Kodak 2004 Annual Report Download - page 56

Financials
54
E A S T M A N฀ K OD A K ฀ C O M PA N Y
n฀Notes฀to฀Financial฀Statements
Eastman฀Kodak฀Company
NOTE฀1:฀SIGNIFICANT฀ACCOUNTING฀
POLICIES฀AND฀RESTATEMENT
Company฀Operations฀฀Eastman฀Kodak฀Company฀(the฀Company฀or฀
Kodak)฀is฀engaged฀primarily฀in฀developing,฀manufacturing,฀and฀marketing฀
traditional฀and฀digital฀imaging฀products,฀services฀and฀solutions฀to฀consum-
ers,฀the฀entertainment฀industry,฀professionals,฀healthcare฀providers฀and฀
other฀customers.฀The฀Company’s฀products฀are฀manufactured฀in฀a฀number฀
of฀countries฀in฀North฀and฀South฀America,฀Europe฀and฀Asia.฀The฀Company’s฀
products฀are฀marketed฀and฀sold฀in฀many฀countries฀throughout฀the฀world.
Basis฀of฀Consolidation฀฀The฀consolidated฀financial฀statements฀include฀
the฀accounts฀of฀Kodak฀and฀its฀majority฀owned฀subsidiary฀companies.฀Inter-
company฀transactions฀are฀eliminated฀and฀net฀earnings฀are฀reduced฀by฀the฀
portion฀of฀the฀net฀earnings฀of฀subsidiaries฀applicable฀to฀minority฀interests.฀
The฀equity฀method฀of฀accounting฀is฀used฀for฀joint฀ventures฀and฀investments฀
in฀associated฀companies฀over฀which฀Kodak฀has฀significant฀influence,฀but฀
does฀not฀have฀effective฀control.฀Significant฀influence฀is฀generally฀deemed฀
to฀exist฀when฀the฀Company฀has฀an฀ownership฀interest฀in฀the฀voting฀stock฀
of฀the฀investee฀of฀between฀20%฀and฀50%,฀although฀other฀factors,฀such฀
as฀representation฀on฀the฀investee’s฀Board฀of฀Directors,฀voting฀rights฀and฀
the฀impact฀of฀commercial฀arrangements,฀are฀considered฀in฀determining฀
whether฀the฀equity฀method฀of฀accounting฀is฀appropriate.฀Income฀and฀losses฀
of฀investments฀accounted฀for฀using฀the฀equity฀method฀are฀reported฀in฀
other฀income฀(charges),฀net,฀in฀the฀accompanying฀Consolidated฀State-
ment฀of฀Earnings.฀฀See฀Note฀7,฀“Investments,”฀and฀Note฀14,฀“Other฀Income฀
(Charges),฀Net.”
฀฀฀฀฀฀฀฀The฀cost฀method฀of฀accounting฀is฀used฀for฀investments฀in฀equity฀
securities฀that฀do฀not฀have฀a฀readily฀determined฀market฀value฀and฀when฀
the฀Company฀does฀not฀have฀the฀ability฀to฀exercise฀significant฀influence.฀฀
These฀investments฀are฀carried฀at฀cost฀and฀are฀adjusted฀only฀for฀other-than-
temporary฀declines฀in฀fair฀value.฀The฀carrying฀value฀of฀these฀investments฀
is฀reported฀in฀other฀long-term฀assets฀in฀the฀accompanying฀Consolidated฀
Statement฀of฀Financial฀Position.
Restatement฀of฀Previously฀Issued฀Financial฀Statements฀฀The฀
Company฀has฀restated฀its฀consolidated฀financial฀statements฀as฀of฀and฀for฀
the฀period฀ended฀December฀31,฀2003.฀In฀addition,฀the฀Company฀restated฀
its฀quarterly฀consolidated฀financial฀statements฀for฀each฀of฀the฀quarterly฀
periods฀in฀2003฀and฀for฀the฀first฀three฀quarters฀of฀2004.฀The฀restatement฀
reflects฀adjustments฀to฀correct฀errors฀in฀the฀Company’s฀accounting฀for฀
income฀taxes,฀accounting฀for฀pensions฀and฀other฀postretirement฀benefits฀
as฀well฀as฀other฀miscellaneous฀adjustments.฀The฀restatement฀resulted฀in฀
the฀Company฀adjusting฀its฀previously฀reported฀2003฀net฀income฀of฀$265฀
million฀($.92฀per฀share)฀to฀net฀income฀of฀$253฀million฀($.88฀per฀share).฀฀
The฀nature฀and฀impact฀of฀these฀adjustments฀are฀described฀below.฀Also฀see฀
Note฀24:฀“Quarterly฀Sales฀and฀Earnings฀Data฀-฀Unaudited”฀for฀the฀impact฀of฀
these฀adjustments฀on฀each฀of฀the฀quarterly฀periods.
