial position or results of operations.
In June 2009, FASB issued authoritative guidance on accounting for transfers of financial assets, which is effective for reporting periods beginning after November 15, 2009. The new requirement limits the circumstances in which a financial asset may be de-recognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by the new requirement. The company expects that this will not have a material effect on its financial position or results of operations.
In June 2009, FASB issued authoritative guidance on accounting for variable interest entities, which is effective for reporting periods beginning after November 15, 2009. The amendments change the process for how an enterprise determines which party consolidates a variable interest entity (VIE) to a primarily qualitative analysis. The party that consolidates the VIE (the primary beneficiary) is defined as the party with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Upon adoption, reporting enterprises must reconsider their conclusions on whether an entity should be consolidated and should a change result, the effect on net assets will be recorded as a cumulative effect adjustment to retained earnings. The company expects that upon adoption this will not have a material effect on its financial position or results of operations.
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| 40 | EATON CORP |
ADOPTION OF NEW ACCOUNTING GUIDANCE
Financial Accounting Standards Board Accounting Standards Codification
In the second quarter of 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Codification (ASC) Topic 105, “Generally Accepted Accounting Principles”, which
establishes a sole source of U.S. authoritative generally accepted accounting principles (GAAP).
The Codification is meant to simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into approximately ninety accounting topics within a
consistent structure; its purpose is not to create new accounting and reporting guidance. Pursuant
to the provisions of ASC Topic 105, Eaton has updated references to U.S. GAAP in these consolidated
financial statements. The adoption of this guidance did not have an effect on Eaton’s consolidated
results of operations, financial position or cash flows.
Subsequent Events
In the second quarter of 2009, Eaton adopted ASC Topic 855, “Subsequent Events”. This guidance
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. Eaton has evaluated subsequent
events through November 5, 2009, the date the financial statements were issued, noting no events
that require adjustment of, or disclosure in, the consolidated financial statements for the period
ended September 30, 2009, other than the Meritor Litigation described in “Contingencies” in the
Notes below.
Noncontrolling Interests in Consolidated Financial Statements
In the first quarter of 2009, Eaton adopted ASC Topic 810-10-65-1, “Noncontrolling Interests in
Consolidated Financial Statements”. This guidance clarifies accounting and reporting for
noncontrolling interests, sometimes called a minority interest, which is the portion of equity in a
subsidiary not owned, directly or indirectly, by Eaton. As a result of the adoption, the
Consolidated Financial Statements were reclassified to separately report noncontrolling interests.
The adoption of this guidance did not have a material effect on Eaton’s consolidated results of
operations, financial position or cash flows.
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| 41 | EDISON INTERNATIONAL |
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| 42 | EDISON MISSION ENERGY |
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| 43 | EME HOMER CITY GENERATION LP |
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| 44 | ENTERPRISE PRODUCTS PARTNERS L P | Estimates Preparing our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts presented in the financial statements (e.g. assets, liabilities, revenues and expenses) and disclosures about contingent assets and liabilities. Our actual results could differ from these estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. Fair Value Information Cash and cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, and other current liabilities are carried at amounts which reasonably approximate their fair values due to their short-term nature. The estimated fair values of our fixed rate debt are based on quoted market prices for such debt or debt of similar terms and maturities. The carrying amounts of our variable rate debt obligations reasonably approximate their fair values due to their variable interest rates. See Note 4 for fair value information associated with our derivative instruments. The following table presents the estimated fair values of our financial instruments at the dates indicated:
Recent Accounting Developments The following information summarizes recently issued accounting guidance that will or may affect our future financial statements. Generally Accepted Accounting Principles. In June 2009, the FASB published ASC 105, Generally Accepted Accounting Principles, as the source of authoritative GAAP for U.S. companies. The ASC reorganized GAAP into a topical format and significantly changes the way users research accounting issues. For SEC registrants, the rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP. References to specific GAAP in our consolidated financial statements now refer exclusively to the ASC. We adopted the new codification on September 30, 2009. Fair Value Measurements. In April 2009, the FASB issued ASC 820, Fair Value Measurements and Disclosures, to clarify fair value accounting rules. This new accounting guidance establishes a process to determine whether a market is active and a transaction is consummated under distress. Companies should look at several factors and use professional judgment to ascertain if a formerly active market has become inactive. When estimating fair value, companies are required to place more weight on observable transactions in orderly markets. Our adoption of this new guidance on June 30, 2009 did not have any impact on our consolidated financial statements or related disclosures. In August 2009, the FASB issued Accounting Standards Update 2009-05, Measuring Liabilities at Fair Value, to clarify how an entity should estimate the fair value of liabilities. If a quoted price in an active market for an identical liability is not available, a company must measure the fair value of the liability using one of several valuation techniques (e.g., quoted prices for similar liabilities or present value of cash flows). Our adoption of this new guidance on October 1, 2009 did not have any impact on our consolidated financial statements or related disclosures. Financial Instruments. In April 2009, the FASB issued ASC 825, Financial Instruments, which requires companies to provide in each interim report both qualitative and quantitative information regarding fair value estimates for financial instruments not recorded on the balance sheet at fair value. Previously, this was only an annual requirement. Apart from adding the required fair value disclosures within this Note 2, our adoption of this new guidance on June 30, 2009 did not have a material impact on our consolidated financial statements or related disclosures. Subsequent Events. In May 2009, the FASB issued ASC 855, Subsequent Events, which governs the accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The date through which an entity has evaluated subsequent events is now a required disclosure. Our adoption of this guidance on June 30, 2009 did not have any impact on our consolidated financial statements. Consolidation of Variable Interest Entities. In June 2009, the FASB amended consolidation guidance for variable interest entities (“VIEs”) under ASC 810. VIEs are entities whose equity investors do not have sufficient equity capital at risk such that the entity cannot finance its own activities. When a business has a “controlling financial interest” in a VIE, the assets, liabilities and profit or loss of that entity must be consolidated. A business must also consolidate a VIE when that business has a “variable interest” that (i) provides the business with the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) funds most of the entity’s expected losses and/or receives most of the entity’s anticipated residual returns. The amended guidance:
The amended guidance is effective for us on January 1, 2010. At September 30, 2009, we did not have any VIEs based on prior guidance. We are in the process of evaluating the amended guidance; however, our adoption and implementation of this guidance is not expected to have an impact on our consolidated financial statements. Restricted Cash Restricted cash represents amounts held in connection with our commodity derivative instruments portfolio and related physical natural gas and NGL purchases. Additional cash may be restricted to maintain this portfolio as commodity prices fluctuate or deposit requirements change. At September 30, 2009 and December 31, 2008, our restricted cash amounts were $102.8 million and $203.8 million, respectively. See Note 4 for additional information regarding derivative instruments and hedging activities. Subsequent Events We have evaluated subsequent events through November 9, 2009, which is the date our Unaudited Condensed Consolidated Financial Statements and Notes are being issued. |
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| 45 | EQUITY RESIDENTIAL |
Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. In preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008. Income and Other Taxes Due to the structure of the Company as a REIT and the nature of the operations of its operating properties, no provision for federal income taxes has been made at the EQR level. Historically, the Company has generally only incurred certain state and local income, excise and franchise taxes. The Company has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries, primarily those entities engaged in condominium conversion and corporate housing activities and as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled. The effects of deferred tax assets and liabilities are recognized in earnings in the period enacted. The Company’s deferred tax assets are generally the result of tax affected amortization of goodwill, differing depreciable lives on capitalized assets and the timing of expense recognition for certain accrued liabilities. As of September 30, 2009, the Company has recorded a deferred tax asset of approximately $38.5 million, which is fully offset by a valuation allowance due to the uncertainty in forecasting future TRS taxable income. Other In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which superseded all then-existing non-SEC accounting and reporting standards and became the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by non-governmental entities. The Company adopted the codification as required, effective for the quarter ended September 30, 2009. The adoption of the codification has no impact on the Company’s consolidated results of operations or financial position but changes the way we refer to accounting literature in reports beginning with the quarter ended September 30, 2009. Effective December 31, 2008, public companies were required to provide additional disclosures about transfers of financial assets. In addition, public enterprises, including sponsors that have a variable interest in a Variable Interest Entity (“VIE”), were required to provide additional disclosures about their involvement with VIEs as well as consolidate the assets, liabilities and results of operations of the activities of its VIEs. For the Company, this includes only its development partnerships as the Company provides substantially all of the capital for these ventures (other than third party mortgage debt, if any). The Company does not have any unconsolidated VIEs. These requirements affected only disclosures and had no impact on the Company’s consolidated results of operations or financial position. Effective January 1, 2010, more information about transfers of financial assets, including securitization transactions and where companies have continuing exposure to the risks related to transferred financial assets, will be required. The concept of a qualifying special-purpose entity will be eliminated, the requirements for derecognizing financial assets will change and additional disclosures will be required. The Company is currently evaluating the impact this will have on its consolidated results of operations and financial position. Effective January 1, 2010, the way in which a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated will change. The determination of whether a company is required to consolidate an entity will be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The Company is currently evaluating the impact this will have on its consolidated results of operations and financial position. Effective December 31, 2003, the Company was required to make certain disclosures regarding noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements (e.g., noncontrolling interests in consolidated limited-life subsidiaries). The Company is presently the controlling partner in various consolidated partnerships consisting of 26 properties and 5,126 units and various uncompleted development properties having a noncontrolling interest book value of $12.3 million at September 30, 2009. Some of these partnership agreements contain provisions that require the partnerships to be liquidated through the sale of their assets upon reaching a date specified in each respective partnership agreement. The Company, as controlling partner, has an obligation to cause the property owning partnerships to distribute the proceeds of liquidation to the Noncontrolling Interests (see definition below) in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of their assets warrant a distribution based on the partnership agreements. As of September 30, 2009, the Company estimates the value of Noncontrolling Interest distributions would have been approximately $45.4 million (“Settlement Value”) had the partnerships been liquidated. This Settlement Value is based on estimated third party consideration realized by the partnerships upon disposition of the Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on September 30, 2009 had those mortgages been prepaid. Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Noncontrolling Interests in the Company’s Partially Owned Properties is subject to change. To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Company has no obligation to remit any consideration to the Noncontrolling Interests in these Partially Owned Properties. Effective January 1, 2008, the rules governing fair value measurements changed. These rules established a comprehensive framework for measuring fair value in accordance with accounting principles generally accepted in the United States and required expanded disclosures about fair value measurements. This did not have a material effect on the Company’s consolidated results of operations or financial position. See Note 11 for further discussion.
Effective January 1, 2008, companies were permitted to elect a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial instruments. The Fair Value Option is available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. The Company decided not to adopt this optional standard. Effective for the quarter ended June 30, 2009, disclosures about fair value of financial instruments are required for interim reporting periods in summarized financial information for publicly traded companies as well as in annual financial statements. This does not have a material effect on the Company’s consolidated results of operations or financial position. See Note 11 for further discussion. Effective for business combinations on or after January 1, 2009, an acquiring entity is required to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. In addition, an acquiring entity is required to expense acquisition-related costs as incurred (amounts are included in the other expenses line item in the consolidated statements of operations), value noncontrolling interests at fair value at the acquisition date and expense restructuring costs associated with an acquired business. Due to the current decline in the Company’s acquisition activities, this has not had a material effect on the Company’s consolidated results of operations or financial position. Effective January 1, 2009, a noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the Consolidated Statements of Operations. Other than modifications to allocations and presentation, this does not have a material effect on the Company’s consolidated results of operations or financial position. See Note 3 for further discussion. Effective January 1, 2009, in an effort to improve financial standards for derivative instruments and hedging activities, companies are required to enhance disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. Among other requirements, entities are required to provide enhanced disclosures about: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Other than the enhanced disclosure requirements, this does not have a material effect on the Company’s consolidated financial statements. See Note 11 for further discussion. Effective for the quarter ended June 30, 2009, companies are required to disclose the date through which an entity has evaluated subsequent events in accordance with general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. For public companies, this is the date the financial statements are issued. This does not have a material effect on the Company’s consolidated results of operations or financial position. Effective January 1, 2009, issuers of certain convertible debt instruments that may be settled in cash on conversion were required to separately account for the liability and equity components of the instrument in a manner that reflects each issuer’s nonconvertible debt borrowing rate. As the Company was required to apply this retrospectively, the accounting for the Operating Partnership’s $650.0 million ($531.1 million outstanding at September 30, 2009) 3.85% convertible unsecured notes that were issued in August 2006 and mature in August 2026 was affected. The amount of the conversion option as of the date of issuance calculated by the Company was $44.3 million and is being amortized to interest expense over the expected life of the convertible notes (through the first put date on August 18, 2011). Total amortization of the cash discount and conversion option discount on the unsecured notes resulted in a reduction to earnings of approximately $7.2 million for the nine months ended September 30, 2009 and is anticipated to result in a reduction to earnings of approximately $9.3 million during the full year of 2009 assuming the Company does not repurchase any additional amounts of this debt. In addition, the Company decreased the January 1, 2009 balance of retained earnings by $27.0 million, decreased the January 1, 2009 balance of notes by $17.3 million and increased the January 1, 2009 balance of paid in capital by $44.3 million. Due to the required retrospective application, it resulted in a reduction to earnings of approximately $7.6 million or $0.03 per share for the nine months ended September 30, 2008.
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| 46 | ERP OPERATING LTD PARTNERSHIP |
Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. In preparation of the Operating Partnership’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2008.
Income and Other Taxes The Operating Partnership generally is not liable for federal income taxes as the partners recognize their proportionate share of the Operating Partnership’s income or loss in their tax returns; therefore, no provision for federal income taxes has been made at the ERPOP level. Historically, the Operating Partnership has generally only incurred certain state and local income, excise and franchise taxes. The Operating Partnership has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries, primarily those entities engaged in condominium conversion and corporate housing activities and as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled. The effects of deferred tax assets and liabilities are recognized in earnings in the period enacted. The Operating Partnership’s deferred tax assets are generally the result of tax affected amortization of goodwill, differing depreciable lives on capitalized assets and the timing of expense recognition for certain accrued liabilities. As of September 30, 2009, the Operating Partnership has recorded a deferred tax asset of approximately $38.5 million, which is fully offset by a valuation allowance due to the uncertainty in forecasting future TRS taxable income. Other In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which superseded all then-existing non-SEC accounting and reporting standards and became the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by non-governmental entities. The Operating Partnership adopted the codification as required, effective for the quarter ended September 30, 2009. The adoption of the codification has no impact on the Operating Partnership’s consolidated results of operations or financial position but changes the way we refer to accounting literature in reports beginning with the quarter ended September 30, 2009. Effective December 31, 2008, public companies were required to provide additional disclosures about transfers of financial assets. In addition, public enterprises, including sponsors that have a variable interest in a Variable Interest Entity (“VIE”), were required to provide additional disclosures about their involvement with VIEs as well as consolidate the assets, liabilities and results of operations of the activities of its VIEs. For the Operating Partnership, this includes only its development partnerships as the Operating Partnership provides substantially all of the capital for these ventures (other than third party mortgage debt, if any). The Operating Partnership does not have any unconsolidated VIEs. These requirements affected only disclosures and had no impact on the Operating Partnership’s consolidated results of operations or financial position. Effective January 1, 2010, more information about transfers of financial assets, including securitization transactions and where companies have continuing exposure to the risks related to transferred financial assets, will be required. The concept of a qualifying special-purpose entity will be eliminated, the requirements for derecognizing financial assets will change and additional disclosures will be required. The Operating Partnership is currently evaluating the impact this will have on its consolidated results of operations and financial position. Effective January 1, 2010, the way in which a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated will change. The determination of whether a company is required to consolidate an entity will be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The Operating Partnership is currently evaluating the impact this will have on its consolidated results of operations and financial position. Effective December 31, 2003, the Operating Partnership was required to make certain disclosures regarding noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements (e.g., noncontrolling interests in consolidated limited-life subsidiaries). The Operating Partnership is presently the controlling partner in various consolidated partnerships consisting of 26 properties and 5,126 units and various uncompleted development properties having a noncontrolling interest book value of $12.3 million at September 30, 2009. Some of these partnership agreements contain provisions that require the partnerships to be liquidated through the sale of their assets upon reaching a date specified in each respective partnership agreement. The Operating Partnership, as controlling partner, has an obligation to cause the property owning partnerships to distribute the proceeds of liquidation to the Noncontrolling Interests (see definition below) in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of their assets warrant a distribution based on the partnership agreements. As of September 30, 2009, the Operating Partnership estimates the value of Noncontrolling Interest distributions would have been approximately $45.4 million (“Settlement Value”) had the partnerships been liquidated. This Settlement Value is based on estimated third party consideration realized by the partnerships upon disposition of the Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on September 30, 2009 had those mortgages been prepaid. Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Noncontrolling Interests in the Operating Partnership’s Partially Owned Properties is subject to change. To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Operating Partnership has no obligation to remit any consideration to the Noncontrolling Interests in these Partially Owned Properties. Effective January 1, 2008, the rules governing fair value measurements changed. These rules established a comprehensive framework for measuring fair value in accordance with accounting principles generally accepted in the United States and required expanded disclosures. This did not have a material effect on the Operating Partnership’s consolidated results of operations or financial position. See Note 11 for further discussion. Effective January 1, 2008, companies were permitted to elect a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial instruments. The Fair Value Option is available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. The Operating Partnership decided not to adopt this optional standard. Effective for the quarter ended June 30, 2009, disclosures about fair value of financial instruments are required for interim reporting periods in summarized financial information for publicly traded companies as well as in annual financial statements. This does not have a material effect on the Operating Partnership’s consolidated results of operations or financial position. See Note 11 for further discussion. Effective for business combinations on or after January 1, 2009, an acquiring entity is required to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. In addition, an acquiring entity is required to expense acquisition-related costs as incurred (amounts are included in the other expenses line item in the consolidated statements of operations), value noncontrolling interests at fair value at the acquisition date and expense restructuring costs associated with an acquired business. Due to the current decline in the Operating Partnership’s acquisition activities, this has not had a material effect on the Operating Partnership’s consolidated results of operations or financial position. Effective January 1, 2009, a noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the Consolidated Statements of Operations. Other than modifications to allocations and presentation, this does not have a material effect on the Operating Partnership’s consolidated results of operations or financial position. See Note 3 for further discussion. Effective January 1, 2009, in an effort to improve financial standards for derivative instruments and hedging activities, companies are required to enhance disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. Among other requirements, entities are required to provide enhanced disclosures about: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Other than the enhanced disclosure requirements, this does not have a material effect on the Operating Partnership’s consolidated financial statements. See Note 11 for further discussion. Effective for the quarter ended June 30, 2009, companies are required to disclose the date through which an entity has evaluated subsequent events in accordance with general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. For public companies, this is the date the financial statements are issued. This does not have a material effect on the Operating Partnership’s consolidated results of operations or financial position.
