Focus - The Dow Chemical Company

Notes to the Consolidated Financial Statements (dollars in millions, except as noted)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND ACCOUNTING CHANGES (continued)
Financial Instruments
The Company calculates the fair value of financial instruments
using quoted market prices whenever available. When quoted
market prices are not available for various types of financial instruments
(such as forwards, options and swaps), the Company uses
standard pricing models with market-based inputs, which take into
account the present value of estimated future cash flows.
The Company utilizes derivative instruments to manage exposures
to currency exchange rates, commodity prices and interest
rate risk. The fair values of all derivative instruments are recognized
as assets or liabilities at the balance sheet date. Changes in the
fair value of these instruments are reported in income or AOCI,
depending on the use of the derivative and whether it qualifies for
hedge accounting treatment.
Gains and losses on derivative instruments qualifying as cash
flow hedges are recorded in AOCI, to the extent the hedges
are effective, until the underlying transactions are recognized in
income. To the extent effective, gains and losses on derivative and
nonderivative instruments used as hedges of the Company’s net
investment in foreign operations are recorded in AOCI as part of
the cumulative translation adjustment. The ineffective portions of
cash flow hedges and hedges of net investment in foreign operations,
if any, are recognized in income immediately.
Gains and losses on derivative instruments designated and qualifying
as fair value hedging instruments, as well as the offsetting
losses and gains on the hedged items, are reported in income in
the same accounting period. Derivative instruments not designated
as hedges are marked-to-market at the end of each accounting
period with the results included in income.
Inventories
Inventories are stated at the lower of cost or market. The method
of determining cost is used consistently from year to year at each
subsidiary and varies among last-in, first-out (“LIFO”); first-in, firstout
(“FIFO”); and average cost.
Property
Land, buildings and equipment, including property under capital
lease agreements, are carried at cost less accumulated depreciation.
Depreciation is based on the estimated service lives of depreciable
assets and is provided using the straight-line method. For most
assets capitalized through 1996, the declining balance method was
used. Fully depreciated assets are retained in property and depreciation
accounts until they are removed from service. In the case
of disposals, assets and related depreciation are removed from the
accounts, and the net amounts, less proceeds from disposal, are
included in income.
> 46 The Dow Chemical Company
Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not
be recoverable. When undiscounted future cash flows will not be
sufficient to recover an asset’s carrying amount, the asset is written
down to its fair value. Long-lived assets to be disposed of other
than by sale are classified as held and used until they are disposed
of. Long-lived assets to be disposed of by sale are classified as
held for sale and are reported at the lower of carrying amount or
fair value less cost to sell, and depreciation is ceased.
Investments
Investments in debt and marketable equity securities, including
warrants, are classified as trading, available-for-sale, or held-tomaturity.
Investments classified as trading are reported at fair
value with unrealized gains and losses included in income. Those
classified as available-for-sale are reported at fair value with
unrealized gains and losses recorded in AOCI. Those classified as
held-to-maturity are recorded at amortized cost. The cost of investments
sold is determined by specific identification.
The excess of the cost of investments in subsidiaries over the
values assigned to assets and liabilities acquired through June 30,
2001, is shown as goodwill and was amortized on a straight-line
basis over its estimated useful life (maximum 40 years) through
December 31, 2001. Effective January 1, 2002, goodwill is no
longer amortized, but is subject to the impairment provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets.” See Accounting Changes
below for further discussion.
Revenue
Sales are recognized when the revenue is realized or realizable,
and has been earned. Approximately 97 percent of the Company’s
sales are related to sales of product, while 1 percent is related
to the Company’s service offerings, 1 percent to its insurance
operations and 1 percent to the licensing of patents and technology.
Revenue for product sales is recognized as risk and title to the
product transfer to the customer, which usually occurs at the time
shipment is made. Substantially all of the Company’s products are
sold FOB (“free on board”) shipping point or, with respect to
countries other than the United States, an equivalent basis. Title to
the product passes when the product is delivered to the freight
carrier. Dow’s standard terms of delivery are included in its contracts
of sale, order confirmation documents, and invoices. Freight
costs and any directly related associated costs of transporting
finished product to customers are recorded as “Cost of sales.”
The Company’s primary service offerings are in the form of
contract manufacturing services and services associated with
Dow AgroSciences’ termite solution, Sentricon Termite Colony
Elimination System. Revenue associated with these service offerings
is recognized when services are rendered, according to
contractual agreements.
Revenue related to the Company’s insurance operations
includes third-party insurance premiums, which are earned over
the terms of the related insurance policies and reinsurance contracts.
Revenue related to the licensing of patents and technology is
recognized according to licensee production levels.