Proctor and Gamble 2009 Annual Report Download - page 57

Notes to Consolidated Financial Statements The Procter & Gamble Company 55
Amounts in millions of dollars except per share amounts or as otherwise specified.
Cash Flow Presentation
The Statements of Cash Flows are prepared using the indirect method,
which reconciles net earnings to cash flow from operating activities.
The reconciliation adjustments include the removal of timing differences
between the occurrence of operating receipts and payments and their
recognition in net earnings. The adjustments also remove cash flows
arising from investing and financing activities, which are presented
separately from operating activities. Cash flows from foreign currency
transactions and operations are translated at an average exchange
rate for the period. Cash flows from hedging activities are included
in the same category as the items being hedged. Cash flows from
derivative instruments designated as net investment hedges are
classified as financing activities. Realized gains and losses from non-
qualifying derivative instruments used to hedge currency exposures
resulting from intercompany financing transactions are also classified
as financing activities. Cash flows from other derivative instruments
used to manage interest, commodity or other currency exposures are
classified as operating activities. Cash payments related to income
taxes are classified as operating activities.
Cash Equivalents
Highly liquid investments with remaining stated maturities of three
months or less when purchased are considered cash equivalents and
recorded at cost.
Investments
Investment securities consist of readily marketable debt and equity
securities. Unrealized gains or losses are charged to earnings for
investments classified as trading. Unrealized gains or losses on securities
classified as available-for-sale are generally recorded in shareholders’
equity. If an available-for-sale security is other than temporarily
impaired, the loss is charged to either earnings or shareholders’ equity
depending on our intent and ability to retain the security until we
recover the full cost basis and the extent of the loss attributable to
the creditworthiness of the issuer. Investments in certain companies
over which we exert significant influence, but do not control the
financial and operating decisions, are accounted for as equity method
investments and are classified as other noncurrent assets. Other
investments that are not controlled, and over which we do not have
the ability to exercise significant influence, are accounted for under
the cost method.
Inventory Valuation
Inventories are valued at the lower of cost or market value. Product-
related inventories are primarily maintained on the first-in, first-out
method. Minor amounts of product inventories, including certain
cosmetics and commodities, are maintained on the last-in, first-out
method. The cost of spare part inventories is maintained using the
average cost method.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost reduced by
accumulated depreciation. Depreciation expense is recognized over
the assets’ estimated useful lives using the straight-line method.
Machinery and equipment includes office furniture and fixtures
(15-year life), computer equipment and capitalized software (3- to
5-year lives) and manufacturing equipment (3- to 20-year lives).
Buildings are depreciated over an estimated useful life of 40 years.
Estimated useful lives are periodically reviewed and, when appropriate,
changes are made prospectively. When certain events or changes
in operating conditions occur, asset lives may be adjusted and an
impairment assessment may be performed on the recoverability of
the carrying amounts.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived brands are not amortized, but are
evaluated for impairment annually or when indicators of a potential
impairment are present. Our impairment testing of goodwill is
performed separately from our impairment testing of individual
indefinite-lived intangibles. The annual evaluation for impairment of
goodwill and indefinite-lived intangibles is based on valuation models
that incorporate assumptions and internal projections of expected
future cash flows and operating plans. We believe such assumptions
are also comparable to those that would be used by other market-
place participants.
We have a number of acquired brands that have been determined to
have indefinite lives due to the nature of our business. We evaluate
a number of factors to determine whether an indefinite life is appro-
priate, including the competitive environment, market share, brand
history, product life cycles, operating plans and the macroeconomic
environment of the countries in which the brands are sold. When
certain events or changes in operating conditions occur, an impairment
assessment is performed and indefinite-lived brands may be adjusted
to a determinable life.
The cost of intangible assets with determinable useful lives is amortized
to reflect the pattern of economic benefits consumed, either on a
straight-line or accelerated basis over the estimated periods benefited.
Patents, technology and other intangibles with contractual terms are
generally amortized over their respective legal or contractual lives.
Customer relationships and other non-contractual intangible assets
with determinable lives are amortized over periods generally ranging
from 5 to 40 years. When certain events or changes in operating
conditions occur, an impairment assessment is performed and lives of
intangible assets with determinable lives may be adjusted.
Fair Values of Financial Instruments
Certain financial instruments are required to be recorded at fair value.
The estimated fair values of such financial instruments (including
certain debt instruments, investment securities and derivatives) have
been determined using market information and valuation methodolo-
gies, primarily discounted cash flow analysis. Changes in assumptions
or estimation methods could affect the fair value estimates; however,
we do not believe any such changes would have a material impact
on our financial condition, results of operations or cash flows. Other
financial instruments, including cash equivalents, other investments