Effective January 1, 2009, issuers of certain convertible debt instruments that may be settled in cash on conversion were required to separately account for the liability and equity components of the instrument in a manner that reflects each issuer’s nonconvertible debt borrowing rate. As the Operating Partnership was required to apply this retrospectively, the accounting for the Operating Partnership’s $650.0 million ($531.1 million outstanding at September 30, 2009) 3.85% convertible unsecured notes that were issued in August 2006 and mature in August 2026 was affected. The amount of the conversion option as of the date of issuance calculated by the Operating Partnership was $44.3 million and is being amortized to interest expense over the expected life of the convertible notes (through the first put date on August 18, 2011). Total amortization of the cash discount and conversion option discount on the unsecured notes resulted in a reduction to earnings of approximately $7.2 million for the nine months ended September 30, 2009 and is anticipated to result in a reduction to earnings of approximately $9.3 million during the full year of 2009 assuming the Operating Partnership does not repurchase any additional amounts of this debt. In addition, the Operating Partnership decreased the January 1, 2009 balance of retained earnings (included in general partner’s capital) by $27.0 million, decreased the January 1, 2009 balance of notes by $17.3 million and increased the January 1, 2009 balance of paid in capital (included in general partner’s capital) by $44.3 million. Due to the required retrospective application, it resulted in a reduction to earnings of approximately $7.6 million or $0.03 per Unit for the nine months ended September 30, 2008.
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| 47 | EXPRESS SCRIPTS INC |
Note 1 — Summary of significant accounting policies
Our significant accounting policies, normally included in financial statements prepared in
conformity with generally accepted accounting principles, have been omitted from this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However,
we believe the disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the notes to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, as
revised and filed with the SEC on Form 8-K on June 2, 2009 to reflect the change in segment
reporting as described in Note 10 to the accompanying consolidated financial statements. We changed
our reportable segments to Pharmacy Benefit Management (“PBM”) and Emerging Markets (“EM”) during
the first quarter of 2009 (see Note 10). For a full description of our accounting policies, refer
to the Notes to Consolidated Financial Statements included in our Current Report on Form 8-K dated
June 2, 2009.
We believe the accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to present fairly the
Unaudited Consolidated Balance Sheet at September 30, 2009, the Unaudited Consolidated Statement of
Operations for the three months and nine months ended September 30, 2009 and 2008, the Unaudited
Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30,
2009, and the Unaudited Consolidated Statement of Cash Flows for the nine months ended September
30, 2009 and 2008. Operating results for the three months and nine months ended September 30, 2009
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2009.
New Accounting Guidance. In December 2007, the Financial Accounting Standards Board (“FASB”)
revised the authoritative guidance for business combinations. The guidance changes the definitions
of a business and a business combination, and will result in more transactions recorded as business
combinations. Certain acquired contingencies will be recorded initially at fair value on the
acquisition date, transaction and restructuring costs generally will be expensed as incurred and in
partial acquisitions, companies generally will record 100 percent of the assets and liabilities at
fair value, including goodwill. In April 2009, the FASB amended guidance which clarifies the
accounting for assets acquired and liabilities assumed in a business combination that arise from
contingencies. The guidance is effective as of the start of the first quarter 2009. We will
account for all business combinations in 2009 and beyond under the guidance.
In April 2008, the FASB issued authoritative guidance which intends to improve the consistency
between the useful life of an intangible asset and the period of expected cash flows used to
measure the fair value of the asset. The guidance is effective for fiscal years beginning after
December 15, 2008. These provisions will be applied to future intangible assets acquired.
In May 2009, the FASB issued authoritative guidance which establishes standards of accounting
for events that occur after the balance sheet date and disclosures of events that occur after the
balance sheet date but before financial statements are issued. The guidance requires disclosure of
the date through which an entity has evaluated subsequent events and the basis for the date. This
guidance is effective for interim or annual financial periods ending after June 15, 2009. We have
evaluated subsequent events through October 28, 2009, the date of the financial statements
issuance. Adoption of the guidance does not have an impact on financial position, results of
operations, or cash flows.
In June 2009, the FASB issued authoritative guidance which identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (“GAAP”) in the United States. This guidance is effective for
financial statements issued for interim and annual periods ending after September 15, 2009.
Adoption of the guidance does not have an impact on financial position, results of operations, or
cash flows.
In August 2009, the FASB issued authoritative guidance which provides clarification regarding
measurement of the fair value of liabilities. This guidance is effective for the first reporting
period beginning after issuance. Adoption of the guidance does not have a material impact on
financial position, results of operations, or cash flows.
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| 48 | FEDERAL NATIONAL MORTGAGE ASSOCIATION FANNIE MAE | 2. Summary of Significant Accounting Policies
Servicer and MBS trust receivable and payable Financial Statement Accounting and Presentation Changes Estimated Net Impact Balance Sheet
Statement of Operations
Statement of Cash Flows
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| 49 | FedEx Corporation | (1) General SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2009 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of August 31, 2009 and the results of our operations and cash flows for the three-month periods ended August 31, 2009 and 2008. Operating results for the three-month period ended August 31, 2009 are not necessarily indicative of the results that may be expected for the year ending May 31, 2010. Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2010 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. Certain prior period amounts have been reclassified to conform to the current period’s presentation. For example, at FedEx Ground certain fuel supplement costs related to our independent contractors were reclassified from fuel expense to purchased transportation to conform to the current period presentation. NEW ACCOUNTING PRONOUNCEMENTS. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe the following new accounting pronouncements are relevant to the readers of our financial statements. On June 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS") 157, “Fair Value Measurements,” which provides a common definition of fair value, establishes a uniform framework for measuring fair value and requires expanded disclosures about fair value measurements. On June 1, 2009, we implemented the previously deferred provisions of SFAS 157 for nonfinancial assets and liabilities recorded at fair value, as required. The adoption of SFAS 157 had no impact on our financial statements. In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 141R, “Business Combinations,” and SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (“ARB”) No. 51.” These new standards significantly change the accounting for and reporting of business combination transactions, including noncontrolling interests (previously referred to as minority interests). For example, these standards require the acquiring entity to recognize the full fair value of assets acquired and liabilities assumed in the transaction and require the expensing of most transaction and restructuring costs. Both standards became effective for us beginning June 1, 2009 and had no impact on our financial statements. In December 2008, the FASB issued FASB Staff Position (“FSP”) 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP provides guidance on the objectives an employer should consider when providing detailed disclosures about assets of a defined benefit pension or other postretirement plan, including disclosures about investment policies and strategies, categories of plan assets, significant concentrations of risk and the inputs and valuation techniques used to measure the fair value of plan assets. This FSP will be effective for our fiscal year ending May 31, 2010. In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP requires disclosures about the fair value of financial instruments for interim reporting periods in addition to annual reporting periods. This FSP became effective for us beginning with the first quarter of fiscal year 2010. In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard requires us to disclose the date through which we have evaluated subsequent events, which for SEC registrants is the date we file our financial statements with the SEC. This standard became effective for our first quarter of fiscal year 2010. Events occurring after the date of the condensed consolidated balance sheet but before the issuance of the financial statements included in this filing have been evaluated through the time of this filing. In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification (“Codification”) and the Hierarchy of GAAP,” (“SFAS 168”), which establishes the Codification as the single source of authoritative U.S. GAAP recognized by the FASB. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective beginning for periods ending after September 15, 2009. As SFAS 168 is not intended to change or alter existing GAAP, it will not impact our results of operations, cash flows or financial position. We will adjust historical GAAP references in our second quarter 2010 Form 10-Q to reflect accounting guidance references included in the Codification. DIVIDENDS DECLARED PER COMMON SHARE. On June 8, 2009, our Board of Directors declared a dividend of $0.11 per share of common stock. The dividend was paid on July 1, 2009 to stockholders of record as of the close of business on June 18, 2009. On August 14, 2009, our Board of Directors declared a dividend of $0.11 per share of common stock. The dividend is payable on October 1, 2009, to stockholders of record as of the close of business on September 10, 2009. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year. |
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| 50 | FIRST SOLAR, INC. |
Note 2. Summary of Significant Accounting Policies
These condensed consolidated financial statements and accompanying notes should be read in
conjunction with our annual consolidated financial statements and notes thereto for the year ended
December 27, 2008 included in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Our significant accounting policies reflect the adoption of Financial Accounting
Standards Board (FASB) Accounting Standards Codification Topic (ASC) 805, Business Combinations, in
the second quarter of fiscal 2009.
During the third quarter of fiscal 2009, we adopted the provisions of ASC 976, Accounting for
Sales of Real Estate for certain solar power projects.
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| 51 | FLEXTRONICS INTERNATIONAL LTD. |
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements, and should be read in conjunction with the
Company’s audited consolidated financial statements as of and for the fiscal year ended March 31,
2009 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-month and six-month periods ended
October 2, 2009 are not necessarily indicative of the results that may be expected for the fiscal
year ended March 31, 2010. The Company evaluated subsequent events for disclosure through November
2, 2009.
The Company’s third fiscal quarter ends on December 31, and the fourth fiscal quarter and year
ends on March 31 of each year. The first fiscal quarters ended on July 3, 2009 and June 27, 2008,
respectively, and the second fiscal quarters ended on October 2, 2009 and September 26, 2008,
respectively.
Customer Credit Risk
The Company has an established customer credit policy, through which it manages customer
credit exposures through credit evaluations, credit limit setting, monitoring, and enforcement of
credit limits for new and existing customers. The Company performs ongoing credit evaluations of
its customers’ financial condition and makes provisions for doubtful accounts based on the outcome
of those credit evaluations. The Company evaluates the collectability of its accounts receivable
based on specific customer circumstances, current economic trends, historical experience with
collections and the age of past due receivables. To the extent the Company identifies exposures as
a result of credit or customer evaluations, the Company also reviews other customer related
exposures, including but not limited to inventory and related contractual obligations.
During the three-month and six-month periods ended September 26, 2008, the Company recognized
approximately $117.4 million of charges associated with certain customers that were filing for
bankruptcy or were experiencing significant financial and liquidity difficulties. The Company
classified approximately $96.7 million of these charges in cost of sales related to the write-down
of inventory and associated contractual obligations. Additionally, the Company recognized
approximately $20.7 million as selling, general and administrative expenses for provisions for
doubtful accounts.
Inventories
The components of inventories, net of applicable lower of cost or market write-downs, were as
follows:
Property and Equipment
Depreciation expense associated with property and equipment amounted to approximately $91.5
million and $186.0 million for the three-month and six-month periods ended October 2, 2009,
respectively, and $91.8 million and $183.8 million for the three-month and six-month periods ended
September 26, 2008, respectively. Proceeds from the disposition of property and equipment were
$15.7 million and $32.7 million during the six-month periods ended October 2, 2009 and September
26, 2008, respectively, and are presented net with purchases of property and equipment within cash
flows from investing activities in the Condensed Consolidated Statements of Cash Flows.
Goodwill and Other Intangibles
The following table summarizes the activity in the Company’s goodwill account during the
six-month period ended October 2, 2009:
The components of acquired intangible assets are as follows:
Total intangible amortization expense was $22.7 million and $46.0 million during the
three-month and six-month periods ended October 2, 2009, respectively, and $50.3 million and $75.6
million during the three-month and six-month periods ended September 26, 2008, respectively. The
estimated future annual amortization expense for acquired intangible assets is as follows:
Other Assets
The Company has certain equity investments in, and notes receivable from, non-publicly traded
companies, which are included within other assets in the Company’s Condensed Consolidated Balance
Sheets. As of October 2, 2009 and March 31, 2009, the Company’s equity investments and notes
receivable from these non-publicly traded companies totaled $30.7 million and $473.6 million
respectively. The Company monitors these investments and notes receivable for impairment and makes
appropriate reductions in carrying values as required.
During the second quarter of fiscal 2010, the Company recognized charges totaling
approximately $92.0 million associated with the impairment of notes receivable from one affiliate
and an equity investment in another affiliate, which are included in Other charges, net in the
Condensed Consolidated Statements of Operations. The notes receivable were partially impaired
during the fourth quarter of fiscal year 2009 based on discussions with a third party for the
potential sale of the notes and the related expected recoverable value. Subsequent deterioration
in the affiliate’s business prospects, cash flow expectations, and increased liquidity concerns has
resulted in an additional impairment. Similarly, deterioration in the business prospects and
liquidity concerns of the equity investment occurring in the six-month period ended October 2, 2009
has resulted in an impairment of the carrying value to the estimated recoverable value.
In August 2009, the Company sold one of its non-majority owned investments and related note
receivable for approximately $252.5 million, net of closing costs. In conjunction with this
transaction the Company recognized an impairment charge of approximately $107.4 million in the
three-month period ended July 3, 2009. Total impairment charges related to the Company’s equity
investments and notes receivable for the six-month period ended October 2, 2009 were approximately
$199.4 million and are included in Other charges, net in the Condensed Consolidated Statements of
Operations.
During the three-month and six-month periods ended September 26, 2008, the Company recognized
$11.9 million in charges for other-than-temporary impairment of certain of the Company’s
investments primarily associated with a customer that was experiencing significant financial and
liquidity difficulties.
Provision for income taxes
The Company has tax loss carryforwards attributable to continuing operations for which the
Company has recognized deferred tax assets. The Company’s policy is to provide a reserve against
those deferred tax assets that in management’s estimate are not more likely than not to be
realized. During the three-month and six-month periods ended October 2, 2009, the provision for
income taxes includes a benefit of approximately $63.3 million and $75.2 million, respectively, for
the net change in the liability for unrecognized tax benefits as a result of settlements in various
tax jurisdictions. During the six-month period ended September 26, 2008, the provision for income
taxes includes a benefit of approximately $38.5 million for the reversal of valuation allowances
and other tax reserves.
Recent Accounting Pronouncements
In June 2009, a new accounting standard was issued which removes the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of
a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor’s interest in transferred financial assets. This guidance is effective
for fiscal years beginning after November 15, 2009 and is required to be adopted by the Company in
the first quarter of fiscal year 2011. The adoption of this standard will not have any impact on
the Company’s consolidated statement of operations and could require that future sales of accounts
receivable be treated as a financing activity in the statement of cash flows and as a liability on
the Company’s balance sheet (see Note 8).
In June 2009, a new accounting standard was issued which amends the consolidation guidance
applicable to variable interest entities (“VIEs”), the approach for determining the primary
beneficiary of a VIE, and disclosure requirements of a Company’s involvement with VIEs. This
standard is effective for fiscal years beginning after November 15, 2009 and is required to be
adopted by the Company in the first quarter of fiscal year 2011. The adoption of this standard
will not have any impact on the Company’s consolidated statement of operations and could require
that future sales of accounts receivable be treated as a financing activity in the statement of
cash flows and as a liability on the Company’s balance sheet (see Note 8).
