1.0.0.3 false Summary of Significant Accounting Policies false 1 $ false false USD Standard http://www.xbrl.org/2003/iso4217 USD iso4217 0 USDEPS Divide http://www.xbrl.org/2003/iso4217 USD iso4217 http://www.xbrl.org/2003/instance shares xbrli 0 2 Summary of Significant Accounting Policies [Abstract] 0 us-gaap_GeneralPoliciesAbstract us-gaap true na duration string No definition available. false false false false false true false false false 1 false false 0 0 false false No definition available. false 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1 us-gaap_SignificantAccountingPoliciesTextBlock us-gaap true na duration string No definition available. false false false false false false false false false 1 false false 0 0    <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"><b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt"><b>Nature of Operations</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Baker Hughes Incorporated (“Baker Hughes”) is engaged in the oilfield services industry. We are a major supplier of wellbore related products and technology services and systems and provide products and services for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the worldwide oil and natural gas industry. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Basis of Presentation</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     The consolidated financial statements include the accounts of Baker Hughes and all majority owned subsidiaries (“Company,” “we,” “our” or “us”). Investments over which we have the ability to exercise significant influence over operating and financial policies, but do not hold a controlling interest, are accounted for using the equity method of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Consolidated Financial Statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Use of Estimates</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While we believe that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts and inventory valuation reserves, recoverability of long-lived assets, useful lives used in depreciation and amortization, income taxes and related valuation allowances and insurance, environmental, legal, pensions and postretirement benefit obligations and stock-based compensation. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Revenue Recognition</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Our products and services are generally sold based upon purchase orders or contracts with the customer that include fixed or determinable prices and that do not include right of return or other similar provisions or other significant post-delivery obligations. Our products are produced in a standard manufacturing operation, even if produced to our customer’s specifications, and are sold in the ordinary course of business through our regular marketing channels. We recognize revenue for these products upon delivery, when title passes, when collectibility is reasonably assured and there are no further significant obligations for future performance. Provisions for estimated warranty returns or similar types of items are made at the time the related revenue is recognized. Revenue for services and rentals is recognized as the services are rendered and when collectibility is reasonably assured. Rates for services are typically priced on a per day, per meter, per man hour or similar basis. In certain situations, revenue is generated from transactions that may include multiple products and services under one contract or agreement. Revenue from these arrangements is recognized as each item or service is delivered based on their relative fair value. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Cost of Sales and Cost of Services and Rentals</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Cost of sales and cost of services and rentals include material, labor, selling and field service costs, and overhead costs associated with the manufacture and distribution of our products for sale or rental. Distribution costs include freight costs, purchasing and receiving costs, warehousing costs and other costs of our distribution network. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Research and Engineering</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Research and engineering expenses include costs associated with the research and development of new products and services and costs associated with sustaining engineering of existing products and services. These costs are expensed as incurred and include research and development costs for new products and services of $231 million, $263 million and $234 million for the year ended December 31, 2009, 2008 and 2007, respectively. </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Marketing, General and Administrative</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Marketing, general and administrative (“MG&A”) expenses include all advertising and marketing efforts, business development costs, and other general and administrative costs not directly associated with the manufacture and distribution of our products for sale or rental and the employee related costs associated with these functions. MG&A expenses also include gains and losses from foreign currency transactions. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Cash Equivalents</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We consider all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Investments</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Prior to September 2007, we invested in auction rate securities, which are variable-rate debt securities. We limited our investments in auction rate securities (“ARS”) to non mortgage-backed securities that, at the time of the initial investment, carried an AAA (or equivalent) rating from a recognized rating agency. During 2009, we sold all ARS investments and recorded a gain of $4 million. During 2008, we recorded an impairment loss of $25 million on these investments. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Inventories</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method or the average cost method, which approximates FIFO, and includes the cost of materials, labor and manufacturing overhead. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Property, Plant and Equipment and Accumulated Depreciation</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Property, plant and equipment (“PP&E”) is stated at cost less accumulated depreciation, which is generally provided by using the straight-line method over the estimated useful lives of the individual assets. Significant improvements and betterments are capitalized if they extend the useful life of the asset. We manufacture a substantial portion of our rental tools and equipment and the cost of these items, which includes direct and indirect manufacturing costs, are capitalized and carried in inventory until the tool is completed. Once the tool has been completed, the cost of the tool is reflected in capital expenditures and the tool is classified as rental tools and equipment in PP&E. Maintenance and repairs are charged to expense as incurred. The capitalized costs of computer software developed or purchased for internal use are classified in machinery and equipment in PP&E. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In 2006, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) <i>360</i>, <i>Property, Plant and Equipment</i>, which prohibits the use of the accrue-in-advance method of accounting for planned major maintenance and repair activities. We adopted this update on January 1, 2007, to change our method of accounting for repairs and maintenance activities on certain rental tools from the accrue-in-advance method to the direct expense method. The adoption resulted in an increase of $25 million to beginning retained earnings as of January 1, 2007. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Asset Retirement Obligations</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and depreciated on a straight-line basis over the remaining estimated useful life of the related asset. Accretion expense in connection with the discounted liability is also recognized over the remaining useful life of the related asset. Asset retirement obligations were $18 million and $17 million at December 31, 2009 and 2008, respectively. </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Goodwill, Intangible Assets and Amortization</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Goodwill and intangible assets with indefinite lives are not amortized. Intangible assets with finite useful lives are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized, which is generally on a straight-line basis over the asset’s estimated useful life. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Impairment of Long-Lived Assets</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We review PP&E, intangible assets and certain other assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We perform an annual impairment test of goodwill for each of our reporting units as of October 1, or more frequently if circumstances indicate an impairment may exist. Our reporting units are based on our organizational and reporting structure. Corporate and other assets and liabilities are allocated to the reporting units to the extent that they relate to the operations of those reporting units in determining their carrying amount. The determination of impairment is made by comparing the carrying amount with its fair value, which is calculated using a combination of a market and discounted cash flow approach. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Income Taxes</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We use the liability method for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Deferred income taxes are provided for the estimated income tax effect of temporary differences between financial and tax bases in assets and liabilities. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We intend to indefinitely reinvest certain earnings of our foreign subsidiaries in operations outside the U.S., and accordingly, we have not provided for U.S. income taxes on such earnings. We do provide for the U.S. and additional non-U.S. taxes on earnings anticipated to be repatriated from our non-U.S. subsidiaries. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We operate in more than 90 countries under many legal forms. As a result, we are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Our operations in these different jurisdictions are taxed on various bases: actual income before taxes, deemed profits (which are generally determined using a percentage of revenues rather than profits) and withholding taxes based on revenue. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each tax jurisdiction could have an impact upon the amount of income taxes that we provide during any given year. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Our tax filings for various periods are subjected to audit by tax authorities in most jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the authorities or through the courts. We believe that these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various tax authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We have provided for the amounts we believe will ultimately result from these proceedings. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable. We provide for uncertain tax positions pursuant to ASC 740, <i>Income Taxes</i>. </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In July 2006, the FASB issued new guidance for accounting for uncertain tax positions which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions effective January 1, 2007, pursuant to which we recognized a $78 million increase in the gross liability for unrecognized tax benefits, a $14 million increase in non-current tax receivables, and a net decrease to beginning retained earnings of $64 million. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Product Warranties</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We sell certain products with a product warranty that provides that customers can return a defective product during a specified warranty period following the purchase in exchange for a replacement product, repair at no cost to the customer or the issuance of a credit to the customer. We accrue amounts for estimated warranty claims based upon current and historical product sales data, warranty costs incurred and any other related information known to us. Our product warranty liability was $11 million and $8 million at December 31, 2009 and 2008, respectively. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Environmental Matters</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     Estimated remediation costs are accrued using currently available facts, existing environmental permits, technology and presently enacted laws and regulations. For sites where we are primarily responsible for the remediation, our cost estimates are developed based on internal evaluations and are not discounted. Accruals are recorded when it is probable that we will be obligated to pay for environmental site evaluation, remediation or related activities, and such costs can be reasonably estimated. If the obligation can only be estimated within a range, we accrue the minimum amount in the range. Accruals are recorded even if significant uncertainties exist over the ultimate cost of the remediation. As additional or more accurate information becomes available, accruals are adjusted to reflect current cost estimates. Ongoing environmental compliance costs, such as obtaining environmental permits, installation of pollution control equipment and waste disposal, are expensed as incurred. Where we have been identified as a potentially responsible party in a United States federal or state “Superfund” site, we accrue our share of the estimated remediation costs of the site. This share is based on the ratio of the estimated volume of waste we contributed to the site to the total volume of waste disposed at the site. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Foreign Currency</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     A number of our significant foreign subsidiaries have designated the local currency as their functional currency and, as such, gains and losses resulting from balance sheet translation of foreign operations are included as a separate component of accumulated other comprehensive loss within stockholders’ equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-functional currency, are included in MG&A expenses in the consolidated statements of operations as incurred. For those foreign subsidiaries that have designated the U.S. Dollar as the functional currency, gains and losses resulting from balance sheet remeasurement of foreign operations are also included in MG&A expense in the consolidated statements of operations as incurred. </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Derivative Financial Instruments</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     We monitor our exposure to various business risks including commodity prices, foreign currency exchange rates and interest rates and occasionally use derivative financial instruments to manage these risks. Our policies do not permit the use of derivative financial instruments for speculative purposes. We use foreign currency forward contracts to hedge certain firm commitments and transactions denominated in foreign currencies. We use interest rate swaps to manage interest rate risk. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     At the inception of any new derivative, we designate the derivative as a hedge as that term is defined in ASC 815, <i>Derivatives and Hedging </i>or we determine the derivative to be undesignated as a hedging instrument as the facts dictate. We document all relationships between the hedging instruments and the hedged items, as well as our risk management objectives and strategy for undertaking various hedge transactions. We assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an ongoing basis. </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 12pt"><b>New Accounting Standards and Accounting Standards Updates</b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In June 2009, the FASB issued ASC 105, <i>Generally Accepted Accounting Principles</i>. The ASC identifies itself as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP. The ASC does not change GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We have included references to authoritative accounting literature in accordance with the Codification. There are no other changes to the content of the Company’s financial statements or disclosures as a result of the adoption. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In October 2009, the FASB issued an update to ASC 605, <i>Revenue Recognition — Multiple Deliverable Revenue Arrangements</i>. This ASU addresses accounting for multiple-deliverable arrangements to enable vendors to account for deliverables separately. The provision establishes a selling price hierarchy for determining the selling price of a deliverable. This update requires expanded disclosures for multiple deliverable revenue arrangements. The ASU will be effective for revenue arrangements entered into or materially modified beginning on or after June 15, 2010. We have not determined the impact, if any, on our consolidated financial statements. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In September 2006, FASB issued ASC 820, <i>Fair Value Measurements and Disclosures</i>, which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. On January 1, 2008, we adopted the provisions of this ASC related to financial assets and liabilities and to nonfinancial assets and liabilities measured at fair value on a recurring basis and on January 1, 2009, we adopted the provisions related to nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. There was no material impact to our consolidated financial statements related to these adoptions. Additionally, in April 2009, the FASB issued the following three accounting standards updates: (i) ASC 820, <i>Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly</i>, (ii) ASC 320, <i>Recognition and Presentation of Other-Than-Temporary Impairments, </i>and (iii) ASC 825, <i>Interim Disclosures about Fair Value of Financial Instruments, </i>which collectively provide additional guidance and require additional disclosure regarding determining and reporting fair values for certain assets and liabilities. We adopted the three accounting standards updates in the second quarter of 2009 with no material impact to our consolidated financial statements. In September 2009, the FASB issued an update to ASC 820, <i>Fair Value Measurements and Disclosures - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). </i>The ASU provides a practical means for measuring the fair value of investments in certain entities that calculate net asset value per share. The ASU is effective for the first reporting period ending after December 15, 2009. We adopted the provisions and disclosure requirements of this ASU in December 2009 with no material impact to our consolidated financial statements. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In December 2007, the FASB issued an update to ASC 810, <i>Consolidation, </i>to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary in an effort to improve the relevance, comparability and transparency of the financial information that a reporting entity provides. On January 1, 2009, we adopted this statement with no change to our consolidated financial statements as amounts are immaterial. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In December 2007, the FASB issued an update to ASC 805, <i>Business Combinations</i>, to establish principles and requirements for the recognition and measurement of assets, liabilities and goodwill, and requires that most transaction and restructuring costs related to the acquisition be expensed. We have applied the provisions of this ASC for business combinations with an acquisition date on or after January 1, 2009. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In March 2008, the FASB issued an update to ASC 815, <i>Disclosures about Derivative Instruments and Hedging Activities</i>, to require qualitative disclosures about objectives and strategies for using derivatives and quantitative data about the fair value of and gains and losses on derivative contracts. We adopted the new disclosure requirements in the first quarter of 2009. </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In June 2008, the FASB issued an update to ASC 260, <i>Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities</i>, to clarify that all unvested share-based payments that contain rights to non-forfeitable dividends are participating securities and shall be included in the computation of both basic and diluted earnings per share. On January 1, 2009, we adopted this ASC and have not applied the provisions to prior year quarters as the impact is immaterial. </div>   </div>  <div style="font-family: 'Times New Roman',Times,serif"> <div align="center" style="font-size: 10pt; margin-top: 0pt"> <b> </b> </div> <div align="left" style="font-size: 10pt; margin-top: 6pt">     In December 2008, the FASB issued an update to ASC 715, <i>Employers’ Disclosures about Postretirement Benefit Plan Assets</i>, to require the disclosures of investment policies and strategies, major categories of plan assets, fair value measurement of plan assets and significant concentration of credit risks. We adopted the new disclosure requirements in the fourth quarter of 2009. See Note 14 of the Notes to Consolidated Financial Statements in Item 8 herein for further information on the impact of this standard. </div> </div>  <!-- Begin Block Tagged Note false false No definition available. 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