Kodak 2002 Annual Report Download - page 7

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements and notes to
consolidated financial statements contain information that is
pertinent to management’s discussion and analysis of financial
condition and results of operations. 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, liabilities, revenue and expenses, and the related
disclosure of contingent assets and liabilities.
Eastman Kodak Company (the Company or Kodak) believes
that the critical accounting policies and estimates discussed below
involve additional management judgment due to the sensitivity of
the methods and assumptions necessary in determining the related
asset, liability, revenue and expense amounts.
REVENUE RECOGNITION
Kodak recognizes revenue when it is realized or realizable and
earned. For the sale of multiple-element arrangements whereby
equipment is combined with services, including maintenance and
training, and other elements, including software and products, the
Company allocates to, and recognizes revenue from, the various
elements based on verifiable objective evidence of fair value (if
software is not included or is incidental to the transaction) or
Kodak-specific objective evidence of fair value if software is
included and is other than incidental to the sales transaction as a
whole. For full service solutions sales, which consist of the sale
of equipment and software which may or may not require
significant production, modification or customization, there are
two acceptable methods of accounting: percentage of completion
accounting and completed contract accounting. For certain of the
Company’s full service solutions, the completed contract method
of accounting is being followed by the Company. This is due to
insufficient historical experience resulting in the inability to
provide reasonably dependable estimates of the revenues and
costs applicable to the various stages of such contracts as would
be necessary under the percentage of completion methodology.
When the Company does have sufficient historical experience and
the ability to provide reasonably dependable estimates of the
revenues and the costs applicable to the various stages of these
contracts, the Company will account for these full service
solutions under the percentage of completion methodology.
The Company records reductions to revenue for customer
incentive programs offered including cash and volume discounts,
price protection, promotional, cooperative and other advertising
allowances, slotting fees and coupons. The liability for the
incentive programs is recorded at the time of sale. The Company
determines the amount of the incentives that are based on
estimates by using historical experience and internal and
customer data. To the extent actual experience differs from
estimates, additional reductions to revenue could be recorded. If
market conditions were to decline, the Company may take actions
to expand these customer offerings, which may result in
incremental reductions to revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Kodak regularly analyzes its customer accounts and, when it
becomes aware of a specific customer’s inability to meet its
financial obligations to the Company, such as in the case of
bankruptcy filings or deterioration in the customer’s overall
financial condition, records a specific provision for uncollectible
accounts to reduce the related receivable to the amount that is
estimated to be collectible. The Company also records and
maintains a provision for doubtful accounts for customers based
on a variety of factors including the Company’s historical
experience, the length of time the receivable has been
outstanding and the financial condition of the customer. If
circumstances related to specific customers were to change, the
Company’s estimates with respect to the collectibility of the
related receivables could be further adjusted. However, losses in
the aggregate have not exceeded management’s expectations.
INVENTORIES
Kodak reduces the carrying value of its inventory based on
estimates of what is excess, slow-moving and obsolete, as well as
inventory whose carrying value is in excess of net realizable
value. These write-downs are based on current assessments about
future demands, market conditions and related management
initiatives. If, in the future, the Company determined that market
conditions and actual demands are less favorable than those
projected and, therefore, inventory was overvalued, the Company
would be required to further reduce the carrying value of the
inventory and record a charge to earnings at the time such
determination was made. However, if in the future the Company
determined that inventory write-downs were overstated and,
therefore, inventory was undervalued, the Company would
recognize the increase to earnings through higher gross profit at
the time the related undervalued inventory was sold. However,
actual results have not differed materially from management’s
estimates.
VALUATION OF LONG-LIVED ASSETS INCLUDING
GOODWILL AND PURCHASED INTANGIBLE ASSETS
The Company reviews the carrying value of its long-lived assets,
including goodwill and purchased intangible assets, for impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. The Company assesses the
recoverability of the carrying value of long-lived assets, other
than goodwill and purchased intangible assets with indefinite
useful lives, by first grouping its long-lived assets with other
assets and liabilities at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other
assets and liabilities (the asset group) and, secondly, estimating
the undiscounted future cash flows that are directly associated
with and expected to arise from the use of and eventual
disposition of such asset group. The Company estimates the
undiscounted cash flows over the remaining useful life of the
primary asset within the asset group. If the carrying value of the
asset group exceeds the estimated undiscounted cash flows, the
Financials
7