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| 52 | Foster Wheeler AG | 1. Summary of Significant Accounting Policies Basis of Presentation — At a special court-ordered meeting of common shareholders held on January 27, 2009, the common shareholders of Foster Wheeler Ltd. approved a scheme of arrangement under Bermuda law. On February 9, 2009, after receipt of the approval of the scheme of arrangement by the Supreme Court of Bermuda and the satisfaction of certain other conditions, the transactions contemplated by the scheme of arrangement were effected. Pursuant to the scheme of arrangement, among other things, all previously outstanding whole common shares of Foster Wheeler Ltd. were cancelled and the common shareholders of Foster Wheeler Ltd. became common shareholders of Foster Wheeler AG, a Swiss corporation, and Foster Wheeler Ltd. became a wholly-owned subsidiary of Foster Wheeler AG, a holding company that owns the stock of its various subsidiary companies. The steps of the scheme of arrangement together with certain related transactions, which are collectively referred to throughout the Notes to the consolidated financial statements as the “Redomestication,” effectively changed our place of incorporation from Bermuda to the Canton of Zug, Switzerland. Please see Note 13 for further information related to the Redomestication. The fiscal year of Foster Wheeler AG ends on December 31 of each calendar year. Foster Wheeler AG’s fiscal quarters end on the last day of March, June and September. The fiscal year of Foster Wheeler Ltd., the parent company prior to the Redomestication, was the 52- or 53-week annual accounting period ending the last Friday in December for our U.S. operations and December 31 for non-U.S. operations and ended on December 26, 2008 for fiscal year 2008. The fiscal third quarter and nine months ended of Foster Wheeler Ltd. for the fiscal year ended December 26, 2008, which for reporting purposes is also the fiscal third quarter and nine months ended of Foster Wheeler AG for such fiscal year, ended on September 26, 2008. Foster Wheeler AG consolidated financial results for the third fiscal quarter represent the period from July 1, 2009 through September 30, 2009 and June 28, 2008 through September 26, 2008, in fiscal years 2009 and 2008, respectively. Foster Wheeler AG consolidated financial results for the first fiscal nine months represent the period from December 27, 2008 through September 30, 2009 and December 29, 2007 through September 26, 2008, in fiscal years 2009 and 2008, respectively. The consolidated financial results include our U.S. operations, which have a fiscal year that is the 52- or 53-week annual accounting period ending the last Friday in December, and our non-U.S. operations, which have a fiscal year ending on December 31. Although the fiscal year for our parent company is now December 31, the fiscal year and fiscal quarter ending dates for both our U.S. and non-U.S. operations were not impacted by the Redomestication. We have evaluated all subsequent events for adjustment to or disclosure in these consolidated financial statements through the issuance of these consolidated financial statements on November 4, 2009. In July 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards CodificationTM (“FASB ASC”) 105-10, "The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” FASB ASC 105-10, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009, established the FASB ASC as the sole source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The FASB ASC supersedes all non-SEC accounting and reporting standards. We have amended the references to U.S. GAAP in our disclosures accordingly beginning with our interim consolidated financial statements included in this quarterly report on Form 10-Q. The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments only consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented in accordance with the requirements of Form 10-Q and do not contain certain information included in our annual report on Form 10-K for the fiscal year ended December 26, 2008 (“2008 Form 10-K”), filed with the Securities and Exchange Commission on February 24, 2009. The consolidated balance sheet as of December 26, 2008 was derived from the audited financial statements included in our 2008 Form 10-K, but does not include all the disclosures required by accounting principles generally accepted in the United States of America for annual consolidated financial statements. Additionally, the presentation of our consolidated balance sheet as of December 26, 2008 reflects the adoption of SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (codified in FASB ASC 810-10-65), as described below. A summary of our significant accounting policies is presented below. Principles of Consolidation — The consolidated financial statements include the accounts of Foster Wheeler AG and all significant U.S. and non-U.S. subsidiaries as well as certain entities in which we have a controlling interest. Intercompany transactions and balances have been eliminated. We adopted FASB ASC 810-10-65 as of the beginning of fiscal year 2009. FASB ASC 810-10-65 amends the accounting and reporting standards for the noncontrolling interest in a subsidiary (formerly referred to as “minority interest”) and for the deconsolidation of a subsidiary. Under FASB ASC 810-10-65, the noncontrolling interest in a subsidiary is reported as equity in the parent company’s consolidated financial statements. FASB ASC 810-10-65 also requires that the parent company’s consolidated statement of operations include both the parent and noncontrolling interest share of the subsidiary’s statement of operations. Formerly, the noncontrolling interest share was shown as a reduction of income on the parent’s consolidated statement of operations. FASB ASC 810-10-65 was applied prospectively as of the beginning of the fiscal year; however, presentation and disclosure requirements are applied retrospectively for all periods presented. Upon our adoption of FASB ASC 810-10-65, we (i) reclassified our minority interest liability to a separate section entitled “noncontrolling interests” within total equity on our consolidated balance sheet, which increased total equity by $28,718 as of December 26, 2008; (ii) removed minority interest expense from the determination of total net income on our consolidated statement of operations, which increased total net income by $834 and $1,859 for the fiscal quarter and nine months ended September 26, 2008, respectively; and (iii) included a reduction for net income attributable to noncontrolling interests in the determination of net income attributable to Foster Wheeler AG (as successor to Foster Wheeler Ltd. - please see Note 13 for further information related to the Redomestication) and earnings per share on the consolidated statement of operations, which corresponded to the net income and earnings per share figures previously reported. Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Changes in estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts including estimates of total costs and customer and vendor claims, employee benefit plan obligations, share-based compensation plans, uncertain tax positions and deferred taxes, and asbestos liabilities and expected recoveries, among others. Revenue Recognition on Long-Term Contracts — Revenues and profits on long-term contracts are recorded under the percentage-of-completion method. Progress towards completion on fixed price contracts is measured based on physical completion of individual tasks for all contracts with a value of $5,000 or greater. For contracts with a value less than $5,000, progress toward completion is measured based on the ratio of costs incurred to total estimated contract costs (the cost-to-cost method). Progress towards completion on cost-reimbursable contracts is measured based on the ratio of quantities expended to total forecasted quantities, typically man-hours. Incentives are also recognized on a percentage-of-completion basis when the realization of an incentive is assessed as probable. We include flow-through costs consisting of materials, equipment or subcontractor services as both operating revenues and cost of operating revenues on cost-reimbursable contracts when we have overall responsibility as the contractor for the engineering specifications and procurement or procurement services for such costs. There is no contract profit impact of flow-through costs as they are included in both operating revenues and cost of operating revenues. Contracts in process are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. At any point, we have numerous contracts in progress, all of which are at various stages of completion. Accounting for revenues and profits on long-term contracts requires estimates of total estimated contract costs and estimates of progress toward completion to determine the extent of revenue and profit recognition. These estimates may be revised as additional information becomes available or as specific project circumstances change. We review all of our material contracts on a monthly basis and revise our estimates as appropriate for developments such as earning project incentive bonuses, incurring or expecting to incur contractual liquidated damages for performance or schedule issues, providing services and purchasing third-party materials and equipment at costs differing from those previously estimated and testing completed facilities, which, in turn, eliminates or confirms completion and warranty-related costs. Project incentives are recognized when it is probable they will be earned. Project incentives are frequently tied to cost, schedule and/or safety targets and, therefore, tend to be earned late in a project’s life cycle. Changes in estimated final contract revenues and costs can either increase or decrease the final estimated contract profit. In the period in which a change in estimate is recognized, the cumulative impact of that change is recorded based on progress achieved through the period of change. There were 28 and 26 separate projects that had final estimated contract profit revisions whose impact on contract profit exceeded $1,000 during the first nine months of fiscal years 2009 and 2008, respectively. The changes in final estimated contract profit resulted in net increases of $11,520 and $47,520 to reported contract profit in the fiscal quarter and nine months ended September 30, 2009, respectively, relating to the revaluation of work performed on contracts in prior periods. The changes in final estimated contract profit resulted in net increases of $9,120 and $26,070 to reported contract profit in the fiscal quarter and nine months ended September 26, 2008, respectively, relating to the revaluation of work performed on contracts in prior periods. Please see Note 11 for further information related to changes in final estimated contract profit. Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, disputed or unapproved change orders as to both scope and price or other causes of unanticipated additional costs. We record claims as additional contract revenue if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. These two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in our performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim may be recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred and are recorded in contracts in process. As of September 30, 2009, our consolidated financial statements assumed recovery of commercial claims of $21,900, of which $100 has yet to be expended. As of December 26, 2008, our consolidated financial statements assumed recovery of commercial claims of $11,200, of which all was expended. In certain circumstances, we may defer pre-contract costs when it is probable that these costs will be recovered under a future contract. Such deferred costs would then be included in contract costs upon execution of the anticipated contract. We had $700 of deferred pre-contract costs as of September 30, 2009 and no deferred pre-contract costs as of December 26, 2008. Certain special-purpose subsidiaries in our global power business group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the corresponding service contracts. Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments with original maturities of three months or less at the date of acquisition. Cash and cash equivalents of $748,350 and $622,907 were maintained by our non-U.S. entities as of September 30, 2009 and December 26, 2008, respectively. These entities require a portion of these funds to support their liquidity and working capital needs, as well as to comply with required minimum capitalization and contractual restrictions. Accordingly, a portion of these funds may not be readily available for repatriation to U.S. entities. Trade Accounts Receivable — Trade accounts receivable represent amounts billed to customers. In accordance with terms under our long-term contracts, our customers may withhold certain percentages of such billings until completion and acceptance of the work performed. Final payments of all such amounts withheld might not be received within a one-year period. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, are included in current assets on the consolidated balance sheet. Trade accounts receivable are continually evaluated for collectibility. Provisions are established on a project-specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Contracts in Process and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts — Under long-term contracts, amounts recorded in contracts in process and billings in excess of costs and estimated earnings on uncompleted contracts may not be realized or paid, respectively, within a one-year period. In conformity with industry practice, however, the full amount of contracts in process and billings in excess of costs and estimated earnings on uncompleted contracts is included in current assets and current liabilities on the consolidated balance sheet, respectively. Land, Buildings and Equipment — Depreciation is computed on a straight-line basis using estimated lives ranging from 10 to 50 years for buildings and from 3 to 35 years for equipment. Expenditures for maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses, if any, are reflected in earnings. Investments in and Advances to Unconsolidated Affiliates — We use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50% unless significant economic or governance considerations indicate that we are unable to exert significant influence in which case the cost method is used. The equity method is also used for affiliates in which our investment ownership is greater than 50% but we do not have a controlling interest. Currently, all of our investments in affiliates in which our investment ownership is 20% or greater and that are not consolidated are recorded using the equity method. Affiliates in which our investment ownership is less than 20% are carried at cost. Intangible Assets — Intangible assets consist principally of goodwill, trademarks and patents. Goodwill is allocated to our reporting units on a relative fair value basis at the time of the original purchase price allocation. Patents and trademarks are amortized on a straight-line basis over periods of 3 to 40 years. Customer relationships, pipeline and backlog are amortized on a straight-line basis over periods of 1 to 13 years. We test goodwill for impairment at the reporting unit level as defined in FASB ASC 350-20-35, “Intangibles — Goodwill and Other.” Our reporting units are defined as the components one level below our operating segments, as these components constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. Presently, goodwill exists in two of our reporting units one within our Global Power Group business segment and one within our Global Engineering and Construction Group (“Global E&C Group”) business segment. The goodwill impairment test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is estimated based on discounted future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each fiscal year, we evaluate goodwill at each reporting unit to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. Intangible assets with determinable useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with FASB ASC 360-10, “Property, Plant and Equipment.” We had total goodwill of $72,310 and $62,165 as of September 30, 2009 and December 26, 2008, respectively. Of the $72,310 of goodwill as of September 30, 2009, $52,988 is related to one of our Global Power Group’s European reporting units and $19,322 is related to our Global E&C Group’s U.S. reporting unit. In fiscal year 2008, the estimated fair value of each of the reporting units were sufficiently in excess of their carrying values even after conducting various sensitivity analyses on key assumptions, such that no adjustment to the carrying values of goodwill was required. We had total unamortized identifiable intangible assets of $59,155 and $59,874 as of September 30, 2009 and December 26, 2008, respectively. Of the $59,155 of identifiable intangible assets as of September 30, 2009, $54,399 is related to our Global Power Group and $4,756 is related to our Global E&C Group. The following table details amounts relating to our identifiable intangible assets:
Amortization expense related to identifiable intangible assets, which is recorded within cost of operating revenues on the consolidated statement of operations, totaled $1,214 and $3,728 for the fiscal quarter and nine months ended September 30, 2009, respectively. Amortization expense totaled $1,157 and $3,454 for the fiscal quarter and nine months ended September 26, 2008, respectively. Amortization expense is expected to be approximately $5,100 in fiscal year 2009 and approximately $4,500 in each of the fiscal years 2010 through 2013. Income Taxes — Deferred tax assets/liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating our ability to realize our deferred tax assets within the various tax jurisdictions in which they arise, we consider all available positive and negative evidence, including scheduled reversals of taxable temporary differences, projected future taxable income, tax planning strategies and recent financial performance. Projecting future taxable income requires significant assumptions about future operating results, as well as the timing and character of taxable income in numerous jurisdictions. We do not make a provision for U.S. federal income taxes on non-U.S. subsidiary earnings if we expect such earnings to be indefinitely reinvested outside the United States. We recognize interest accrued on the potential tax liability related to unrecognized tax benefits in interest expense, and we recognize any potential penalties in other deductions, net on our consolidated statement of operations. Foreign Currency — The functional currency of our non-U.S. operations is typically the local currency of their country of domicile. Assets and liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at period-end exchange rates with the resulting translation adjustment recorded as a separate component within accumulated other comprehensive loss. Income and expense accounts and cash flows are translated at weighted-average exchange rates for the period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other deductions, net on our consolidated statement of operations. Fair Value Measurements — In the first fiscal quarter of 2008, we adopted SFAS 157 (codified in FASB ASC 820-10), “Fair Value Measurements and Disclosures”, except for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis for which the date of adoption was the beginning of the first fiscal quarter of 2009. FASB ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Our financial assets and liabilities that are recorded at fair value consist primarily of the assets or liabilities arising from derivative financial instruments. We value our derivative financial instruments using broker quotations, or market transactions in either the listed or over-the-counter markets, resulting in fair value measurements using level 2 inputs as defined under the fair value hierarchy. See Note 7 for further information regarding our derivative financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: · Cash, Cash Equivalents and Restricted Cash — The carrying value of our cash, cash equivalents and restricted cash approximates fair value because of the short-term maturity of these instruments. · Short-term Investments — Short-term investments primarily consist of deposits with maturities in excess of three months but less than one year. Short-term investments are carried at cost plus accrued interest, which approximates fair value. · Long-term Debt — We estimate the fair value of our long-term debt (including current installments) based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities. · Foreign Currency Forward Contracts — We estimate the fair value of foreign currency forward contracts by obtaining quotes from financial institutions or market transactions in either the listed or over-the-counter markets. · Interest Rate Swaps — We estimate the fair value of our interest rate swaps based on quotes obtained from financial institutions. Retirement of Registered Shares under Registered Share Repurchase Program — On September 12, 2008, we announced a share repurchase program pursuant to which Foster Wheeler Ltd.’s Board of Directors authorized the repurchase of up to $750,000 of Foster Wheeler Ltd.’s outstanding common shares. In connection with the Redomestication, Foster Wheeler AG adopted a share repurchase program pursuant to which it is authorized to repurchase up to $264,800 of its outstanding registered shares and designate the repurchased shares for cancellation. The amount authorized for repurchase of registered shares under the Foster Wheeler AG program is equal to the amount that remained available for repurchases under the Foster Wheeler Ltd. program as of February 9, 2009, the date of the completion of the Redomestication. The Foster Wheeler AG program replaces the Foster Wheeler Ltd. program, and no further repurchases will be made under the Foster Wheeler Ltd. program. Any repurchases will be made at our discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and will depend on a variety of factors, including market conditions, share price and other factors. The program does not obligate us to acquire any particular number of registered shares. The program has no expiration date and may be suspended or discontinued at any time. All registered shares acquired under our registered share repurchase program are immediately retired upon purchase. The registered share value, on the consolidated balance sheet, is reduced for the par value of the retired registered shares. Paid-in capital, on the consolidated balance sheet, is reduced for the excess of fair value and related fees paid above par value for the registered shares acquired. Registered shares retired under the registered share repurchase program reduce the weighted-average number of registered shares outstanding during the reporting period when calculating earnings per share, as described below. Earnings per Share — Basic earnings per share is computed by dividing net income attributable to Foster Wheeler AG by the weighted-average number of shares outstanding during the reporting period, excluding non-vested restricted shares. There were no non-vested restricted shares as of September 30, 2009 and 82,980 non-vested restricted shares as of September 26, 2008. Restricted shares and restricted share units (collectively, “restricted awards”) are included in the weighted-average number of shares outstanding when such restricted awards vest. Diluted earnings per share is computed by dividing net income attributable to Foster Wheeler AG by the combination of the weighted-average number of shares outstanding during the reporting period and the impact of dilutive securities, if any, such as outstanding stock options, warrants to purchase shares and the non-vested portion of restricted awards to the extent such securities are dilutive. In profitable periods, outstanding stock options and warrants have a dilutive effect under the treasury stock method when the average share price for the period exceeds the assumed proceeds from the exercise of the warrant or option. The assumed proceeds include the exercise price, compensation cost, if any, for future service that has not yet been recognized in the consolidated statement of operations, and any tax benefits that would be recorded in paid-in capital when the option or warrant is exercised. Under the treasury stock method, the assumed proceeds are assumed to be used to repurchase shares in the current period. The dilutive impact of the non-vested portion of restricted awards is determined using the treasury stock method, but the proceeds include only the unrecognized compensation cost and tax benefits as assumed proceeds. The computations of basic and diluted earnings per share were as follows:
The following table summarizes the registered share equivalent of potentially dilutive securities that have been excluded from the denominator used in the calculation of diluted earnings per share due to their antidilutive effect:
Share-Based Compensation Plans — Our share-based compensation plans are accounted for in accordance with the provisions of FASB ASC 718-10, “Compensation Stock Compensation.” We estimate the fair value of each option award on the date of grant using the Black-Scholes option valuation model. We then recognize the grant date fair value of each option as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions: · Expected volatility – we estimate the volatility of our share price at the date of grant using historical volatility adjusted for periods of unusual stock price activity. · Expected term – we estimate the expected term using the “simplified” method, as outlined in Staff Accounting Bulletin No. 107, “Share-Based Payment.” · Risk-free interest rate – we estimate the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. · Dividends – we use an expected dividend yield of zero because we have not declared or paid a cash dividend since July 2001 and we do not have any plans to declare or pay any cash dividends.
