# 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.

### Translation of Non-U.S. Currency Amounts:
Non-U.S. assets and liabilities are translated to U.S. dollars at year-end exchange rates, except that inventories and plant, rental machines, and other property are translated at approximate rates prevailing when acquired. Income and expense items are translated at average rates of exchange prevailing during the year, except that inventories charged to cost of sales and depreciation are translated at historical rates. Exchange gains and losses are included in earnings currently.

### Gross Income:
Gross income is recognized from sales when the product is shipped or in certain cases upon customer acceptance, from rentals 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, with some covering periods up to five years.

### Depreciation:
With minor exceptions, depreciation of U.S. properties is computed using the sum of the years'-digits method. Depreciation of non-U.S. properties is computed using either accelerated methods or the straight-line method.

### Retirement Plans:
Current service costs are accrued currently. Prior service costs resulting from improvements in the plans are amortized generally over 10 years.

### Expenses:
Marketing expenses and development and engineering 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.

## Non-U.S. Operations

| 1978 | 1977 |
| --- | --- |
| (Dollars in thousands) |
| **At end of year:** |
| Net assets employed |
| Current assets | $5,690,104 | $4,638,130 |
| Current liabilities | 3,345,561 | 2,801,117 |
| Working capital | 2,344,543 | 1,837,013 |
| Plant, rental machines and other property, net | 4,424,520 | 3,797,078 |
| Deferred charges and other assets | 737,910 | 686,195 |
| Reserves for employees' indemnities and retirement plans | 7,506,973 | 6,320,286 |
| Long-term debt | 1,072,226 | 808,003 |
| 206,034 | 165,526 |
| 1,278,260 | 973,529 |
| Net assets employed | $6,228,713 | $5,346,757 |
| Number of employees | 144,593 | 139,488 |
| **For the year:** |
| Gross income from sales, rentals and services | $11,040,442 | $9,125,414 |
| Net earnings | 1,560,143 | 1,227,956 |
| Capital expenditures | $2,162,485 | $1,864,085 |

Undistributed earnings of non-U.S. subsidiaries included in consolidated retained earnings amounted to $5,002 million at December 31, 1978 and $4123 million at December 31, 1977. These earnings are indefinitely reinvested in non-U.S. operations. Accordingly, no provision has been made for taxes that might be payable upon remittance of such earnings.