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Print friendly pdf of Form 10-K Part II |
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Item 8 Notes to Consolidated Financial Statements
2. Summary of Accounting Policies
The Consolidated Financial Statements of Schlumberger Limited and its
subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America.
Discontinued Operations
In July 2003, Schlumberger completed the sale of its NPTest semiconductor
testing business to a partnership led by Francisco Partners and Shah Management.
The proceeds were $220 million in cash. Additionally, the partnership has
a contingent obligation to make a further payment to Schlumberger upon a
subsequent qualifying disposition or an initial public offering of NPTest
by the partnership, under certain circumstances. The results of NPTest are
reported as Discontinued Operations in the Consolidated Statement
of Income and include a net loss of $12 million on the sale. The net
assets were $202 million.
In August 2003, Schlumberger completed the sale of its Verification Systems business by a proceed-free management buyout. The results of Verification Systems are reported as Discontinued Operations in the Consolidated Statement of Income and include a net loss of $18 million on the sale. The net assets were $17 million.
In October 2003, Schlumberger completed the sale of its e-City 'pay & display' parking solutions business to Apax Partners. The proceeds were $84 million in cash. The results of e-City are reported as Discontinued Operations in the Consolidated Statement of Income and include a net loss of $56 million on the sale. The net assets were $120 million, including a $65 million allocation of goodwill.
In December, 2002, Schlumberger completed the sale of its Reed Hycalog drillbits business. The proceeds included $259 million in cash and 9.7 million shares of Grant Prideco common stock with a value of $103 million. The results for the Reed Hycalog operations are reported as Discontinued Operations in the Consolidated Statement of Income and, in 2002, include results of operations of $32 million and gain on sale of $66 million. The net assets were $185 million.
Revenue and operating income (loss) from discontinued operations for 2003, 2002 and 2001 were as follows:
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2003 |
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2002 |
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2001 |
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e-City: |
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| Revenue |
$ |
99,388 |
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$ |
124,500 |
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$ |
121,575 |
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| Operating income (loss) |
$ |
(4,328 |
) |
$ |
(1,224 |
) |
$ |
7,826 |
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| NPTest & Verification Systems: |
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| Revenue |
$ |
120,318 |
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$ |
240,113 |
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$ |
180,865 |
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| Operating income (loss) |
$ |
967 |
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$ |
909 |
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$ |
(11,045 |
) |
| Reed Hycalog: |
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| Revenue |
$ |
– |
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$ |
212,433 |
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$ |
244,639 |
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| Operating income |
$ |
– |
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$ |
31,553 |
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$ |
31,582 |
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Principles of Consolidation
The Consolidated Financial Statements include the accounts of majority-owned subsidiaries. Significant 20% - 50% owned companies are carried on the equity method and classified in Investments in Affiliated Companies.The pro rata share of Schlumberger after-tax earnings is included in Interest and other income. All inter-company accounts and transactions have been eliminated.
Reclassifications
Certain items from prior years have been reclassified to conform to
the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions 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 revenue and expenses during the
reporting period. On an on-going basis, Schlumberger evaluates its estimates,
including those related to bad debts, valuation of inventories and investments,
recoverability of goodwill and intangible assets, income tax provision
and deferred taxes, profit assumptions on long-term percentage-of-completion
contracts, contingencies and litigation and actuarial assumptions for
employee benefit plans. Schlumberger bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue Recognition
Products and Services Revenue
Schlumberger's 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. Revenue
is recognized for products upon delivery, customer acceptance and when
title passes. Revenue is recognized when services are rendered and collectibility
is reasonably assured.
Certain revenues are recognized on a time and materials basis, or on a percentage
of completion basis, depending on the contract, as services are provided.
Revenue from time and material service contracts is recognized as the services
are provided. Revenue from fixed price contracts is recognized over the
contract term based on the percentage of the cost of services provided during
the period compared to the total estimated cost of services to be provided
over the entire contract. Losses on contracts are recognized during the
period in which the loss first becomes probable and reasonably estimated.
Software Revenue
Revenue derived from the sale of licenses for its software, maintenance
and related services may include installation, consulting and training services.
If services are not essential to the functionality of the software, the revenue
for each element of the contract is recognized separately based on its respective
vendor specific objective evidence of fair value when all of the following
conditions are met: a signed contract is obtained, delivery has occurred,
fee is fixed and determinable and collectibility is probable.