We used the following weighted-average assumptions to estimate the fair value of the options granted for the periods indicated:
We estimate the fair value of restricted awards using the market price of our shares on the date of grant. We then recognize the fair value of each restricted award as compensation cost ratably using the straight-line attribution method over the service period (generally the vesting period). We estimate pre-vesting forfeitures at the time of grant using a combination of historical data and demographic characteristics, and we revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We record share-based compensation expense only for those awards that are expected to vest. Recent Accounting Developments — In December 2008, the FASB issued FASB Staff Position No. FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (codified in FASB ASC 715-20-65-2). FASB ASC 715-20-65-2 will expand the disclosures regarding investments held by employer-sponsored defined benefit pension plans and other postretirement plans, with the purpose of providing additional information related to the valuation methodologies for these assets similar to disclosures regarding the valuation methodologies required by FASB ASC 820-10. Additionally, the standard will require disclosures on how investment allocation decisions are made as well as significant concentrations of risk within plan assets. FASB ASC 715-20-65-2 is effective for annual financial statements for fiscal years ending after December 15, 2009. We will amend our disclosures accordingly beginning with our consolidated financial statements included in our Annual Report on Form 10-K for fiscal year 2009. In June 2009, the FASB issued authoritative guidance which requires an enterprise to qualitatively assess the determination of the primary beneficiary (or "consolidator") of a variable interest entity (“VIE”) based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The guidance changes the consideration of kick-out rights, which are the ability to remove the enterprise with the power to direct the activities of a VIE, in determining if an entity is a VIE, which may cause certain additional entities to now be considered VIEs. In contrast to prior authoritative guidance, the new guidance requires an ongoing reconsideration of the primary beneficiary and also amends the events that trigger a reassessment of whether an entity is a VIE. The guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. We are currently assessing the impact that the guidance may have on our consolidated financial statements and disclosures. In August 2009, the FASB issued Accounting Standards Update No. (“ASU”) 2009-05, “Measuring Liabilities at Fair Value.” ASU 2009-05 supplements and amends the existing definition of fair value while reintroducing the concept of entry value (amount an entity would receive to enter into an identical liability) into the definition. Additionally, ASU 2009-05 clarifies that restrictions preventing the transfer of a liability should not be considered as a separate input or adjustment in the measurement of its fair value. ASU 2009-05 is effective for the first reporting period, including interim periods, beginning after August 2009. We are currently assessing the impact that ASU 2009-05 may have on our consolidated financial statements; however, we do not anticipate that it will have a material impact. |
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| 53 | General Electric Company | Notes to Condensed, Consolidated Financial Statements (Unaudited) Accounting Changes
In April 2009, the FASB amended FASB ASC 805 and changed the previous accounting for assets and liabilities arising from contingencies in a business combination. We adopted this amendment retrospectively effective January 1, 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of FASB ASC 450, Contingencies.
Interim Period Presentation |
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| 54 | General Electric Company | Notes to Condensed, Consolidated Financial Statements (Unaudited) Accounting Changes
In April 2009, the FASB amended FASB ASC 805 and changed the previous accounting for assets and liabilities arising from contingencies in a business combination. We adopted this amendment retrospectively effective January 1, 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of FASB ASC 450, Contingencies.
Interim Period Presentation |
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| 55 | GILEAD SCIENCES INC | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of Gilead Sciences, Inc. (Gilead, we or our) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, management evaluates its estimates, including critical accounting policies and estimates related to revenue recognition, allowance for doubtful accounts, prepaid royalties, intangible assets, clinical trial accruals, our tax provision and stock-based compensation. We base our estimates on historical experience and on various other market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and our joint ventures with Bristol-Myers Squibb Company (BMS), for which we are the primary beneficiary as determined under the Consolidation Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). We record a noncontrolling interest in our Condensed Consolidated Financial Statements to reflect BMS’s interest in the joint ventures. Significant intercompany transactions have been eliminated. The Condensed Consolidated Financial Statements include the operating results of companies acquired by us from the date of each acquisition for the applicable reporting periods. The accompanying Condensed Consolidated Financial Statements and related financial information should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC). The condensed consolidated balance sheet at December 31, 2008 has been derived from audited consolidated financial statements at that date. Certain prior year amounts have been revised for the retrospective application of certain guidance in the Debt Topic and Consolidation Topic of the FASB ASC, as discussed below. FASB Accounting Standards Codification In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP)—a replacement of SFAS No. 162 (SFAS 168), which establishes the FASB ASC as the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. This guidance is effective for interim periods and fiscal years ending after September 15, 2009. On July 1, 2009, we adopted the provisions of this guidance and as a result, the majority of references to historically issued accounting pronouncements are now superseded by references to the FASB ASC. Certain accounting pronouncements, such as SFAS 168, will remain authoritative until they are integrated into the FASB ASC.
Convertible Senior Notes In May 2008, the FASB issued guidance in the Debt Topic of the FASB ASC which addresses instruments that require the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer’s option. This guidance requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. This guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. On January 1, 2009, we adopted the provisions of this guidance on a retrospective basis for our convertible senior notes due in 2011 (2011 Notes) and the convertible senior notes due in 2013 (2013 Notes) (collectively, the Notes) and reflected additional interest expense of $13.4 million and $39.6 million, respectively, a related benefit from income taxes of $5.3 million and $15.6 million, respectively, and a decrease in net income per share attributable to Gilead common stockholders on a diluted basis of $0.01 and $0.03, respectively, for the three and nine months ended September 30, 2008 in our Condensed Consolidated Statements of Income. We recorded additional interest expense of $14.2 million and $41.9 million, respectively, a related benefit from income taxes of $5.5 million and $16.3 million, respectively, and a decrease in net income per share attributable to Gilead common stockholders on a diluted basis of $0.01 and $0.03, respectively, for the three and nine months ended September 30, 2009. In addition, the retrospective adoption of this guidance decreased deferred tax assets and debt issuance costs included in other assets by an aggregate of $81.7 million, decreased convertible senior notes, net included in long-term liabilities by $201.8 million and increased total stockholders’ equity by $120.1 million after a charge of $82.6 million to retained earnings in our Condensed Consolidated Balance Sheet as of December 31, 2008. Noncontrolling Interest In December 2007, the FASB issued guidance in the Consolidation Topic of the FASB ASC which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income (loss) attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes additional reporting requirements that identify and distinguish between the ownership interest of the parent and the interest of the noncontrolling owners. This guidance is effective for interim periods and fiscal years beginning after December 15, 2008 and requires retrospective application to all periods presented. On January 1, 2009, we adopted the provisions of this guidance on a retrospective basis and reclassified the noncontrolling interest (formerly minority interest) from liabilities to stockholders’ equity on our Condensed Consolidated Balance Sheets. Our adoption of this guidance also resulted in the reclassification of the change in noncontrolling interest from net cash provided by operating activities to net cash used in financing activities on our Condensed Consolidated Statements of Cash Flows. We also presented the noncontrolling interest on our Condensed Consolidated Statements of Income as net loss attributable to noncontrolling interest, a component of consolidated net income, on a retrospective basis. Net Income Per Share Attributable to Gilead Common Stockholders Basic net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding during the period. Diluted net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options and equivalents (consisting primarily of performance shares) and the assumed exercise of warrants relating to the Notes are determined under the treasury stock method.
Because the principal amount of the Notes will be settled in cash, only the conversion spread relating to the Notes is included in our calculation of diluted net income per share attributable to Gilead common stockholders. In accordance with the guidance in the Earnings Per Share Topic of the FASB ASC, our common stock resulting from the assumed settlement of the conversion spread of the Notes has a dilutive effect when the average market price of our common stock during the period exceeds the conversion prices of $38.75 and $38.10 for the 2011 Notes and 2013 Notes, respectively. The average market prices of our common stock during each of the three and nine months ended September 30, 2009 and 2008 exceeded both of the conversion prices of the Notes and the dilutive effect is included in the table below. Warrants relating to the 2011 Notes and 2013 Notes have a dilutive effect when the average market price of our common stock during the period exceeds the warrants’ exercise prices of $50.80 and $53.90, respectively. The average market prices of our common stock during the three and nine months ended September 30, 2009 and the nine months ended September 30, 2008 did not exceed the warrants’ exercise prices relating to the 2011 Notes. The average market prices of our common stock during the three and nine months ended September 30, 2009 and 2008 did not exceed the warrants’ exercise prices relating to the 2013 Notes. For the three months ended September 30, 2008, the dilutive effect of warrants related to the 2011 Notes is included in the table below. Stock options to purchase approximately 16.9 million and 17.1 million weighted-average shares of our common stock were outstanding during the three and nine months ended September 30, 2009, respectively, but were not included in the computation of diluted net income per share attributable to Gilead common stockholders because the options’ exercise prices were greater than the average market price of our common stock during these periods; therefore, their effect was antidilutive. Stock options to purchase approximately 10.0 million and 9.9 million weighted-average shares of our common stock were outstanding during the three and nine months ended September 30, 2008, respectively, but were not included in the computation of diluted net income per share attributable to Gilead common stockholders because the options’ exercise prices were greater than the average market price of our common stock during these periods; therefore, their effect was antidilutive. The following table is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share attributable to Gilead common stockholders (in thousands):
Concentrations of Risk We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by duration, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk, liquidity of investments sufficient to meet cash flow requirements and a competitive after-tax rate of return. We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States and Europe. In certain countries where payments are typically slow, primarily Greece, Italy, Portugal and Spain, our aggregate accounts receivable balance is significant. In most cases, slow payment practices in these countries reflect the pace at which governmental entities reimburse our customers. This, in turn, may increase the financial risk related to certain of our customers. Sales to customers in these countries in Europe that tend to pay relatively slowly have increased and may continue to further increase, therefore increasing the average length of time that we have accounts receivable outstanding. At September 30, 2009, our aggregate accounts receivable in Greece, Italy, Portugal and Spain totaled $723.8 million, of which $247.4 million was more than 120 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable and believe that our past due accounts receivable, net of allowances, as reflected in our Condensed Consolidated Balance Sheets, are collectible. We perform credit evaluations of our customers’ financial conditions and generally have not required collateral. |
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| 56 | GOLDMAN SACHS GROUP INC |
Basis of
Presentation
These condensed consolidated financial statements include the
accounts of Group Inc. and all other entities in which the
firm has a controlling financial interest. All material
intercompany transactions and balances have been eliminated.
The firm determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is
a voting interest entity, a variable interest entity (VIE) or a
qualifying
special-purpose
entity (QSPE) under generally accepted accounting principles
(GAAP).
These condensed consolidated financial statements are unaudited
and should be read in conjunction with the audited consolidated
financial statements included in the firm’s Annual Report
on
Form 10-K
for the fiscal year ended November 28, 2008. The
condensed consolidated financial information as of
November 28, 2008 has been derived from audited
consolidated financial statements not included herein.
These unaudited condensed consolidated financial statements
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the interim
periods presented. These adjustments are of a normal, recurring
nature. Interim period operating results may not be indicative
of the operating results for a full year.
In connection with becoming a bank holding company, the firm was
required to change its fiscal
year-end
from November to December. This change in the firm’s fiscal
year-end resulted in a
one-month
transition period that began on November 29, 2008 and
ended on December 26, 2008. The firm’s financial
information for this fiscal transition period is included in the
firm’s Quarterly Report on
Form 10-Q
for the quarter ended March 27, 2009. On
April 13, 2009, the Board of Directors of
Group Inc. (the Board) approved a change in the firm’s
fiscal year-end from the last Friday of December to
December 31, beginning in the fourth quarter of 2009.
Fiscal 2009 began on December 27, 2008 and will end on
December 31, 2009.
In the condensed consolidated statements of earnings, cash flows
and comprehensive income, the firm compares the three and nine
month periods, as applicable, ended September 25, 2009
with the previously reported three and nine month periods ended
August 29, 2008. Financial information for the three
and nine months ended September 26, 2008 has not been
included in this
Form 10-Q
for the following reasons: (i) the three and nine months
ended August 29, 2008 provide a meaningful comparison
for the three and nine months ended
September 25, 2009; (ii) there are no significant
factors, seasonal or other, that would impact the comparability
of information if the results for the three and nine months
ended September 26, 2008 were presented in lieu of
results for the three and nine months ended
August 29, 2008; and (iii) it was not practicable
or cost justified to prepare this information.
All references to September 2009 and August 2008,
unless specifically stated otherwise, refer to the firm’s
fiscal periods ended, or the dates, as the context requires,
September 25, 2009 and August 29, 2008,
respectively. All references to November 2008, unless
specifically stated otherwise, refer to the firm’s fiscal
year ended, or the date, as the context requires,
November 28, 2008. All references to 2009, unless
specifically stated otherwise, refer to the firm’s fiscal
year ending, or the date, as the context requires,
December 31, 2009. Certain reclassifications have been
made to previously reported amounts to conform to the current
presentation.
Use of
Estimates
These condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles that require management to make certain estimates and
assumptions. The most important of these estimates and
assumptions relate to fair value measurements, the accounting
for goodwill and identifiable intangible assets, discretionary
compensation accruals and the provision for potential losses
that may arise from litigation and regulatory proceedings and
tax audits. Although these and other estimates and assumptions
are based on the best available information, actual results
could be materially different from these estimates.
Revenue
Recognition
Investment Banking. Underwriting revenues and
fees from mergers and acquisitions and other financial advisory
assignments are recognized in the condensed consolidated
statements of earnings when the services related to the
underlying transaction are completed under the terms of the
engagement. Expenses associated with such transactions are
deferred until the related revenue is recognized or the
engagement is otherwise concluded. Underwriting revenues are
presented net of related expenses. Expenses associated with
financial advisory transactions are recorded as
non-compensation
expenses, net of client reimbursements.
Trading Assets and Trading
Liabilities. Substantially all trading assets and
trading liabilities are reflected in the condensed consolidated
statements of financial condition at fair value. Related gains
or losses are generally recognized in “Trading and
principal investments” in the condensed consolidated
statements of earnings.
Other Financial Assets and Financial Liabilities at Fair
Value. In addition to “Trading assets, at
fair value” and “Trading liabilities, at fair
value,” the firm has elected to account for certain of its
other financial assets and financial liabilities at fair value
under ASC
815-15 and
825-10
(i.e., the fair value option). The primary reasons for
electing the fair value option are to reflect economic events in
earnings on a timely basis, to mitigate volatility in earnings
from using different measurement attributes and to address
simplification and
cost-benefit
considerations.
Such financial assets and financial liabilities accounted for at
fair value include:
Fair Value Measurements. The fair value of a
financial instrument is the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., the exit price). Financial assets are marked to bid
prices and financial liabilities are marked to offer prices.
Fair value measurements do not include transaction costs.
The fair value hierarchy under ASC 820 prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value
hierarchy are described below:
Basis of Fair Value
Measurement
A financial instrument’s level within the fair value
hierarchy is based on the lowest level of any input that is
significant to the fair value measurement.
The firm defines active markets for equity instruments based on
the average daily trading volume both in absolute terms and
relative to the market capitalization for the instrument. The
firm defines active markets for debt instruments based on both
the average daily trading volume and the number of days with
trading activity.
Credit risk is an essential component of fair value. Cash
products (e.g., bonds and loans) and derivative instruments
(particularly those with significant future projected cash
flows) trade in the market at levels which reflect credit
considerations. The firm calculates the fair value of derivative
assets by discounting future cash flows at a rate which
incorporates counterparty credit spreads and the fair value of
derivative liabilities by discounting future cash flows at a
rate which incorporates the firm’s own credit spreads. In
doing so, credit exposures are adjusted to reflect mitigants,
namely collateral agreements which reduce exposures based on
triggers and contractual posting requirements. The firm manages
its exposure to credit risk as it does other market risks and
will price, economically hedge, facilitate and intermediate
trades which involve credit risk. The firm records liquidity
valuation adjustments to reflect the cost of exiting
concentrated risk positions, including exposure to the
firm’s own credit spreads.
In determining fair value, the firm separates “Trading
assets, at fair value” and “Trading liabilities, at
fair value” into two categories: cash instruments and
derivative contracts.
The types of instruments that trade in markets that are not
considered to be active, but are valued based on quoted market
prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
most government agency securities, most corporate bonds, certain
mortgage products, certain bank loans and bridge loans, less
liquid listed equities, certain state, municipal and provincial
obligations and certain money market securities and loan
commitments. Such instruments are generally classified within
level 2 of the fair value hierarchy.
Certain cash instruments are classified within level 3 of
the fair value hierarchy because they trade infrequently and
therefore have little or no price transparency. Such instruments
include private equity and real estate fund investments, certain
bank loans and bridge loans (including certain mezzanine
financing, leveraged loans arising from capital market
transactions and other corporate bank debt), less liquid
corporate debt securities and other debt obligations (including
less liquid corporate bonds, distressed debt instruments and
collateralized debt obligations (CDOs) backed by corporate
obligations), less liquid mortgage whole loans and securities
(backed by either commercial or residential real estate), and
acquired portfolios of distressed loans. The transaction price
is initially used as the best estimate of fair value.