Income฀Taxes฀฀During฀the฀year-end฀closing฀process,฀errors฀were฀discov-
ered฀relating฀to฀the฀Company’s฀accounting฀for฀income฀taxes,฀the฀majority฀
of฀which฀related฀to฀the฀Company’s฀foreign฀operations.฀The฀more฀significant฀
errors฀that฀were฀discovered฀related฀to฀matters฀surrounding฀1)฀inappropri-
ately฀recognizing฀tax฀benefits,฀including฀the฀timing฀of฀the฀recognition฀of฀
valuation฀allowances,฀associated฀with฀net฀operating฀loss฀carry฀forwards,฀
2)฀the฀recording฀of฀benefits฀for฀certain฀restructuring฀charges฀that฀were฀
not฀deductible฀for฀income฀tax฀purposes,฀3)฀correcting฀deferred฀income฀tax฀
accounts฀for฀book/tax฀differences฀in฀certain฀foreign฀subsidiaries฀and฀4)฀
accruing฀net฀interest฀expense฀on฀potential฀tax฀settlements฀with฀the฀Internal฀
Revenue฀Service฀(more฀fully฀discussed฀in฀Note฀15).฀Excluding฀the฀impact฀
of฀income฀tax฀adjustments฀relating฀to฀periods฀prior฀to฀2003฀which฀are฀
discussed฀below,฀the฀impact฀of฀these฀adjustments฀on฀previously฀reported฀
2003฀net฀income฀amounted฀to฀a฀reduction฀of฀$1฀million.
Pensions฀and฀Other฀Postretirement฀Benefits฀฀During฀the฀year-
end฀testing฀of฀the฀effectiveness฀of฀the฀Company’s฀internal฀controls฀over฀
financial฀reporting,฀the฀Company฀identified฀ineffective฀controls฀surround-
ing฀the฀reconciliation฀of฀participant฀census฀data฀between฀the฀Company’s฀
source฀systems฀and฀the฀information฀provided฀to฀the฀actuary฀in฀performing฀
the฀actuarial฀valuation฀of฀the฀liabilities฀and฀net฀periodic฀benefits฀cost฀for฀
the฀various฀domestic฀and฀international฀pension฀and฀other฀postretirement฀
benefit฀plans.฀This฀control฀weakness฀resulted฀in฀incorrect฀participant฀data฀
being฀utilized฀in฀the฀actuarial฀calculations.฀In฀addition,฀the฀Company฀had฀
identified฀an฀error฀in฀the฀recorded฀amounts฀of฀its฀฀postretirement฀benefits฀
expense.฀The฀Company฀has฀quantified฀the฀effect฀of฀these฀errors฀and,฀ex-
cluding฀the฀impact฀of฀pension฀and฀other฀postretirement฀benefit฀adjustments฀
relating฀to฀periods฀prior฀to฀2003฀which฀are฀discussed฀below,฀the฀Company฀
has฀reduced฀it’s฀previously฀reported฀2003฀net฀income฀by฀$6.1฀million.
Other฀Adjustments฀฀During฀2004,฀the฀Company฀determined฀that฀its฀
general฀ledger฀accounting฀system฀was฀inappropriately฀translating฀deprecia-
tion฀expense฀from฀its฀foreign฀operations,฀using฀an฀historical฀exchange฀rate฀
rather฀than฀a฀current฀exchange฀rate฀for฀purposes฀of฀translating฀periodic฀
depreciation฀expense.฀Excluding฀amounts฀relating฀to฀periods฀prior฀to฀2003,฀
which฀are฀discussed฀below,฀the฀impact฀of฀this฀adjustment฀on฀previously฀
reported฀2003฀net฀income฀amounted฀to฀a฀reduction฀of฀$14.8฀million.
฀During฀2003,฀the฀Company฀recorded฀a฀charge฀to฀write-off฀an฀exclu-
sivity฀payment฀made฀to฀a฀customer฀that฀had฀previously฀been฀recorded฀as฀
an฀asset฀based฀on฀the฀Company’s฀ability฀to฀recover฀a฀pro-rata฀portion฀of฀the฀
payment฀in฀the฀event฀of฀a฀customer฀breach.฀The฀Company฀determined฀that฀
this฀payment฀should฀have฀been฀written฀off฀prior฀to฀January฀1,฀2003.฀Exclud-
ing฀amounts฀relating฀to฀periods฀prior฀to฀2003,฀which฀are฀discussed฀below,฀
the฀impact฀of฀this฀adjustment฀on฀previously฀reported฀2003฀net฀income฀
amounted฀to฀an฀increase฀of฀$13.3฀million.
In฀addition,฀the฀Company฀also฀determined฀that฀a฀number฀of฀individu-
ally฀immaterial฀adjustments฀were฀recorded฀in฀2003฀that฀more฀appropriately฀
belonged฀in฀periods฀prior฀to฀January฀1,฀2003.฀Excluding฀amounts฀relating฀to฀
periods฀prior฀to฀2003,฀which฀are฀discussed฀below,฀the฀impact฀of฀this฀adjust-
ment฀on฀previously฀reported฀2003฀net฀income฀amounted฀to฀a฀decrease฀of฀
$2.5฀million.
Adjustments฀Relating฀to฀Periods฀Prior฀to฀2003฀฀As฀discussed฀above,฀
certain฀of฀the฀adjustments,฀or฀portions฀thereof,฀made฀to฀restate฀the฀
Company’s฀2003฀financial฀statements฀relate฀to฀periods฀prior฀to฀January฀1,฀
2003.฀The฀following฀table฀summarizes฀these: