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)
As a result of the Company’s impairment testing, goodwill
impairment losses totaling $22 were recorded in the first quarter
of 2002 and included in “Cumulative effect of changes in accounting
principles.” Summaries of the impairment losses are as follows:
• The Hampshire Fine Chemicals reporting unit has
experienced increased competition and the loss of several
large customers. The reporting unit has revised its 10-year
earnings forecast to reflect the decreased profitability
outlook, and, as a result, the Company recognized a
goodwill impairment loss of $18 in the first quarter of
2002 in the Performance Chemicals segment.
• The Rubber reporting unit has faced increased competition
and rapidly rising hydrocarbon costs with a significant
oversupply of natural rubber, resulting in steadily declining
margins. Revisions were made to the 10-year earnings
forecast to reflect these negative trends and, as a result,
a goodwill impairment loss of $4 was recognized in the first
quarter of 2002 in the Plastics segment.
As required by SFAS No. 142, the Company also reassessed
the useful lives and the classification of its identifiable intangible
assets and determined them to be appropriate. See Note F for
additional disclosures regarding the adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, “Accounting for
Asset Retirement Obligations,” which requires an entity to record
the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the
related long-lived asset. The liability is adjusted to its present value
each period and the asset is depreciated over its useful life. A gain
or loss may be incurred upon settlement of the liability. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002.
Adoption of SFAS No. 143 will result in a charge of approximately
$15 in the first quarter of 2003, which will be included in
“Cumulative effect of changes in accounting principles.”
In August 2001, the FASB issued SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” This statement
replaces SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of,”
and provisions of APB Opinion No. 30, “Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions” for the disposal of segments of a business.
The statement creates one accounting model, based on the framework
established in SFAS No. 121, to be applied to all long-lived
assets, including discontinued operations. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. The Company
determined that its current accounting policy for the impairment of
long-lived assets is consistent with SFAS No. 144.
In June 2002, the FASB issued SFAS No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities,” which nullifies
EITF Issue 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity.” This
statement, which is effective for exit or disposal activities initiated
after December 31, 2002, will change the measurement and timing
of costs associated with exit and disposal activities undertaken by
the Company in the future.
> 48 The Dow Chemical Company
On August 26, 2002, the Company announced that in the first
quarter of 2003 it would begin expensing stock options issued to
employees in accordance with SFAS No. 123, “Accounting for
Stock-Based Compensation.” Dow currently uses the accounting
method prescribed by APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” as allowed by SFAS No. 123; however,
expensing stock options is considered the preferable method of
accounting for stock-based compensation. On December 31,
2002, the FASB issued SFAS No. 148, “Accounting for Stock-
Based Compensation—Transition and Disclosure,” which amends
SFAS No. 123. SFAS No. 148, which is effective for fiscal years
ending after December 15, 2002, provides alternative methods of
transition for a voluntary change to the fair value based method
and requires more prominent and more frequent disclosures in the
financial statements about the effects of stock-based compensation.
For its transition, Dow will use the transition method originally
provided by SFAS No. 123 and expects the after-tax expense
associated with stock options to be approximately $0.02 per share
in 2003, growing to approximately $0.06 per share in 2005. These
estimates were based on the terms of Dow’s stock option plans and
current assumptions for stock option grants and valuation, which
may change when stock options are granted in 2003 and in the
future. See Note N for disclosures related to stock compensation.
In November 2002, the FASB issued FASB Interpretation
(“FIN”) No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.” FIN No. 45 clarifies the requirements
of SFAS No. 5, “Accounting for Contingencies,” relating to the
guarantor’s accounting for and disclosures of certain guarantees
issued. The initial recognition and measurement provisions of the
interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the
guarantor’s fiscal year-end. The disclosure requirements of the
interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company’s
disclosures related to guarantees for the year ended December 31,
2002 can be found in Note J.
In January 2003, the FASB issued FIN No. 46, “Consolidation of
Variable Interest Entities.” FIN No. 46 clarifies the application of
Accounting Research Bulletin No. 51, “Consolidated Financial
Statements,” to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or in
which equity investors do not bear the residual economic risks.
The interpretation applies to variable interest entities (“VIEs”)
created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. It applies in the fiscal year
or interim period beginning after June 15, 2003, to VIEs in which
an enterprise holds a variable interest that was acquired before
February 1, 2003. See Note M for disclosures regarding the
Company’s VIEs, and the expected impact of adoption in the third
quarter of 2003.