Accordingly, when a pricing model is used to value such an
instrument, the model is adjusted so that the model value at
inception equals the transaction price. This valuation is
adjusted only when changes to inputs and assumptions are
corroborated by evidence such as transactions in similar
instruments, completed or pending
third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity or debt capital markets, and changes in financial
ratios or cash flows.
For positions that are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to
reflect illiquidity
and/or
non-transferability.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
Management’s judgment is required to determine the
appropriate
risk-adjusted
discount rate for cash trading instruments that are classified
within level 3 of the fair value hierarchy and that have
little or no price transparency as a result of decreased volumes
and lower levels of trading activity. In such situations, the
firm’s valuation is adjusted to approximate rates which
market participants would likely consider appropriate for
relevant credit and liquidity risks.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including
market-based
inputs to models, model calibration to
market-clearing
transactions, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency.
Where models are used, the selection of a particular model to
value an OTC derivative depends upon the contractual terms of,
and specific risks inherent in, the instrument, as well as the
availability of pricing information in the market. The firm
generally uses similar models to value similar instruments.
Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit curves,
measures of volatility, prepayment rates and correlations of
such inputs. For OTC derivatives that trade in liquid markets,
such as generic forwards, swaps and options, model inputs can
generally be verified and model selection does not involve
significant management judgment. OTC derivatives are classified
within level 2 of the fair value hierarchy when all of the
significant inputs can be corroborated to market evidence.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. Such
instruments are classified within level 3 of the fair value
hierarchy. Where the firm does not have corroborating market
evidence to support significant model inputs and cannot verify
the model to market transactions, the transaction price is
initially used as the best estimate of fair value. Accordingly,
when a pricing model is used to value such an instrument, the
model is adjusted so that the model value at inception equals
the transaction price. The valuations of these less liquid OTC
derivatives are typically based on level 1
and/or
level 2 inputs that can be observed in the market, as well
as unobservable level 3 inputs. Subsequent to initial
recognition, the firm updates the level 1 and level 2
inputs to reflect observable market changes, with resulting
gains and losses reflected within level 3. Level 3
inputs are only changed when corroborated by evidence such as
similar market transactions,
third-party
pricing services
and/or
broker or dealer quotations, or other empirical market data. In
circumstances where the firm cannot verify the model value to
market transactions, it is possible that a different valuation
model could produce a materially different estimate of fair
value.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
Collateralized Agreements and
Financings. Collateralized agreements consist of
resale agreements and securities borrowed. Collateralized
financings consist of repurchase agreements, securities loaned
and other secured financings. Interest on collateralized
agreements and collateralized financings is recognized in
“Interest income” and “Interest expense,”
respectively, in the condensed consolidated statements of
earnings over the life of the transaction.
Hybrid Financial Instruments. Hybrid financial
instruments are instruments that contain bifurcatable embedded
derivatives and do not require settlement by physical delivery
of
non-financial
assets (e.g., physical commodities). If the firm elects to
bifurcate the embedded derivative from the associated debt, it
is accounted for at fair value and the host contract is
accounted for at amortized cost, adjusted for the effective
portion of any fair value hedge accounting relationships. If the
firm does not elect to bifurcate, the entire hybrid financial
instrument is accounted for at fair value under the fair value
option. See Notes 3 and 6 for further information regarding
hybrid financial instruments.
Transfers of Financial Assets. In general,
transfers of financial assets are accounted for as sales when
the firm has relinquished control over the transferred assets.
For transfers accounted for as sales, any related gains or
losses are recognized in net revenues. Transfers that are not
accounted for as sales are accounted for as collateralized
financings, with the related interest expense recognized in net
revenues over the life of the transaction.
Commissions. Commission revenues from
executing and clearing client transactions on stock, options and
futures markets are recognized in “Trading and principal
investments” in the condensed consolidated statements of
earnings on a
trade-date
basis.
Insurance Activities. Certain of the
firm’s insurance and reinsurance contracts are accounted
for at fair value under the fair value option, with changes in
fair value included in “Trading and principal
investments” in the condensed consolidated statements of
earnings.
Revenues from variable annuity and life insurance and
reinsurance contracts not accounted for at fair value generally
consist of fees assessed on contract holder account balances for
mortality charges, policy administration fees and surrender
charges, and are recognized in “Trading and principal
investments” in the condensed consolidated statements of
earnings in the period that services are provided.
Interest credited to variable annuity and life insurance and
reinsurance contract account balances and changes in reserves
are recognized in “Other expenses” in the condensed
consolidated statements of earnings.
Premiums earned for underwriting property catastrophe
reinsurance are recognized in “Trading and principal
investments” in the condensed consolidated statements of
earnings over the coverage period, net of premiums ceded for the
cost of reinsurance. Expenses for liabilities related to
property catastrophe reinsurance claims, including estimates of
losses that have been incurred but not reported, are recognized
in “Other expenses” in the condensed consolidated
statements of earnings.
Merchant Banking Overrides. The firm is
entitled to receive merchant banking overrides (i.e., an
increased share of a fund’s income and gains) when the
return on the funds’ investments exceeds certain threshold
returns. Overrides are based on investment performance over the
life of each merchant banking fund, and future investment
underperformance may require amounts of override previously
distributed to the firm to be returned to the funds.
Accordingly, overrides are recognized in the condensed
consolidated statements of earnings only when all material
contingencies have been resolved. Overrides are included in
“Trading and principal investments” in the condensed
consolidated statements of earnings.
Asset Management. Management fees are
recognized over the period that the related service is provided
based upon average net asset values. In certain circumstances,
the firm is also entitled to receive incentive fees based on a
percentage of a fund’s return or when the return on assets
under management exceeds specified benchmark returns or other
performance targets. Incentive fees are generally based on
investment performance over a
12-month
period and are subject to adjustment prior to the end of the
measurement period. Accordingly, incentive fees are recognized
in the condensed consolidated statements of earnings when the
measurement period ends. Asset management fees and incentive
fees are included in “Asset management and securities
services” in the condensed consolidated statements of
earnings.
Share-Based
Compensation
The cost of employee services received in exchange for a
share-based
award is generally measured based on the grant-date fair value
of the award in accordance with ASC 718.
Share-based
awards that do not require future service (i.e., vested
awards, including awards granted to retirement-eligible
employees) are expensed immediately.
Share-based
employee awards that require future service are amortized over
the relevant service period. Expected forfeitures are included
in determining
share-based
employee compensation expense.
The firm pays cash dividend equivalents on outstanding
restricted stock units (RSUs). Dividend equivalents paid on RSUs
are generally charged to retained earnings. Dividend equivalents
paid on RSUs expected to be forfeited are included in
compensation expense. In the first quarter of fiscal 2009, the
firm adopted amended accounting principles related to income tax
benefits of dividends on
share-based
payment awards (ASC 718). These amended principles require the
tax benefit related to dividend equivalents paid on RSUs to be
accounted for as an increase to additional
paid-in
capital. Previously, the firm accounted for this tax benefit as
a reduction to income tax expense. See
“— Recent
Accounting Developments” below for further information on
these amended principles.
In certain cases, primarily related to the death of an employee
or conflicted employment (as outlined in the applicable award
agreements), the firm may cash settle
share-based
compensation awards. For awards accounted for as equity
instruments, additional
paid-in
capital is adjusted to the extent of the difference between the
current value of the award and the grant-date value of the award.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair
value of identifiable net assets at acquisition date. Goodwill
is tested at least annually for impairment. An impairment loss
is recognized if the estimated fair value of an operating
segment, which is a component one level below the firm’s
three business segments, is less than its estimated net book
value. Such loss is calculated as the difference between the
estimated fair value of goodwill and its carrying value.
Identifiable
Intangible Assets
Identifiable intangible assets, which consist primarily of
customer lists, New York Stock Exchange (NYSE) Designated Market
Maker (DMM) rights and the value of business acquired
(VOBA) in the firm’s insurance subsidiaries, are amortized
over their estimated lives or, in the case of insurance
contracts, in proportion to estimated gross profits or premium
revenues. Identifiable intangible assets are tested for
impairment whenever events or changes in circumstances suggest
that an asset’s or asset group’s carrying value may
not be fully recoverable. An impairment loss, generally
calculated as the difference between the estimated fair value
and the carrying value of an asset or asset group, is recognized
if the sum of the estimated undiscounted cash flows relating to
the asset or asset group is less than the corresponding carrying
value.
Property,
Leasehold Improvements and Equipment
Property, leasehold improvements and equipment, net of
accumulated depreciation and amortization, are recorded at cost
and included in “Other assets” in the condensed
consolidated statements of financial condition.
Substantially all property and equipment are depreciated on a
straight-line basis over the useful life of the asset. Leasehold
improvements are amortized on a straight-line basis over the
useful life of the improvement or the term of the lease,
whichever is shorter. Certain costs of software developed or
obtained for internal use are capitalized and amortized on a
straight-line basis over the useful life of the software.
Property, leasehold improvements and equipment are tested for
impairment whenever events or changes in circumstances suggest
that an asset’s or asset group’s carrying value may
not be fully recoverable. An impairment loss, calculated as the
difference between the estimated fair value and the carrying
value of an asset or asset group, is recognized if the sum of
the expected undiscounted cash flows relating to the asset or
asset group is less than the corresponding carrying value.
The firm’s operating leases include office space held in
excess of current requirements. Rent expense relating to space
held for growth is included in “Occupancy” in the
condensed consolidated statements of earnings. The firm records
a liability, based on the fair value of the remaining lease
rentals reduced by any potential or existing sublease rentals,
for leases where the firm has ceased using the space and
management has concluded that the firm will not derive any
future economic benefits. Costs to terminate a lease before the
end of its term are recognized and measured at fair value upon
termination.
Foreign
Currency Translation
Assets and liabilities denominated in
non-U.S. currencies
are translated at rates of exchange prevailing on the date of
the condensed consolidated statements of financial condition,
and revenues and expenses are translated at average rates of
exchange for the period. Gains or losses on translation of the
financial statements of a
non-U.S. operation,
when the functional currency is other than the U.S. dollar,
are included, net of hedges and taxes, in the condensed
consolidated statements of comprehensive income. The firm seeks
to reduce its net investment exposure to fluctuations in foreign
exchange rates through the use of foreign currency forward
contracts and foreign
currency-denominated
debt. For foreign currency forward contracts, hedge
effectiveness is assessed based on changes in forward exchange
rates; accordingly, forward points are reflected as a component
of the currency translation adjustment in the condensed
consolidated statements of comprehensive income. For foreign
currency-denominated
debt, hedge effectiveness is assessed based on changes in spot
rates. Foreign currency remeasurement gains or losses on
transactions in nonfunctional currencies are included in the
condensed consolidated statements of earnings.
Income
Taxes
Income taxes are provided for using the asset and liability
method. Deferred tax assets and liabilities are recognized for
temporary differences between the financial reporting and tax
bases of the firm’s assets and liabilities. Valuation
allowances are established to reduce deferred tax assets to the
amount that more likely than not will be realized. The
firm’s tax assets and liabilities are presented as a
component of “Other assets” and “Other
liabilities and accrued expenses,” respectively, in the
condensed consolidated statements of financial condition. The
firm adopted amended accounting principles related to the
accounting for uncertainty in income taxes (ASC 740) as of
December 1, 2007, and recorded a transition adjustment
resulting in a reduction of $201 million to beginning
retained earnings in the first fiscal quarter of 2008. The firm
recognizes tax positions in the financial statements only when
it is more likely than not that the position will be sustained
upon examination by the relevant taxing authority based on the
technical merits of the position. A position that meets this
standard is measured at the largest amount of benefit that will
more likely than not be realized upon settlement. A liability is
established for differences between positions taken in a tax
return and amounts recognized in the financial statements. The
firm reports interest expense related to income tax matters in
“Provision for taxes” in the condensed consolidated
statements of earnings and income tax penalties in “Other
expenses” in the condensed consolidated statements of
earnings.
Earnings Per
Common Share (EPS)
Basic EPS is calculated by dividing net earnings applicable to
common shareholders by the weighted average number of common
shares outstanding. Common shares outstanding includes common
stock and RSUs for which no future service is required as a
condition to the delivery of the underlying common stock.
Diluted EPS includes the determinants of basic EPS and, in
addition, reflects the dilutive effect of the common stock
deliverable pursuant to stock warrants and options and to RSUs
for which future service is required as a condition to the
delivery of the underlying common stock. In the first quarter of
fiscal 2009, the firm adopted amended accounting principles
related to determining whether instruments granted in
share-based
payment transactions are participating securities. Accordingly,
the firm treats unvested
share-based
payment awards that have
non-forfeitable
rights to dividends or dividend equivalents as a separate class
of securities in calculating earnings per common share. See
“— Recent
Accounting Developments” below for further information on
these amended principles.
Cash and Cash
Equivalents
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business. As of
September 2009 and November 2008, “Cash and cash
equivalents” on the condensed consolidated statements of
financial condition included $4.07 billion and
$5.60 billion, respectively, of cash and due from banks and
$18.95 billion and $10.14 billion, respectively, of
interest-bearing deposits with banks.
Recent
Accounting Developments
FASB Accounting Standards Codification. In
July 2009, the FASB launched the FASB Accounting Standards
Codification (the Codification) as the single source of GAAP.
While the Codification did not change GAAP, it introduced a new
structure to the accounting literature and changed references to
accounting standards and other authoritative accounting
guidance. The Codification was effective for the firm for the
third quarter of 2009 and did not have an effect on the
firm’s financial condition, results of operations or cash
flows.
Accounting for Income Tax Benefits of Dividends on
Share-Based
Payment Awards (ASC 718). In June 2007,
the FASB issued amended accounting principles related to income
tax benefits of dividends on
share-based
payment awards, which require that the tax benefit related to
dividend equivalents paid on RSUs, which are expected to vest,
be recorded as an increase to additional
paid-in
capital. The firm previously accounted for this tax benefit as a
reduction to income tax expense. These amended accounting
principles were applied prospectively for tax benefits on
dividend equivalents declared beginning in the first quarter of
fiscal 2009. Adoption did not have a material effect on the
firm’s financial condition, results of operations or cash
flows.
Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions (ASC 860). In
February 2008, the FASB issued amended accounting
principles related to transfers of financial assets and
repurchase financing transactions. These amended principles
require an initial transfer of a financial asset and a
repurchase financing that was entered into contemporaneously or
in contemplation of the initial transfer to be evaluated as a
linked transaction (for purposes of determining whether a sale
has occurred) unless certain criteria are met, including that
the transferred asset must be readily obtainable in the
marketplace. The firm adopted these amended accounting
principles for new transactions entered into after
November 2008. Adoption did not have a material effect on
the firm’s financial condition, results of operations or
cash flows.
Disclosures About Derivative Instruments and Hedging
Activities (ASC 815). In March 2008,
the FASB issued amended principles related to disclosures about
derivative instruments and hedging activities, which were
effective for the firm beginning in the
one-month
transition period ended December 2008. Since these amended
principles require only additional disclosures concerning
derivatives and hedging activities, adoption did not affect the
firm’s financial condition, results of operations or cash
flows.
Determining Whether Instruments Granted in
Share-Based
Payment Transactions Are Participating Securities
(ASC 260). In June 2008, the FASB
issued amended accounting principles related to determining
whether instruments granted in
share-based
payment transactions are participating securities. These amended
principles require companies to treat unvested
share-based
payment awards that have
non-forfeitable
rights to dividends or dividend equivalents as a separate class
of securities in calculating earnings per common share under the
two-class method. The firm adopted these amended accounting
principles in the first quarter of fiscal 2009. The impact to
basic earnings per common share for the three and nine months
ended September 2009 was a reduction of $0.02 and $0.04 per
common share, respectively. There was no impact on diluted
earnings per common share. Prior periods have not been restated
due to immateriality.
Business Combinations (ASC 805). In
December 2007, the FASB issued amended accounting
principles related to business combinations, which changed the
accounting for transaction costs, certain contingent assets and
liabilities, and other balances in a business combination. In
addition, in partial acquisitions, when control is obtained, the
amended principles require that the acquiring company measure
and record all of the target’s assets and liabilities,
including goodwill, at fair value as if the entire target
company had been acquired. These amended accounting principles
applied to the firm’s business combinations beginning in
the first quarter of fiscal 2009. Adoption did not affect the
firm’s financial condition, results of operations or cash
flows, but may have an effect on accounting for future business
combinations.
Noncontrolling Interests in Consolidated Financial Statements
(ASC 810). In December 2007, the FASB
issued amended accounting principles related to noncontrolling
interests in consolidated financial statements, which require
that ownership interests in consolidated subsidiaries held by
parties other than the parent (i.e., noncontrolling
interests) be accounted for and presented as equity, rather than
as a liability or mezzanine equity. These amended accounting
principles were effective for the firm beginning in the first
quarter of fiscal 2009. Adoption did not have a material effect
on the firm’s financial condition, results of operations or
cash flows.
Disclosures by Public Entities (Enterprises) about Transfers
of Financial Assets and Interests in Variable Interest Entities
(ASC 860 and 810). In December 2008,
the FASB issued amended principles related to disclosures by
public entities (enterprises) about transfers of financial
assets and interests in variable interest entities, which were
effective for the firm beginning in the
one-month
transition period ended December 2008. Since these amended
principles require only additional disclosures concerning
transfers of financial assets and interests in VIEs, adoption
did not affect the firm’s financial condition, results of
operations or cash flows.
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock
(ASC 815). In June 2008, the FASB
issued amended accounting principles related to determining
whether an instrument (or embedded feature) is indexed to an
entity’s own stock. These amended accounting principles
provide guidance about whether an instrument (such as the
firm’s outstanding common stock warrants) should be
classified as equity and not subsequently recorded at fair
value. The firm adopted these amended accounting principles in
the first quarter of fiscal 2009. Adoption did not affect the
firm’s financial condition, results of operations or cash
flows.
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(ASC 820). In April 2009, the FASB
issued amended accounting principles related to determining fair
value when the volume and level of activity for the asset or
liability have significantly decreased and identifying
transactions that are not orderly. Specifically, these amended
principles list factors which should be evaluated to determine
whether a transaction is orderly, clarify that adjustments to
transactions or quoted prices may be necessary when the volume
and level of activity for an asset or liability have decreased
significantly, and provide guidance for determining the
concurrent weighting of the transaction price relative to fair
value indications from other valuation techniques when
estimating fair value. The firm adopted these amended accounting
principles in the second quarter of 2009. Since the firm’s
fair value methodologies were consistent with these amended
accounting principles, adoption did not affect the firm’s
financial condition, results of operations or cash flows.
Recognition and Presentation of
Other-Than-Temporary
Impairments (ASC 320). In April 2009,
the FASB issued amended accounting principles related to
recognition and presentation of
other-than-temporary
impairments. These amended principles prescribe that only the
portion of an
other-than-temporary
impairment on a debt security related to credit loss is
recognized in current period earnings, with the remainder
recognized in other comprehensive income, if the holder does not
intend to sell the security and it is more likely than not that
the holder will not be required to sell the security prior to
recovery. Previously, the entire
other-than-temporary
impairment was recognized in current period earnings. The firm
adopted these amended accounting principles in the second
quarter of 2009. Adoption did not have a material effect on the
firm’s financial condition, results of operations or cash
flows.
Interim Disclosures about Fair Value of Financial Instruments
(ASC 825). In April 2009, the FASB
issued amended principles related to interim disclosures about
fair value of financial instruments. The firm adopted these
amended principles in the second quarter of 2009. Adoption did
not affect the firm’s financial condition, results of
operations or cash flows.
Subsequent Events (ASC 855). In
May 2009, the FASB issued amended accounting principles
related to subsequent events, which codify the guidance
regarding the disclosure of events occurring subsequent to the
balance sheet date. These amended principles do not change the
definition of a subsequent event (i.e., an event or
transaction that occurs after the balance sheet date but before
the financial statements are issued) but require disclosure of
the date through which subsequent events were evaluated when
determining whether adjustment to or disclosure in the financial
statements is required. These amended principles were effective
for the firm for the second quarter of 2009. For the third
quarter of 2009, the firm evaluated subsequent events through
November 3, 2009. Since these amended principles
require only additional disclosures concerning subsequent
events, adoption of the standard did not affect the firm’s
financial condition, results of operations or cash flows.
Transfers of Financial Assets and Interests in Variable
Interest Entities. In June 2009, the FASB
issued Statement of Financial Accounting Standards (SFAS)
No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement
No. 140” and SFAS No. 167, “Amendments
to FASB Interpretation No. 46(R),” which change the
accounting for securitizations and VIEs. SFAS No. 166
will eliminate the concept of a QSPE, change the requirements
for derecognizing financial assets, and require additional
disclosures about transfers of financial assets, including
securitization transactions and continuing involvement with
transferred financial assets. SFAS No. 167 will change
the determination of when a VIE should be consolidated. Under
SFAS No. 167, the determination of whether to
consolidate a VIE is based on the power to direct the activities
of the VIE that most significantly impact the VIE’s
economic performance together with either the obligation to
absorb losses or the right to receive benefits that could be
significant to the VIE, as well as the VIE’s purpose and
design. SFAS No. 166 and 167, which have not yet been
incorporated into the Codification, are effective for fiscal
years beginning after November 15, 2009. The firm is
currently evaluating the impact of adopting
SFAS No. 166 and 167, which requires the firm to make
complex judgments that are subject to change as interpretations
and practices evolve. Based on the firm’s current analyses,
the firm does not expect adoption to have a material effect on
its financial condition, results of operations or cash flows.
Fair Value Measurements and Disclosures — Measuring
Liabilities at Fair Value. In August 2009,
the FASB issued Accounting Standards Update (ASU)
No. 2009-05,
“Fair Value Measurements and Disclosures —
Measuring Liabilities at Fair Value.” ASU
No. 2009-05
provides guidance in measuring liabilities when a quoted price
in an active market for an identical liability is not available
and clarifies that a reporting entity should not make an
adjustment to fair value for a restriction that prevents the
transfer of the liability.
ASU No. 2009-05
is effective for financial statements issued for the first
reporting period beginning after issuance of the ASU. Because
the firm’s current fair value measurement policies are
consistent with ASU
No. 2009-5,
adoption will not affect the firm’s financial condition,
results of operations or cash flows.
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). In
September 2009, the FASB issued ASU
No. 2009-12,
“Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent).” ASU
No. 2009-12
provides guidance about using net asset value to measure the
fair value of interests in certain investment funds and requires
additional disclosures about interests in investment funds. ASU
No. 2009-12
is effective for financial statements issued for reporting
periods ending after December 15, 2009, with earlier
application permitted. Because the firm’s current fair
value measurement policies are consistent with ASU
No. 2009-12,
adoption will not affect the firm’s financial condition,
results of operations or cash flows. The firm will adopt the ASU
in the fourth quarter of 2009 to comply with the ASU’s
disclosure requirements.
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| 57 | GRAINGER W W INC, | NEW ACCOUNTING STANDARDS In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” which is codified primarily in Accounting Standards Codification (ASC) 805. ASC 805 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB Statement No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss,” which are codified primarily in ASC 450. ASC 805 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of ASC 805 did not have a material effect on the Company’s results of operations or financial position. In April 2009, the FASB issued three Staff Positions intended to provide application guidance and revise the disclosures regarding fair value measurements and impairment of securities. A summary of each Staff Position is as follows: - FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” codified primarily in ASC 820, addresses the determination of fair values when there is no active market or where the price inputs represent distressed sales. ASC 820 reaffirms the view in SFAS No. 157 that the objective of fair value measurement is to reflect an asset’s sale price in an orderly transaction at the date of the financial statements. - FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” codified primarily in ASC 825, enhances consistency in financial reporting by increasing the frequency of fair value disclosures to a quarterly basis for any financial instruments for which it is practicable to estimate the value, whether recognized or not recognized in the balance sheet. - FSP 115-2, FAS 124-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” codified primarily in ASC 320, provides additional guidance designed to create greater consistency to the timing of impairment recognition and provide greater clarity about the credit and noncredit components of impaired debt securities that are not expected to be sold. ASC 820, 825 and 320 are effective for interim and annual periods ending after June 15, 2009. The adoption of these ASCs did not have a material effect on the Company’s results of operations or financial position. In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events,” codified primarily in ASC 855, to provide authoritative accounting literature for subsequent events which was previously addressed only in auditing literature. ASC 855 addresses events that occur after the balance sheet date but before the issuance of the financial statements. It distinguishes between subsequent events that should be recognized in the financial statements and those that should not. Also, it requires disclosure of the date through which subsequent events were evaluated and disclosures for certain non-recognized events. ASC 855 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009. The Company applied the provision of ASC 855 for the period ending September 30, 2009 and disclosed the date through which it has evaluated subsequent events and the basis for choosing that date. The adoption of ASC 855 did not have a material effect on the Company’s results of operations or financial position. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (SFAS No. 167) which is a revision to FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” codified primarily in ASC 810. This statement changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASC 810 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. ASC 810 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. The Company does not expect the adoption of ASC 810 to have a material effect on its results of operations or financial position. In June 2009, the FASB issued statement No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” codified in ASC 105, which establishes the FASB Accounting Standards Codification to become the source of authoritative U.S. generally accepted accounting principles to be applied by non-governmental entities. The Accounting Standards Codification will supersede all existing non-SEC accounting and reporting standards. ASC 105 is effective for interim or annual financial periods ending after September 15, 2009. The Company applied this statement for the period ending September 30, 2009 and the adoption did not have a material effect on its results of operations or financial position. In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05), codified primarily in ASC 820. If available, a quoted price in an active market for an identical liability must be used. If such information is not available, an entity may use one or more of the following techniques: - The quoted price of the identical liability when traded as an asset - Quoted prices for similar liabilities or similar liabilities traded as assets - Another valuation technique consistent with principles of ASC 820, such as the income approach or a market approach ASU 2009-05 reintroduces the concept of an entry value, which is a means for valuing a liability by use of a market approach based on the estimated proceeds that would be received upon entering into an identical liability at the measurement date. However, it also specifically affirms that a fair value measurement should maximize observable inputs and minimize unobservable inputs, which is likely to prevent issuers from using entry values for liabilities where identical or similar liabilities quotes are observable as liabilities or as assets. ASU 2009-05 also reaffirms the key measurement concept of determining fair value based on an orderly transaction between market participants, even though liabilities are infrequently transferred due to contractual or other legal restrictions. In addition, under the new guidance the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. ASU 2009-05 is effective the first reporting period after August 27, 2009. The adoption of ASU 2009-05 did not have a material effect on the Company’s results of operations of financial position. |
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| 58 | HCP, INC. |
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| 59 | HOST HOTELS & RESORTS, INC. |
We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Current Report on Form 8-K filed August 5, 2009 to revise the previously issued Annual Report on Form 10-K. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 11, 2009 and the results of our operations for the quarterly and year-to-date periods ended September 11, 2009 and September 5, 2008 and cash flows for the year-to-date periods ended September 11, 2009 and September 5, 2008. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations. Subsequent events have been evaluated through October 15, 2009. Certain prior year financial statement amounts have been reclassified to conform to the current presentation, including changes as a result of the application of new accounting pronouncements for our exchangeable debentures and non-controlling interests in consolidated entities. Reporting Periods The results we report are based on results of our hotels reported to us by our hotel managers. Our hotel managers use different reporting periods. Marriott International, Inc., the manager of the majority of our properties, uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations for each of the first three quarters of the year and sixteen or seventeen weeks for the fourth quarter of the year. In contrast, other managers of our hotels, such as Starwood Worldwide, Inc. and Hyatt Hotels, report results on a monthly basis. For results reported by hotel managers using a monthly reporting period (approximately 42% of our hotels), the month of operation that ends after our fiscal quarter-end is included in our results of operations in the following fiscal quarter. Accordingly, our results of operations include results from hotel managers reporting results on a monthly basis as follows: first quarter (January, February), second quarter (March to May), third quarter (June to August), and fourth quarter (September to December). We elected to adopt the reporting period used by Marriott, modified so that our fiscal year always ends on December 31 as required by existing REIT rules. Accordingly, our first three quarters of operations end on the same day as Marriott, but our fourth quarter ends on December 31. Non-controlling Interests in Consolidated Financial Statements We record the non-controlling interests of other consolidated partnerships as a separate component of equity in the condensed consolidated balance sheets. Additionally, the condensed consolidated statements of operations separately present earnings and other comprehensive income attributable to controlling and non-controlling interests. We adjust the non-controlling interests of Host LP each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value. The historical cost of the non-controlling interests of Host LP is based on the proportional relationship between the carrying value of equity associated with our common stockholders relative to that of the unitholders of Host LP. Net income (loss) is allocated to the non-controlling partners of Host LP based on their weighted average ownership percentage during the period. As of September 11, 2009, approximately $124 million of cash or Host common stock, at our option, would be paid to the noncontrolling interests of Host LP if the partnership were terminated. This balance is equivalent to the approximately 11.8 million partnership units outstanding valued at the September 11, 2009 Host common stock closing price of $10.55, which we have assumed would be equal to the value provided to outside partners upon liquidation of Host LP. Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) We separately account for the liability and equity components of our exchangeable senior debentures to reflect the fair value of the liability component based on our non-convertible borrowing cost at the issuance date. Accordingly, for both our 25/8% Exchangeable Senior Debentures (the “2007 Debentures”) and our 31/4% Exchangeable Senior Debentures (the “2004 Debentures”) (collectively, the “Debentures”), we record the liability components of the Debentures at fair value as of the date of issuance and amortize the resulting discount as an increase to interest expense over the expected life of the debt. We measured the fair value of the debt components of the 2004 Debentures and 2007 Debentures at issuance based on effective interest rates of 6.8% and 6.5%, respectively. As a result, we attributed $165 million of the proceeds received to the conversion feature of the Debentures. This amount represents the excess proceeds received over the fair value of the debt at the date of issuance and is included in additional paid-in capital on the condensed consolidated balance sheets. The retroactive application of this accounting treatment has resulted in a decrease to net income (increase to net loss) and earnings (loss) per share for all periods presented; however, there is no effect on our cash interest payments. As a result of this accounting:
Application of New Accounting Standards The FASB recently amended its guidance surrounding a company’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:
Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The guidance is effective for the first annual reporting period that begins after November 15, 2009 and, accordingly, we will reevaluate our interests in variable interest entities for the period beginning on January 1, 2010 to determine that the entities are reflected properly in the financial statements as investments or consolidated entities. We do not anticipate that the implementation of this guidance will have any material effect on our financial statements. |
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| 60 | INTUITIVE SURGICAL INC | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“financial statements”) of Intuitive Surgical, Inc., and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared on a consistent basis with the December 31, 2008 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which was filed on February 6, 2009. The results of operations for the first nine months of fiscal 2009 are not indicative of the results to be expected for the entire fiscal year or any future periods. Subsequent Events Evaluation Management has reviewed and evaluated material subsequent events from the balance sheet date of September 30, 2009 through the financial statements issue date of October 21, 2009. All appropriate subsequent event disclosures, if any, have been made in notes to our unaudited Condensed Consolidated Financial Statements. Foreign Currency and Other Hedging Instruments The accounts of the Company’s foreign subsidiaries are translated in accordance with Accounting Standards Codification (ASC) 830, “Foreign Currency Matters.” The Company has determined that the functional currency of its subsidiaries should be their local currency, with the exception of its subsidiaries in the Cayman Islands and Switzerland, whose functional currency is the U.S. dollar. For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. dollars at exchange rates at the balance sheet date and revenues and expenses are translated using average exchange rates in effect during the quarter. Gains and losses from foreign currency translation are included in accumulated other comprehensive income (loss) within stockholders’ equity in the accompanying unaudited condensed consolidated balance sheets. For all non functional currency account balances, the re-measurement of such balances to the functional currency will result in either a foreign exchange gain or loss which is recorded to interest and other income, net in the same accounting period that the re-measurement occurred. In January 2009, the Company began a hedging program to address the risk associated with non-functional currency (primarily Euro) financial statement exposures. The Company accounts for these instruments in accordance with ASC 815, “Derivatives and Hedging,” which requires that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at its fair value as of the reporting date. Derivative valuations are determined using Level 2 inputs (as defined on Note 4), including closing currency prices and observable inputs other than quoted prices, including interest rates, forward points and credit risk. The Company sells products to certain European customers in foreign currencies. Fluctuations in exchange rates can change the Company’s U.S. dollar equivalent revenue and hence the Company’s U.S. dollar earnings. The Company hedges a portion of forecasted foreign currency denominated sales (primarily Euro-denominated) utilizing foreign exchange forward contracts. These transactions are designated as cash flow hedges and are accounted for under the hedge accounting provisions of ASC 815. The effective portion of the hedge gain or loss is reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into net revenues when the hedged exposure affects earnings. Any ineffective portions of related gains or losses are recorded in the statements of income immediately. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income, net on its consolidated statement of income. The Company also hedges the net recognized non-functional currency balance sheet exposures with foreign exchange forward contracts to reduce the risk that its earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments are carried at fair value with changes in the fair value recorded to interest and other income, net on the Company’s consolidated statement of income and are intended to offset gains and losses on the assets and liabilities being hedged. The bank counterparties to the foreign exchange forward contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties that meet certain minimum requirements under its counterparty risk assessment process. The Company monitors ratings and potential downgrades on at least a quarterly basis. Based on its on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties. Recent Accounting Pronouncements With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, that are of significance, or potential significance to the Company. Adopted Accounting Pronouncements Effective July 1, 2009, the Company adopted The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC 105). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements. Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on the Company’s consolidated financial statements. Effective April 1, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have any impact on the Company’s consolidated financial statements. Effective January 1, 2009, the Company adopted a new accounting standard update from the Emerging Issues Task Force (EITF) consensus regarding the accounting of defensive intangible assets. This update, as codified in ASC 350-30, clarifies accounting for defensive intangible assets subsequent to initial measurement. It applies to acquired intangible assets which an entity has no intention of actively using, or intends to discontinue use of, the intangible asset but holds it to prevent others from obtaining access to it (i.e., a defensive intangible asset). Under this update, a consensus was reached that an acquired defensive asset should be accounted for as a separate unit of accounting (i.e., an asset separate from other assets of the acquirer); and the useful life assigned to an acquired defensive asset should be based on the period during which the asset would diminish in value. The adoption did not have any impact on the Company’s consolidated financial statements. Effective January 1, 2009, the Company adopted an accounting standard update regarding the determination of the useful life of intangible assets. As codified in ASC 350-30-35, this update amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. It also requires a consistent approach between the useful life of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of an asset under the new business combinations accounting (as currently codified under ASC 850). The update also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. The adoption did not have any impact on the Company’s consolidated financial statements. Effective January 1, 2009, the Company adopted an accounting standard update that required additional quantitative disclosures (provided in tabular form) and qualitative disclosures for derivative instruments. As codified in ASC 815-10, the required disclosures include how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows; the relative volume of derivative activity; the objectives and strategies for using derivative instruments; the accounting treatment for those derivative instruments formally designated as the hedging instrument in a hedge relationship; and the existence and nature of credit-risk-related contingent features for derivatives. This accounting standard update does not change the accounting treatment for derivative instruments. Since this update only required additional disclosure, the Company has included the additional disclosures required effective January 1, 2009. In February 2008, the FASB issued an accounting standard update that delayed the effective date of fair value measurements accounting for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. These include goodwill and other non-amortizable intangible assets. The Company adopted this accounting standard update effective January 1, 2009. The adoption of this update to non-financial assets and liabilities, as codified in ASC 820-10, did not have any impact on the Company’s consolidated financial statements. Effective January 1, 2009, the Company adopted a new accounting standard update regarding business combinations. As codified under ASC 805, this update requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. For Intuitive, this accounting update was effective on a prospective basis for all business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired contingencies under ASC 805-740. With the adoption of this accounting standard update, any tax related adjustments associated with acquisitions that closed prior to January 1, 2009 will be recorded through income tax expense, whereas the previous accounting treatment would require any adjustment to be recognized through the purchase price. The adoption did not have any impact on the Company’s consolidated financial statements. In June 2008, the FASB ratified the consensus reached on EITF and issued an accounting standard update. As codified in ASC 815-40, Derivatives and Hedging, this update provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The update applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception under ASC 815-10-15-2. The update also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative under previous derivative GAAP accounting, for purposes of determining whether the instrument is within the scope of derivative accounting. This accounting update was effective beginning first quarter of fiscal 2009. The Company applied this update in its accounting for the share repurchase program. See Note 7 for further discussion.
