Kodak 2005 Annual Report Download - page 79

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The Company uses cash fl ow hedges to manage foreign currency exchange risk and commodity price risk related to forecasted transactions. The
Company also uses foreign currency forward contracts to offset currency-related changes in foreign currency denominated assets and liabilities; these
foreign currency forward contracts are not designated as accounting hedges and all changes in fair value are recognized in net (loss) earnings in the
period of change.
The fair values of foreign currency forward contracts designated as cash fl ow hedges of forecasted foreign currency denominated intercompany sales
are reported in other current assets and/or current liabilities, and the effective portion of the gain or loss on the derivatives is recorded in accumulated
other comprehensive (loss) income. When the related inventory is sold to third parties, the hedge gains or losses as of the date of the intercompany
sale are transferred from accumulated other comprehensive (loss) income to cost of goods sold.
The fair values of silver forward contracts designated as hedges of forecasted worldwide silver purchases are reported in other current assets and/or
current liabilities, and the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive (loss) income. When
the related silver-containing products are sold to third parties, the hedge gains or losses as of the date of the purchase of raw silver are transferred
from accumulated other comprehensive (loss) income to cost of goods sold.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing
condition caused by past operations and that do not provide future benefi ts are expensed as incurred. Costs that are capital in nature and that provide
future benefi ts are capitalized. Liabilities are recorded when environmental assessments are made or the requirement for remedial efforts is probable,
and the costs can be reasonably estimated. The timing of accruing for these remediation liabilities is generally no later than the completion of
feasibility studies.
The Company has an ongoing monitoring and identifi cation process to assess how the activities, with respect to the known exposures, are progressing
against the accrued cost estimates, as well as to identify other potential remediation sites that are presently unknown.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” The asset and liability approach
underlying SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and tax basis of the Company’s assets and liabilities. Management provides valuation allowances against
the net deferred tax asset for amounts that are not considered more likely than not to be realized.
The valuation allowance as of December 31, 2005 of $1,406 million is attributable to $177 million of net foreign deferred tax assets, including certain
net operating loss and capital loss carryforwards and $1,229 million of U.S. net deferred tax assets, including current year losses and credits, which
the Company is unable to realize.
Earnings Per Share
The Company currently has approximately $575 million in contingent convertible notes (the Convertible Securities) outstanding that were issued in
October 2003. Interest on the Convertible Securities accrues at a rate of 3.375% and is payable semi-annually. The Convertible Securities are
convertible at an initial conversion rate of 32.2373 shares of the Company’s common stock for each $1,000 principal of the Convertible
Securities. The Company’s diluted net earnings per share include the effect of the Convertible Securities, which had no material impact on the
Company’s reported diluted earnings per share for any period presented.