# Notes to Consolidated Financial Statements:

## Significant Accounting Policies

### Principles of Consolidation:
The consolidated financial statements include the accounts of International Business Machines Corporation and its U.S. and non-U.S. subsidiary companies, other than the wholly owned IBM Credit Corporation and non-U.S. finance subsidiaries, for which the equity method is used. Investments in joint ventures, and other companies in which IBM has a 20 to 50 percent ownership, are accounted for by the equity method. Investments of less than 20 percent are accounted for by the cost method.

### Translation of Non-U.S. Currency Amounts:
For non-U.S. subsidiaries which operate in a local currency environment, assets and liabilities are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate component of stockholders' equity. For non-U.S. subsidiaries and branches which operate in U.S. dollars or whose economic environment is highly inflationary, inventories and plant, rental machines and other property are translated at approximate rates prevailing when acquired. All other assets and liabilities are translated at year-end exchange rates. Inventories charged to cost of sales and depreciation are remeasured at historical rates. All other income and expense items are translated at average rates of exchange prevailing during the year. Gains and losses which result from remeasurement are included in earnings.

### Gross Income:
Gross income is recognized from sales or sales-type leases when the product is shipped, or in certain cases upon customer acceptance, from rentals under operating leases in the month in which they accrue, and from services over the contractual period or as the services are performed. Rental plans include maintenance service and contain discontinuance and purchase option provisions. Rental terms are predominantly monthly or for a two-year period. IBM equipment offered under term leases by IBM's finance subsidiaries is accounted for by IBM as outright sales.

### Program Products:
Costs related to the conceptual formulation and design of licensed programs are expensed as research and development. Costs incurred subsequent to establishment of technological feasibility to produce the finished product are generally capitalized as program products assets. The assets are amortized based on the estimated revenue distribution over their revenue-producing lives, but not in excess of six years. Ongoing costs to support or service licensed programs are expensed.

### Depreciation:
Plant, rental machines and other property are carried at cost and depreciated over their estimated useful lives. Depreciation of assets acquired subsequent to December 31, 1983 is computed using the straight-line method. Depreciation of assets acquired prior to January 1, 1984 is computed using the sum-of-the-years digits method for rental machines, and either accelerated methods or the straight-line method for plant and other property.

### Goodwill:
The excess of the cost over the fair value of the net assets of purchased businesses is recorded as goodwill and amortized on a straight-line basis over 20 years. Goodwill related to equity investments is included in the investment and amortized on a straight-line basis over 20 years.

### Retirement Plans and Other Postretirement Benefits:
Current service costs of retirement plans are accrued currently. Prior service costs resulting from improvements in the plans are amortized generally over 15 years. Postretirement health care and life insurance benefits are fully accrued when the employee retires.

### Selling Expenses:
Selling expenses are charged against income as they are incurred.

### Income Taxes:
Income tax expense is based on reported earnings before income taxes. It thus includes the effects of timing differences between reported and taxable earnings that arise because certain transactions are included in taxable earnings in other years. Investment tax credits are deferred and amortized as a reduction of income tax expense over the average useful life of the applicable classes of property.

### Inventories:
Raw materials, operating supplies, finished goods and work in process are included at the lower of average cost or market.