New Accounting Pronouncements In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements. In August 2009, the FASB issued Update No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures, of the FASB Accounting Standards Codification (the Codification) to provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This standard is effective beginning fourth quarter of 2009 for the Company. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements. |
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| 61 | Invesco Ltd. |
1. ACCOUNTING POLICIES
Corporate Information
Invesco Ltd. (Parent) and all of its consolidated entities (collectively, the company or
Invesco) provide retail, institutional and high-net-worth clients with an array of global
investment management capabilities. The company’s sole business is investment management.
Basis of Accounting and Consolidation
The accompanying Condensed Consolidated Balance Sheets, Statements of Income, Statements of
Cash Flows, and Statement of Changes in Equity (together, the Condensed Consolidated Financial
Statements) have not been audited and should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the
year ended December 31, 2008. In the opinion of management, the Condensed Consolidated Financial
Statements reflect all adjustments, consisting of normal recurring accruals, which are necessary
for the fair presentation of the financial condition and results of operations for the interim
periods presented. All significant intercompany transactions, balances, revenues and expenses are
eliminated upon consolidation.
The Condensed Consolidated Financial Statements have been prepared in accordance with
U.S. GAAP and consolidate the financial statements of the Parent, all of its controlled
subsidiaries, any variable interest entities (VIEs) required to be consolidated, and any non-VIE
general partnership investments where the company is deemed to have control. Control is deemed to
be present when the Parent holds a majority voting interest or otherwise has the power to govern
the financial and operating policies of the subsidiary so as to obtain the benefits from its
activities. VIEs, or entities in which the risks and rewards of ownership are not directly linked
to voting interests, for which the company is the primary beneficiary (having the majority of
rewards/risks of ownership) are consolidated. Certain of the company’s managed products are
structured as partnerships in which the company is the general partner receiving a management
and/or performance fee. If the company is deemed to have a variable interest in these entities and
is determined to be the primary beneficiary, these entities are consolidated into the company’s
financial statements. If the company is not determined to be the primary beneficiary, the equity
method of accounting is used to account for the company’s investment in these entities. Non-VIE
general partnership investments are deemed to be controlled by the company and would be
consolidated under a voting interest entity (VOE) model, unless the limited partners have the
substantive ability to remove the general partner without cause based upon a simple majority vote
or can otherwise dissolve the partnership, or unless the limited partners have substantive
participating rights over decision-making. Investment products that are consolidated are referred
to as consolidated investment products in the accompanying Condensed Consolidated Financial
Statements.
A significant portion of consolidated investment products are private equity funds. Private
equity investments made by the underlying funds consist of direct investments in, or fund
investments in other private equity funds that hold direct investments in, equity or debt
securities in operating companies that are generally not initially publicly traded. Private equity
funds are considered investment companies and are therefore accounted for under the American
Institute of Certified Public Accountants’ Investment Company Audit Guide and are scoped out of
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320,
“Investments — Debt and Equity Securities.” All of the investments of consolidated investment
products are presented at fair value in the financial statements. The company has retained the
specialized industry accounting principles of these investment products in our Consolidated
Financial Statements. See Note 9, “Consolidated Investment Products,” for additional details.
The equity method of accounting is used to account for investments in joint ventures and
noncontrolled subsidiaries in which the company’s ownership is between 20 and 50 percent. Equity
investments are carried initially at cost (subsequently adjusted to recognize the company’s share
of the profit or loss of the investee after the date of acquisition) and are included in
investments on the Condensed Consolidated Balance Sheets. The proportionate share of income or loss
is included in equity in earnings of unconsolidated affiliates in the Condensed Consolidated
Statements of Income.
The financial statements have been prepared primarily on the historical cost basis; however,
certain items are presented using other bases such as fair value, where such treatment is required.
The financial statements of subsidiaries are prepared for the same reporting year as the Parent and
use consistent accounting policies, which, where applicable, have been adjusted to U.S. GAAP from
local
generally accepted accounting principles or reporting regulations. Noncontrolling interests in
consolidated entities represent the interests in certain entities consolidated by the company
either because the company has control over the entity or has determined that it is the primary
beneficiary, but of which the company does not own all of the equity.
In preparing the financial statements, management is required to make estimates and
assumptions that affect reported revenues, expenses, assets, liabilities and disclosure of
contingent liabilities. The primary estimates relate to investment valuation, goodwill impairment
and taxes. Use of available information and application of judgment are inherent in the formation
of estimates. Actual results in the future could differ from such estimates and the differences may
be material to the financial statements.
Dividends to shareholders
Dividends to shareholders are recognized on the declaration date. Dividends are declared and
paid on a quarterly basis.
Reclassifications
The presentation of certain prior period reported amounts has been reclassified to be
consistent with the current presentation. Such reclassifications had no impact on net income or
shareholders’ equity.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (FASB
Statement No. 157), which became effective for Invesco on January 1, 2008. FASB Statement No. 157,
which is now encompassed in ASC Topic 820, “Fair Value Measurements and Disclosures,” clarified how
companies should measure fair value when they are required by U.S. GAAP to use a fair value measure
for recognition or disclosure. FASB Statement No. 157 established a common definition of fair
value, established a framework for measuring fair value under U.S. GAAP, and expanded disclosures
about fair value measurements to eliminate differences in current practice in measuring fair value
under existing accounting standards. The adoption of FASB Statement No. 157 did not result in any
retrospective adjustments to prior period information or in a cumulative effect adjustment to
retained earnings. See Note 2, “Fair Value of Assets and Liabilities,” for additional disclosures.
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations
(FASB Statement No. 141(R)),” and Statement No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (FASB Statement No. 160).” Under FASB Statement
No. 141(R), which is now encompassed in ASC Topic 805, “Business Combinations” (ASC Topic 805), the
acquirer must recognize, with certain exceptions, 100% of the fair values of assets acquired,
liabilities assumed, and noncontrolling interests in acquisitions of less than 100% controlling
interest when the acquisition constitutes a change in control of the acquired entity. Additionally,
when an acquirer obtains partial ownership in an acquiree, an acquirer recognizes and consolidates
assets acquired, liabilities assumed and any noncontrolling interests at 100% of their fair values
at that date regardless of the percentage ownership in the acquiree. As goodwill is calculated as a
residual, all goodwill of the acquired business, not just the acquirer’s share, is recognized under
this “full-goodwill” approach. Contingent consideration obligations that are elements of
consideration transferred are recognized as of the acquisition date as part of the fair value
transferred in exchange for the acquired business. Acquisition-related costs incurred in connection
with a business combination shall be expensed. FASB Statement No. 160, which is now encompassed in
ASC Topic 810, “Consolidation,” establishes new accounting and reporting standards for
noncontrolling interests (formerly known as “minority interests”) in a subsidiary and for the
deconsolidation of a subsidiary. FASB Statement No. 141(R) and FASB Statement No. 160 became
effective for the company on January 1, 2009. FASB Statement No. 141(R) was applied prospectively,
while FASB Statement No. 160 required retroactive adoption of the presentation and disclosure
requirements for existing noncontrolling interests but prospective adoption of all of its other
requirements. The adoption of FASB Statement No. 141(R) amended the definition of a business, which
led to a change in the company’s basis, but not the company’s conclusion, of determining that it
has one reporting unit for goodwill impairment purposes. See Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and
Estimates — Goodwill” for additional information.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (FASB Statement No. 159), which also became effective for Invesco
on January 1, 2008, at its own discretion. FASB Statement No. 159, which is now encompassed under
ASC Topic 825, “Financial Instruments” (ASC Topic 825), permits companies to elect, on an instrument-by-instrument
basis, to fair value certain financial assets and financial liabilities with changes in fair value
recognized in earnings as they occur (the fair value option). The company chose not to elect the
FASB Statement No. 159 fair value option for eligible items existing on its balance sheet as of
January 1, 2008, or for any new eligible items recognized subsequent to January 1, 2008.
In February 2008, the FASB issued Staff Position No. FAS 157-2, “Effective Date of FASB
Statement No. 157 (FSP FAS 157-2).” FSP FAS 157-2, which is now encompassed in ASC Topic 820, “Fair
Value Measurements and Disclosures” (ASC Topic 820), amended FASB Statement No. 157 to delay the
effective date for nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at
least annually). For items within its scope, FSP FAS 157-2 delayed the effective date of FASB
Statement No. 157 to January 1, 2009. As of January 1, 2008, Invesco applied the fair value
measurement and disclosure provisions of FASB Statement No. 157 to its financial assets and
financial liabilities that are recognized or disclosed at fair value in the financial statements.
As of January 1, 2009, Invesco applied the fair value measurement and disclosure provisions of FASB
Statement No. 157 to nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a non-recurring basis. Those items include:
(1) nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business
combination or other new basis event, but not measured at fair value in subsequent periods; (2)
nonfinancial long-lived assets measured at fair value for an impairment assessment under FASB
Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets;” (now
encompassed in ASC Topic 360, “Property, Plant and Equipment”); (3) nonfinancial liabilities for
exit or disposal activities initially measured at fair value under FASB Statement No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities;” (now encompassed in ASC Topic
420, “Exit or Disposal Cost Obligations”) and (4) nonfinancial assets and nonfinancial liabilities
measured at fair value in the second step of a goodwill impairment test. The adoption of FSP FAS
157-2 did not have a material impact on the company’s financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life
of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3, which is now encompassed in ASC Topic 350,
“Intangibles — Goodwill and Other” (ASC Topic 350), amended the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life over which to
amortize the cost of a recognized intangible asset under FASB Statement No. 142, “Goodwill and
Other Intangible Assets,” also now encompassed in ASC Topic 350. FSP FAS 142-3 required an entity
to consider its own assumptions about renewal or extension of the term of the arrangement,
consistent with its expected use of the asset. FSP FAS 142-3 was intended to improve the
consistency between the useful life of an intangible asset determined under FASB Statement No. 142
and the period of expected cash flows used to measure the fair value of the asset under FASB
Statement No. 141(R) (now encompassed in ASC Topic 805, “Business Combinations”) and other U.S.
GAAP. The guidance provided by FSP FAS 142-3 for determining the useful life of a recognized
intangible asset was to be applied prospectively to intangible assets acquired after the effective
date, which is January 1, 2009. FSP FAS 142-3 did not have a material impact on the company’s
financial statements.
During June 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF
03-6-1). FSP EITF 03-6-1, which is now encompassed in ASC Topic 260, “Earnings Per Share” (ASC
Topic 260), addressed whether instruments granted in share-based payment transactions are
participating securities prior to vesting and need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method described in FASB Statement No. 128,
“Earnings Per Share,” also now encompassed in ASC Topic 260. The guidance in the FSP EITF 03-6-1
provided that only those unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities that should be included in the
calculation of basic EPS under the two-class method. The FASB concluded that the holder of a
share-based award receives a noncontingent transfer of value each time the entity declares a
dividend, and therefore the share-based award meets the definition of a participating security. FSP
EITF 03-6-1 was effective for financial statements issued for fiscal years beginning after December
15, 2008, with all prior period EPS data being adjusted retrospectively. The adoption of FSP EITF
03-6-1 on January 1, 2009, required the company to include unvested restricted stock units (RSUs)
that contain nonforfeitable dividend equivalents as outstanding common shares for purposes of
calculating basic EPS. The adoption of FSP EITF 03-6-1 did not have a material impact on the
company’s calculation of basic EPS. The weighted average number of shares used for the calculation
of prior period earnings per share have been restated to reflect the adoption of EITF 03-6-1. The
adoption of FSP EITF 03-6-1 resulted in a change to the nine months ended September 30, 2008,
reported diluted earnings per share amount of $0.01. There was no change to the three months ended
September 30, 2008, figures.
In October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3), which became
effective for Invesco for the period ended September 30, 2008. FSP 157-3, which is now encompassed
in ASC Topic 820, clarified the application of FASB Statement No. 157 (also now encompassed in ASC
Topic 820) to financial assets in an inactive market. The FSP included an illustration of the
application of judgment when selecting an appropriate discount rate to apply in the valuation of a
collateralized debt obligation in a market that has become increasingly inactive. The adoption of
FSP 157-3 did not have a material impact on the company’s financial statements.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8,
“Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities (FSP
FAS 140-4 and FIN 46(R)-8),” which became effective for the
company on March 31, 2009. FSP FAS 140-4 and FIN 46(R)-8, which is now encompassed in ASC
Topic 860, “Transfers and Servicing,” required additional disclosures by public entities with a)
continuing involvement in transfers of financial assets to a special purpose entity or b) a
variable interest in a variable interest entity. The adoption of FSP FAS 140-4 and FIN 46(R)-8 did
not have a material impact on the company’s financial statements. See Note 9, “Consolidated
Investment Products,” for additional disclosures.
In January 2009, the FASB issued Staff Position No. EITF 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1),” which became effective for the
company on March 31, 2009. FSP EITF 99-20-1, which is now encompassed in ASC Topic 325,
“Investments — Other,” revised the impairment guidance provided by EITF 99-20 for beneficial
interests to make it consistent with the requirements of FASB Statement No. 115 (now encompassed in
ASC Topic 320, “Investments — Debt and Equity Securities”) for determining whether an impairment of
other debt and equity securities is other-than-temporary. FSP EITF 99-20-1 eliminated the
requirement to rely exclusively on market participant assumptions about future cash flows and
permitted the use of reasonable management judgment of the probability that the holder will be
unable to collect all amounts due. Instead, FSP 99-20-1 required that an other-than-temporary
impairment be recognized when it is probable that there has been an adverse change in the holder’s
estimated cash flows. FSP EITF 99-20-1 did not have a material impact on the company’s financial
statements.
On April 9, 2009, the FASB issued three Staff Positions (FSPs) intended to provide additional
application guidance and enhance disclosures regarding fair value measurements and impairments of
securities. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly
(FSP FAS 157-4),” now encompassed in ASC Topic 820, provided guidelines for making fair value
measurements more consistent with the principles presented in FASB Statement No. 157. FSP FAS 107-1
and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1),” now
encompassed in ASC Topic 825, enhanced consistency in financial reporting by increasing the
frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2),” now encompassed in ASC Topic 320, provided additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on securities.
FSP FAS 157-4 addressed the measurement of fair value of financial assets when there is no
active market or where the price inputs being used could be indicative of distressed sales. FSP FAS
157-4 reaffirmed the definition of fair value already reflected in FASB Statement No. 157, which is
the price that would be paid to sell an asset in an orderly transaction (as opposed to a distressed
or forced transaction) at the measurement date under current market conditions. FSP FAS 157-4 also
reaffirmed the need to use judgment to ascertain if a formerly active market has become inactive
and in determining fair values when markets have become inactive. FSP FAS 157-4 became effective
for the company for the period ended June 30, 2009. The application of FSP FAS 157-4 did not result
in a change in valuation techniques or related inputs used to obtain the fair value measurement of
its assets that are carried at fair value in the statement of financial position; however, it did
result in expanded disclosures of fair valued assets by major security type. See Note 2, “Fair
Value of Assets and Liabilities,” and Note 9, “Consolidated Investment Products,” for additional
details.
FSP FAS 107-1 was issued to improve the fair value disclosures for any financial instruments
that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing
FSP FAS 107-1, fair values of these assets and liabilities were only disclosed on an annual basis.