If an ongoing vendor obligation exists under the license arrangement, or if
any uncertainties with regard to customer acceptance are significant, revenue
for the related element is deferred based on its vendor specific objective
evidence of fair value. Vendor specific objective evidence of fair value
is determined as being the price for the element when sold separately. If
vendor specific objective evidence of fair value does not exist for all
undelivered elements, all revenue is deferred until sufficient evidence
exists or all elements have been delivered.
Multiple Element Arrangement and Collectibility
Many sales are generated from complex contractual arrangements
that require significant revenue recognition judgments, particularly in
the areas of multiple element arrangements. Revenues from contracts with
multiple element arrangements, such as those including installation and
integration services, are recognized as each element is earned based on
the relative fair value of each element and when the delivered elements
have stand alone value to the customers.
The assessment of collectibility is particularly critical in determining whether
revenue should be recognized in the current market environment. As part
of the revenue recognition process, Schlumberger determines whether trade
and notes receivables are reasonably assured of collection based on various
factors, including the ability to sell those receivables and whether there
has been deterioration in the credit quality of customers that could result
in the inability to sell the receivables. In situations where Schlumberger
has the ability to sell the receivables without recourse, revenue is recognized
to the extent of the value Schlumberger could reasonably expect to realize
from the sale. Schlumberger defers revenue and related costs when it is
uncertain as to whether it will be able to collect or sell the receivable.
Schlumberger defers revenue but recognizes costs when it determines that
the collection or sale of the receivable is unlikely.
Translation of Non-US Currencies
The Oilfield Services and WesternGeco segments functional currency
is primarily the US dollar. The SchlumbergerSema segment and Other segment
functional currencies are primarily local currencies. All assets and liabilities
recorded in functional currencies other than US dollars are translated at
current exchange rates. The resulting adjustments are charged or credited
directly to the Stockholders' Equity section of the Consolidated
Balance Sheet. Revenue and expenses are translated at the weighted-average
exchange rates for the period. All realized and unrealized transaction gains
and losses are included in income in the period in which they occur. Schlumberger's
policy is to hedge against unrealized gains and losses on a monthly basis.
Included in the 2003 results were transaction gains of $1 million, compared
with losses of $2 million and $7 million in 2002 and 2001, respectively.
Currency exchange contracts are entered into as a hedge against the effect of future
settlement of assets and liabilities denominated in other than the functional
currency of the individual businesses. Gains or losses on the contracts
are recognized when the currency exchange rates fluctuate, and the resulting
charge or credit partially offsets the unrealized currency gains or losses
on those assets and liabilities. On December 31, 2003, contracts were outstanding
for the US dollar equivalent of $2.2 billion in various foreign currencies.
These contracts mature on various dates in 2004.
Investments
Both short-term investments and fixed income investments, held to
maturity comprise primarily eurodollar time deposits, certificates of deposit
and commercial paper, euronotes and eurobonds, substantially all denominated
in US dollars. They are stated at cost plus accrued interest, which approximates
market. Substantially all the investments designated as held to maturity
that were purchased and matured during the year had original maturities
of less than three months. Short-term investments that are designated as
trading are stated at market. The unrealized gains/losses on such securities
at December 31, 2003 were not significant.
For purposes of the Consolidated Statement of Cash Flows, Schlumberger
does not consider short-term investments to be cash equivalents as they
generally have original maturities in excess of three months.
Inventories
Inventories are stated at average cost or at market, whichever is
lower. Inventory consists of materials, supplies and finished goods.
Fixed Assets and Depreciation
Fixed assets are stated at cost less accumulated depreciation, which
is provided for by charges to income over the estimated useful lives of
the assets using the straight-line method. Fixed assets include the manufacturing
cost (average cost) of oilfield technical equipment manufactured or assembled
by subsidiaries of Schlumberger. Expenditures for renewals, replacements
and improvements are capitalized. Maintenance and repairs are charged to
operating expenses as incurred. Upon sale or other disposition, the applicable
amounts of asset cost and accumulated depreciation are removed from the
accounts and the net amount, less proceeds from disposal, is charged or
credited to income.
Multiclient Seismic Data
Schlumberger capitalizes the cost of obtaining multiclient surveys.
Such costs are charged to Cost of goods sold and services based on
a percentage of estimated total revenue that Schlumberger expects to receive
from the sales of such data. The carrying value of individual surveys is
reviewed, at least annually, and adjustments to the value are made based
upon the revised estimated revenues for the surveys.
