Apple 2007 Annual Report Download - page 64

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 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 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 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.
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 5 years for equipment, and the
shorter of lease terms or 10 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 3 to 5 years. Depreciation and amortization expense on
property and equipment was $249 million, $180 million, and $141 million during 2007, 2006, and 2005, respectively.
Asset Retirement Obligations
The Company records obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs in
accordance with SFAS No. 143, Accounting for Asset Retirement Obligations . 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 $18 million and $15 million as of September 29, 2007 and September 30, 2006, 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 in accordance
with SFAS No. 144, Accounting for the Impairment of Long-Lived
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