FSP FAS 107-1 required these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. FSP FAS 107-1 became effective for the company for the
period ended June 30, 2009, which required the company to make annual disclosures in its interim
financial statements, which are included in Note 2, “Fair Value of Assets and Liabilities,” Note 3,
“Investments,” and Note 4, “Long-Term Debt.”
FSP FAS 115-2 was intended to improve the consistency in the timing of impairment recognition
and provide greater clarity to investors about the credit and noncredit components of impaired debt
securities that are not expected to be sold. FSP FAS 115-2 required increased and more timely
disclosures sought by investors regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. The company adopted FSP FAS 115-2 on April 1, 2009. Upon
adoption, the company recorded a cumulative effect adjustment of $1.5 million to the April 1, 2009,
opening balance of retained earnings with a corresponding adjustment to accumulated other
comprehensive income.
In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (SFAS 165). SFAS 165,
which is now encompassed in ASC Topic 855, “Subsequent Events,” established general standards of
accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically, SFAS 165 provided
clarity around the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosure that an entity should make about
events or transactions that occurred after the balance sheet date. SFAS 165 was effective for
interim and annual financial reporting periods ending after June 15, 2009, and was applied
prospectively. The company has made the required disclosures at Note 14, “Subsequent Events.”
In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets
— an amendment of FASB Statement No. 140,” (FASB Statement No. 166), which addresses the effects of
eliminating the qualifying special-purpose entity concept from FASB Statement No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FASB Statement
No. 140), and will generally subject those entities to the consolidation guidance applied to other
VIEs as provided by FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (FASB
Statement No. 167). FASB Statements No. 166 and 167 have yet to be entered by the FASB into the
ASC. Specifically, FASB Statement No. 166 introduces the concept of a participating interest, which
will limit the circumstances where the transfer of a portion of a financial asset will qualify as a
sale, assuming all other derecogntion criteria are met, and clarifies and amends the derecogntion
criteria for determining whether a transfer qualifies for sale accounting. FASB Statement No. 166
will be applied prospectively to new transfers of financial assets occurring on or after January 1,
2010. The company is currently assessing the impact of FASB Statement No. 166 on its Condensed
Consolidated Financial Statements.
In June 2009, the FASB issued Statement No. 167, which addresses the effects of eliminating
the qualifying special-purpose entity concept from FASB Statement No. 140 and amends certain
provisions of FIN 46(R). Specifically, FASB Statement No. 167 amends certain provisions for
determining whether an entity is a VIE, it requires a qualitative rather than a quantitative
analysis to determine whether the company is the primary beneficiary of a VIE, it amends FIN
46(R)’s consideration of related party relationships in the determination of the primary
beneficiary of a VIE by providing an exception regarding de facto agency relationships in certain
circumstances, it requires continuous assessments of whether the company is a VIE’s primary
beneficiary, and it requires enhanced disclosures about the company’s involvement with VIEs, which
are generally consistent with those disclosures required by FSP FAS 140-4 and FIN 46(R)-8 discussed
above. The company is currently assessing the impact of FASB Statement No. 167 on its Condensed
Consolidated Financial Statements. FASB Statement No. 167, which is effective January 1, 2010, may
have a significant impact on the presentation of the company’s financial statements,
as its provisions may require the company to consolidate many managed investment products that are
not currently consolidated.
In July 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No.
162,” (FASB Statement No. 168). FASB Statement No. 168 replaced the existing hierarchy of U.S.
Generally Accepted Accounting Principles with the FASB ASC as the single source of authoritative
U.S. accounting and reporting standards applicable for all nongovernmental entities, with the
exception of guidance issued by the U.S. Securities and Exchange Commission and its staff. FASB
Statement No. 168 is now encompassed in ASC Topic 105, “Generally Accepted Accounting Principles,”
and was effective July 1, 2009. The company has replaced references to FASB accounting standards
with ASC references, where applicable and relevant, in this Report.
In September 2009, the FASB issued Accounting Standards Update 2009-12, “Investments in
Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2009-12). ASU
2009-12 amends ASC Topic 820 to provide further guidance on how to measure the fair value of
investments in alternative investments, such as hedge, private equity, real estate, venture
capital, offshore and fund of funds. ASU 2009-12 permits, as a practical expedient, the measurement
of fair value of an investment on the basis of the net asset value per share of the investment (or
its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a
manner consistent with ASC Topic 946, “U.S. GAAP for Investment Companies,” including measurement
of all or substantially all of the fund’s underlying investments being accounted for at fair value
in accordance with ASC Topic 820. ASU 2009-12 is effective for interim and annual periods ending
after December 15, 2009. The company is currently assessing the impact of ASU 2009-12 on its
Condensed Consolidated Financial Statements.
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| 62 | JUNIPER NETWORKS INC |
Note 2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2009-14, Software (Topic 985) Certain Arrangements That Contain Software
Elements — a consensus of the FASB Emerging Issues Task Force (“EITF”) (“ASU 2009-14”), which
amends the scope of software revenue guidance in Accounting Standards Codification (“ASC”) Subtopic
985-605, Software-Revenue Recognition, to exclude tangible products containing software and
non-software components that function together to deliver the product’s essential functionality.
In October 2009, FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable
Revenue Arrangements — a consensus of the FASB EITF (“ASU 2009-13”), which eliminates the residual
method of allocation and requires the relative selling price method when allocating deliverables of
a multiple-deliverable revenue arrangement. ASU 2009-13 specifies the best estimate of a selling
price is consistent with that used to determine the price to sell the deliverable on a standalone
basis.
ASU 2009-14 and ASU 2009-13 are effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the
same period using the same transition method. If adoption is elected in a period other than the
beginning of a fiscal year, the amendments in these standards must be applied retrospectively to
the beginning of the fiscal year. Full retrospective application of these amendments to prior
fiscal years is optional. Companies may elect early adoption of these standards. The Company is
currently assessing the timing of adoption and affects that ASU 2009-14 and ASU 2009-13 will have
on its consolidated results of operations and financial condition.
In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic
820) — Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 amends FASB ASC Topic 820
and provides amendments to FASB ASC Subtopic 820-10, Fair Value Measurements and Disclosures —
Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for an identical liability is not
available, a reporting entity is required to measure fair value using one or more of the following
techniques: (1) a valuation technique that uses: (a) quoted price of the identical liability when
traded as an asset, or (b) quoted prices for similar liabilities or similar liabilities when traded
as assets, or (2) another valuation technique that is consistent with the principles of FASB ASC
Topic 820. The guidance in ASU 2009-05 is effective for the first reporting period (including
interim periods) beginning after issuance. The
Company’s adoption of ASU 2009-5 in the fourth quarter of 2009 will not materially affect the
Company’s consolidated results of operations or financial condition.
In June 2009, the FASB issued ASU No. 2009-01, Topic 105 — Generally Accepted Accounting
Principles amendments based upon Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles —
a replacement of FASB Statement 162 (“ASU 2009-01”). ASU 2009-1 adopts Statement of Financial
Accounting Standards (“SFAS”) No. 168 and establishes the FASB Accounting Standards Codification
(“Codification”) as the single source of authoritative accounting principles to be applied to
financial statements of nongovernmental entities in conformity with U.S. GAAP. ASU 2009-1 is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. The Company’s implementation of ASU 2009-01 during the third quarter of 2009 did not affect
its consolidated results of operations or financial condition.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — An
Amendment of FASB Statement No. 140 (“SFAS 166”), which amends SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), to
eliminate the concept of the qualifying special-purpose entity (“QSPE”) from SFAS 140. SFAS 166
removes the exception from applying FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities (“FIN 46R”) to QSPE, changes the requirements for
derecognizing financial assets, and requires additional disclosures. SFAS 166 has not yet been
included in the FASB Accounting Standards Codification. SFAS 166 is effective for each entity’s
first annual reporting period that begins after November 15, 2009, for interim periods within the
first annual reporting period, and for interim and annual reporting periods thereafter. SFAS 166
must be applied to transfers of financial assets occurring on or after the effective date. Earlier
application of SFAS 166 is prohibited. Accordingly, the Company’s transfers of financial assets
will be recorded and disclosed following existing GAAP until January 1, 2010. The impact of SFAS
166 on the Company’s consolidated results of operations or financial condition will depend upon the
level of activity of financial asset transfers that the Company may consummate after the effective
date.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS
167”), which amends FIN 46R. SFAS 167 amends FIN46R by eliminating the QSPE concept in SFAS 166.
SFAS 167 amends the provisions on determining whether an entity is a variable interest entity and
would require consolidation, as well as requires additional disclosures. SFAS 167 has not yet been
included in the FASB Accounting Standards Codification. SFAS 167 is effective for each entity’s
first annual reporting period that begins after November 15, 2009, for interim periods within the
first annual reporting period, and for interim and annual reporting periods thereafter. Earlier
application of SFAS 167 is prohibited. Accordingly, the Company will adopt SFAS 167 on January 1,
2010. The impact of SFAS 167 on the Company’s consolidated results of operations or financial
condition will depend upon its involvement with variable interest entities as of and subsequent to
the adoption date.
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| 63 | KANSAS CITY SOUTHERN |
In the opinion of the management of KCS, the accompanying
unaudited consolidated financial statements contain all
adjustments necessary for a fair presentation of the results for
interim periods. All adjustments made were of a normal and
recurring nature. Certain information and footnote disclosure
normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted. The Company
has evaluated subsequent events through October 29, 2009,
the date that these financial statements were issued and
determined that no subsequent events occurred that would require
additional recognition or disclosure. These consolidated
financial statements should be read in conjunction with the
financial statements and accompanying notes included in the
Company’s Annual Report on
Form 10-K
for the year ended December 31, 2008. The results of
operations for the three and nine months ended
September 30, 2009 are not necessarily indicative of the
results to be expected for the full year ending
December 31, 2009. Certain prior year amounts have been
reclassified to conform to the current year presentation.
During the third quarter of 2009, the Company identified that
changes in accounts payable and accrued liabilities related to
capital spending had not been correctly presented in the
Company’s prior period consolidated cash flow statements.
Changes in these accruals had previously been classified within
cash flows from operating activities and should have been
classified as capital expenditures within investing activities,
in order to report capital expenditures on a cash basis rather
than on an accrual basis. The accompanying consolidated cash
flow statement for the nine months ended September 30, 2009
presents capital expenditures on a cash basis. This
misclassification was not material to net cash provided by
operating activities, capital expenditures, and net cash used by
investing activities for the nine months ended
September 30, 2008.
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| 64 | KELLOGG CO | Note 1 Accounting policies Basis of presentation The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 27 to 54 of the Company’s 2008 Annual Report on Form 10-K. The condensed balance sheet data at January 3, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended October 3, 2009 are not necessarily indicative of the results to be expected for other interim periods or the full year. The accounting policies used in preparing these financial statements are the same as those applied in the prior year, except that the Company adopted new financial accounting standards in its 2009 fiscal year, as discussed within this Note. Accounting standards codification In June 2009, the Financial Accounting Standards Board (FASB) issued a standard which established the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The Codification was effective for financial statements issued for interim and annual periods ending after September, 15, 2009, and was adopted by the Company in the quarter ended October 3, 2009. Adoption of this standard did not impact the Company’s consolidated financial statements. Subsequent events In May 2009, the FASB issued a standard on subsequent events which was effective for the Company’s quarter ended July 4, 2009. This standard requires interim and annual disclosure of the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The Company’s adoption of this standard, which was applied prospectively, resulted in additional disclosures contained in Note 12. Interim fair value disclosures In April 2009, the FASB issued a staff position on interim disclosures of the fair value of financial instruments. This staff position, which was adopted by the Company as of the quarter ended July 4, 2009, expanded to include certain fair value disclosures for financial instruments on an interim basis that were previously required on an annual basis. It also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim basis and to highlight any changes in the methods and significant assumptions from prior periods. The Company’s adoption of this guidance, which was applied prospectively, resulted in additional disclosures contained in Note 9. Fair value In September 2006, the FASB issued a standard that defined fair value, established a framework for measuring fair value, and expanded disclosures about fair value measurements. In February 2008, the FASB issued a one-year deferral for all non-financial assets and non-financial liabilities, except for those that are recognized or disclosed at fair value in the financial statements at least annually. Assets and liabilities subject to this deferral included goodwill, intangible assets, long-lived assets measured at fair value for impairment assessments and nonfinancial assets and liabilities initially measured at fair value in a business combination. As of the beginning of its 2009 fiscal year, the Company applied the provisions of the standard to assets and liabilities subject to the one-year deferral. The provisions of this standard, which were applied prospectively, did not have a significant impact on the Company’s consolidated financial statements. In April 2009, the FASB issued a staff position on determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and identifying transactions that are not orderly. It clarified and included additional factors to consider in determining whether there has been a significant decrease in market activity for an asset or liability. In addition, the staff position amended prior fair value measurement guidance to require additional disclosures in interim and annual periods. These disclosures include the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The Company’s adoption of this guidance as of the quarter ended July 4, 2009 resulted in additional disclosures contained in Note 9. Disclosures about derivative instruments In March 2008, the FASB issued a standard on disclosures about derivative instruments and hedging activities, which was adopted by the Company as of the beginning of its 2009 fiscal year. The standard requires companies to disclose their objectives and strategies for using derivative instruments, whether or not the derivatives are designated as hedging instruments. The pronouncement requires disclosure of the fair value of derivative instruments by primary underlying risk exposure (e.g. interest rate, credit, foreign exchange rate, combination of interest rate and foreign exchange rate, or overall price). It also requires disclosures about the income statement impact of derivative instruments by designation as fair value hedges, cash flow hedges, or hedges of the foreign currency exposure of a net investment in a foreign operation. The provisions of this standard, which were applied prospectively, resulted in additional disclosures contained in Note 10. Business combinations and noncontrolling interests In December 2007, the FASB issued separate standards on business combinations and noncontrolling interests in consolidated financial statements. These standards were adopted by the Company at the beginning of its 2009 fiscal year. The underlying fair value concepts of previous guidance were retained, but the method for applying the acquisition method changed in a number of significant respects including the requirement to expense transaction fees and expected restructuring costs as incurred, rather than including these amounts in the allocated purchase price; the requirement to recognize the fair value of contingent consideration at the acquisition date, rather than the expected amount when the contingency is resolved; the requirement to recognize the fair value of acquired in-process research and development assets at the acquisition date, rather than immediately expensing them; and the requirement to recognize a gain in relation to a bargain purchase price, rather than reducing the allocated basis of long-lived assets. The effect on the Company’s financial statements will depend primarily on specific transactions, if any, completed after 2008. For acquisitions completed prior to January 4, 2009, changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in net income rather than as an adjustment to the cost of the acquisition. These changes are not expected to have a significant impact on the Company’s consolidated financial statements. The consolidated financial statements are presented as if the parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in the consolidated financial statements. Furthermore, the consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only the Company’s share. Lastly, transactions between the Company and noncontrolling interests are reported in equity as transactions between shareholders provided that these transactions do not create a change in control. Previously, acquisitions of additional interests in a controlled subsidiary generally resulted in remeasurement of assets and liabilities acquired; dispositions of interests resulted in a gain or loss. The Company’s adoption of this pronouncement changed its presentation of noncontrolling interests. New accounting pronouncements In June 2009, the FASB issued guidance that changed the consolidation model for variable interest entities (VIEs). This guidance requires companies to qualitatively assess the determination of the primary beneficiary of a VIE based on whether a company (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. For the Company, this standard is effective at the beginning of its 2010 fiscal year and must be applied retrospectively. The Company is currently in the process of evaluating the impact on its consolidated financial statements. |
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| 65 | KIMBERLY CLARK CORP | Note 1. Accounting Policies Basis of Presentation The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008. Management has evaluated events occurring subsequent to September 30, 2009 through November 6, 2009, the date of filing the Form 10-Q with the Securities and Exchange Commission (“SEC”), to determine if any such events should either be recognized or disclosed in the condensed Consolidated Financial Statements. New Accounting Standards Effective January 1, 2009, the Corporation adopted new Financial Accounting Standards Board (“FASB”) guidance with respect to the classification of noncontrolling interests (formerly minority interests) in its Consolidated Financial Statements. See Note 7 for additional detail. Effective January 1, 2009, the Corporation adopted new accounting requirements whereby certain share-based payment awards entitled to nonforfeitable dividends or dividend equivalents are considered participating securities, and must be included in the computation of basic and diluted earnings per share under the two-class method. Under the two-class method earnings per share are computed by allocating net income between common stockholders and participating securities. The Corporation’s basic and diluted earnings per share amounts have been recast from amounts previously reported as follows:
6 Note 1. (Continued) In June 2009, the Corporation adopted new FASB requirements to evaluate events or transactions that occur after the balance sheet date but before financial statements are issued. Subsequent events that provide additional evidence about conditions that existed at the balance sheet date, including estimates inherent in the process of preparing financial statements, must be recognized in the financial statements. Subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after the balance sheet date but before financial statements are issued are not permitted to be recognized, but may require disclosure. In June 2009, the FASB adopted a codification of accounting standards and the hierarchy of GAAP. The codification became effective for financial statements issued for interim or annual periods ending after September 15, 2009 and is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All nongrandfathered non-SEC accounting literature not included in the codification is superseded and deemed non-authoritative. Adoption of the codification did not have a financial effect on the Corporation’s financial statements. Effective June 30, 2009, as required, the Corporation:
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