Capitalized Software
The costs incurred for the development of computer software that will
be sold, leased or otherwise marketed are capitalized when technological
feasibility has been established, generally when all of the planning, designing,
coding and testing activities that are necessary in order to establish that
the product can be produced to meet its design specifications including
functions, features and technical performance requirements are completed.
These capitalized costs are subject to an ongoing assessment of recoverability
based on anticipated future revenues and changes in hardware and software
technologies. Costs that are capitalized include direct labor and related
overheads. Total capitalized internally developed software costs was $47
million at December 31, 2003 of which $33 million was deferred in 2003.
Amortization of capitalized software development costs begins when the product is available
for general release. Amortization is provided on the greater of the straight-line
method or the sales ratio method over the estimated useful life. Unamortized
capitalized software development costs determined to be in excess of the
net realizable value of the product are expensed immediately.
Schlumberger capitalizes certain costs of internally developed software. Capitalized
costs include purchased materials and services, payroll and payroll related
costs and interest costs. The costs of internally developed software is
amortized on a straight-line basis over the estimated useful life which
is principally 6 years.
Impairment of Long-lived Assets
On an annual basis Schlumberger reviews the carrying value of its long-lived
assets, including goodwill, intangible assets and investments. In addition,
whenever events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be recoverable, a review is
performed. Schlumberger assesses recoverability of the carrying value of
the asset by estimating the future net cash flows expected to result from
the asset, including eventual disposition. If the future net cash flows
are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset's carrying value and fair value.
In accordance with SFAS 142 (Goodwill and Other Intangible Assets),
which was adopted by Schlumberger commencing January 1, 2002, goodwill ceased
to be amortized.
Taxes on Income
Schlumberger and its subsidiaries compute taxes on income in accordance
with the tax rules and regulations of the many taxing authorities where
the income is earned. The income tax rates imposed by these taxing authorities
vary substantially. Taxable income may differ from pretax income for financial
accounting purposes. To the extent that differences are due to revenue or
expense items reported in one period for tax purposes and in another period
for financial accounting purposes, an appropriate provision for deferred
income taxes is made. Any effect of changes in income tax rates or tax laws
are included in the provision for income taxes in the period of enactment.
When it is more likely than not that a portion or all of the deferred tax
asset will not be realized in the future, Schlumberger provides a corresponding
valuation allowance against deferred tax assets.
Approximately $2.3 billion of consolidated income retained for use in the business on
December 31, 2003 represented undistributed earnings of consolidated subsidiaries
and the pro rata Schlumberger share of 20% - 50% owned companies. No provision
is made for deferred income taxes on those earnings considered to be indefinitely
reinvested or earnings that would not be taxed when remitted.
Concentration of Credit Risk
Schlumberger's financial instruments which potentially subject the company
to concentration of credit risk consist primarily of accounts receivable.
Schlumberger maintains an allowance for uncollectible accounts receivable
based on expected collectibility and performs ongoing credit evaluations
of its customers' financial condition.
Earnings per Share
Basic earnings per share is calculated by dividing net income by the average
number of common shares outstanding during the year. Diluted earnings per
share is calculated by dividing net income, as adjusted for the interest
on convertible debentures unless the adjustment is anti-dilutive, by the
average number of common shares outstanding assuming dilution, the calculation
of which assumes (i) that all stock options which are in the money are exercised
at the beginning of the period and the proceeds used, by Schlumberger, to
purchase shares at the average market price for the period, and (ii) the
convertible debentures have been converted unless the effect is anti-dilutive.
The following is a reconciliation from basic earnings per share to diluted earnings
per share from continuing operations for each of the last three years:
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Income (loss)
from Continuing
Operations |
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Average
Shares
Outstanding |
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Earnings (loss)
Per Share from
Continuing
Operations |
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| 2003 |
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| Basic |
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$ |
472,557 |
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583,904 |
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$ |
0.81 |
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| Dilutive effect of convertible debentures |
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15,938 |
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10,566 |
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| Dilutive effect of options |
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2,587 |
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$ |
488,495 |
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597,057 |
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$ |
0.82 |
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| less: Anti-dilutive effect of convertible debentures |
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(15,938) |
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(10,566 |
) |
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(0.01 |
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| Diluted |
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$ |
472,557 |
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586,491 |
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$ |
0.81 |
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| 2002 |
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| Basic |
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$ |
(2,417,214 |
) |
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578,588 |
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$ |
(4.18 |
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| Dilutive effect of options |
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– |
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| Diluted1 |
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$ |
(2,417,214 |
) |
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578,588 |
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$ |
(4.18 |
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| 2001 |
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| Basic |
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$ |
493,854 |
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574,328 |
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$ |
0.86 |
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| Dilutive effect of options |
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5,886 |
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| Diluted |
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$ |
493,854 |
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580,214 |
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$ |
0.85 |
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1. There is no dilution of shares or earnings per share in 2002 due to the net loss.
