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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The financial statements include the accounts of our
majority-owned or controlled subsidiaries and affiliates.
Intercompany transactions have been eliminated. Investments
in unconsolidated affiliates, over which we
exercise significant influence, but not control, are
accounted for by the equity method. Accordingly, our
share of net income or loss of unconsolidated affiliates is
included in consolidated net income.
Use of Estimates
Preparation of financial statements that follow accounting
principles generally accepted in the U.S. requires us to
make estimates and assumptions that affect the amounts
reported in the financial statements and notes. Actual
amounts could differ from these estimates.
Cash and Cash Equivalents
All highly liquid investments purchased with an original
maturity of 3 months or less are classified as cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost
is determined using standard or average costs which
approximate the first-in, first-out costing method.
Property, Plant and Equipment
Property, plant and equipment is stated at historical cost
and depreciated over its estimated useful life using the
straight-line method for financial reporting and both accelerated
and straight-line methods for tax reporting. The
estimated useful lives range from 20 to 40 years for buildings
and 3 to 12 years for machinery, equipment and
computer software.
Repairs and maintenance costs are expensed as
incurred.
Capitalized Software Development Costs
We capitalize costs of software developed or obtained for
internal use.
Capitalized software development costs
include only (1) direct costs paid to others for materials
and services to develop or buy the software, (2) payroll
and payroll-related costs for employees who work directly
on the software development project and (3) interest
costs while developing the software. Capitalization of
these costs stops when the project is substantially
complete and ready for use. Software is amortized using the straight-line method over a range
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of 3 to 8 years, but
not exceeding the expected life of the product. We capitalized
$19.9 million of software during the year ended
November 30, 2007, $15.4 million during the year ended
November 30, 2006 and $23.5 million during the year
ended November 30, 2005.
Goodwill and Other Intangible Assets
We review the carrying value of goodwill and non-amortizable
intangible assets and conduct tests of impairment on
an annual basis as described below. We also test for
impairment if events or circumstances indicate that it is
more likely than not that the fair value of a reporting unit or
the non-amortizable intangible asset is below its carrying
amount. Separable intangible assets that have finite useful
lives are amortized over those lives.
Goodwill Impairment
We have concluded that our reporting units used to
measure goodwill values are the same as our business
segments. We calculate fair value of a reporting unit by
using a discounted cash flow model and then compare
that to the carrying amount of the reporting unit, including
intangible assets and goodwill. An impairment charge
would be recognized to the extent the carrying amount
exceeds the estimated fair value.
Non-Amortizable Intangible Asset Impairment
Our non-amortizable intangible assets consist of brand
names and trademarks. We calculate fair value by using a
discounted cash flow model or royalty savings method
and then compare that to the carrying amount of the non-amortizable
intangible asset. If the carrying amount of the
non-amortizable intangible asset exceeds its fair value, an
impairment charge is recorded to the extent the recorded
non-amortizable intangible asset exceeds the fair value.
Prepaid Allowances
Prepaid allowances arise when we prepay sales discounts
and marketing allowances to certain customers on multiyear
sales contracts. These costs are capitalized and
amortized against net sales. The majority of our contracts
are for a specific committed customer sales volume while
others are for a specific time duration. Prepaid allowances
on volume based contracts are amortized based on the
actual volume of customer purchases, while prepaid
allowances on time based contracts are amortized on a
straight-line basis over the life of the contract. The
amounts reported in the balance sheet are stated at the
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