Proctor and Gamble 2011 Annual Report Download - page 59

Notes to Consolidated Financial StatementsThe Procter & Gamble Company 57
Amounts in millions of dollars except per share amounts or as otherwise specified.
Cash Flow Presentation
The Consolidated 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. 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. Both equity and cost
method investments are included as other noncurrent assets in the
Consolidated Balance Sheets.
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 accu-
mulated 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 depreci-
ated 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 per-
formed separately from our impairment testing of 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 marketplace participants.
We have acquired brands that have been determined to have indefi-
nite lives due to the nature of our business. We evaluate a number of
factors to determine whether an indefinite life is appropriate, 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, brands and other non-contractual intangible
assets with determinable lives are amortized over periods generally
ranging from 5to 30 years. When certain events or changes in oper-
ating 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.
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 and short-term debt, are recorded at cost, which
approximates fair value. The fair values of long-term debt and financial
instruments are disclosed in Note 4and Note 5, respectively.