Adjusted Net Income
The following is a reconciliation of reported net income (loss) to adjusted
net income (loss) following the adoption of SFAS 142 (Goodwill and Other
Intangible Assets) on January 1, 2002.
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2003 |
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2002 |
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2001 |
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Reported Net Income (Loss) |
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$383,002 |
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$(2,319,995 |
) |
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$522,217 |
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| Goodwill amortization |
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– |
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– |
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291,574 |
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| Adjusted Net Income (Loss) |
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$383,002 |
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$(2,319,995 |
) |
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$813,791 |
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Research & Engineering
All research and engineering expenditures are expensed as incurred, including
costs relating to patents or rights that may result from such expenditures.
Included in 2001 expenditures was a charge of $25 million for in-process
R&D related to the Bull CP8 acquisition.
New Accounting Standards
In July 2002, the Financial Accounting Standards Board issued SFAS 146 (Accounting
for Costs Associated with Exit or Disposal Activities). The standard
required companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing, or other exit
or disposal activity. Previous accounting guidance was provided by EITF
Issue No. 94-3, (Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity [including Certain Costs Incurred
in a Restructuring]). SFAS 146 replaced Issue 94-3. Schlumberger adopted
SFAS 146 prospectively to exit or disposal activities initiated after December
31, 2002.
In November 2002, FASB Interpretation No. 45 (Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others) was issued. It requires certain accounting and
disclosures of guarantees to third parties including indebtedness. The interpretation
is effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The implementation of this interpretation did not have
a material effect on Schlumberger's financial position or results of operations.
In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 (Accounting
for Revenue Arrangements with Multiple Deliverables). This EITF establishes
the criteria for recognizing revenue in arrangements when several items
are bundled into one agreement. EITF 00-21 does not allow revenue recognition
unless the fair value of the undelivered element(s) is available and the
element has stand-alone value to the customer. EITF 00-21 also provides
guidance on allocating the total contract revenue to the individual elements
based upon the available fair value of each deliverable. The implementation
of this pronouncement did not have a material impact on Schlumberger's financial
position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation
No. 46, (Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51). The primary objective of the interpretation is to provide
guidance on the identification of, and financial reporting for entities
over which control is achieved through means other than voting rights; such
entities are known as variable-interest entities (VIE's). FIN 46 provides
guidance that determines (1) whether consolidation is required under the
"controlling financial interest" model of Accounting Research Bulletin No.
51 (ARB 51), Consolidated Financial Statements, or other existing
authoritative guidance, or, alternative, (2) whether the variable-interest
model under FIN 46 should be used to account for existing and new entities.
Schlumberger does not believe that the adoption of this statement will have
a material effect on the financial position or results of operations.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149
(Amendment of Statement 133 on Derivative Instruments and Hedging Activities)
which amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133 (Accounting for
Derivative Instruments and Hedging Activities). SFAS 149, which is to
be applied prospectively, is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June
30, 2003. The adoption of this new standard did not have a material impact
on Schlumberger's results of operations or financial position.
In May 2003, the Financial Accounting Standards Board, issued SFAS No. 150,
(Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity). The Standard specifies that instruments within
its scope embody obligations of the issues and therefore, the issuer must
classify them as liabilities. The Standard was effective July 1, 2003, and
had no material effect on Schlumberger's financial position.
In January 2004, the Financial Accounting Standards Board issued FSP No. FAS
106-1 (Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of 2003). The statement
permits the deferral of accounting related to the effects of the legislation
until the earlier of issuance of final accounting guidance by the FASB or
a significant plan amendment/curtailment event requiring remeasurement,
occurring after January 31, 2004. Schlumberger expects the new legislation
will significantly reduce future postretirement medical costs.
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Go to Part II, Item 8, Notes: 3. Hanover Compressor Company |
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