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Annual Report 1996


Notes to Consolidated Financial Statements
Polaroid Corporation and Subsidiary Companies

1. Summary of Significant Accounting Policies
Principles of Consolidation:

The consolidated financial statements include the accounts of the Company's domestic and foreign subsidiaries, all of which are either wholly owned or majority owned. Intercompany accounts and transactions are eliminated.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents:
The Company considers all highly liquid debt instruments with maturities of three months or less when purchased to be cash equivalents.

Short-term Investments:
The Company classifies its securities as held-to-maturity. Held-to-maturity securities are those investments which the Company has the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization of premiums and discounts which approximates market value.

Derivatives:
Gains on the Company's purchase of call options, if any, related to qualifying hedges of anticipated transactions are deferred and are recognized in income when the hedged transaction occurs.

Inventories:
Inventories are valued on a first-in, first-out basis at the lower of cost or market value. Market value is determined by replacement cost or net realizable value.

Income Taxes:
Amounts in the financial statements related to income taxes are calculated using the principles of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109, prepaid and deferred taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be recognized.

Provision for U.S. income taxes on the undistributed earnings of foreign subsidiaries is made only on those amounts in excess of the funds considered to be permanently reinvested.

Property, Plant and Equipment:
The cost of buildings, machinery and equipment is depreciated, primarily by accelerated depreciation methods, over the estimated useful lives of such assets as follows: buildings, 20-40 years; machinery and equipment, 3-15 years.

Foreign Currency Translation:
The Company's foreign operations are measured by reflecting financial results of these operations as if they had taken place within a U.S. dollar based economic environment. Inventory, property, plant and equipment, cost of goods sold and depreciation are remeasured from foreign currencies to U.S. dollars at historical exchange rates. All other accounts are translated at current exchange rates. Gains and losses resulting from remeasurement are included in income.

Patents and Trademarks:
Patents and trademarks are valued at $1.

Product Warranty:
Estimated product warranty costs are accrued at the time the products are sold.

Advertising Costs:
The Company expenses the cost of advertising as incurred or the first time the advertising takes place.

Earnings Per Common Share:
Primary earnings/(loss) per common share are computed by dividing net earnings/(loss) available to common stockholders by the weighted average number of common shares and, as appropriate, dilutive common stock equivalents outstanding for the period. All shares held in the Polaroid Stock Equity Plan (ESOP) Trust (see
Note 9) are considered outstanding for both primary and fully diluted earnings/(loss) per share calculations. Stock options are considered to be common stock equivalents. The number of shares used to compute primary earnings/(loss) per common share were (in thousands) 45,989 in 1996, 45,404 in 1995, and 46,992 in 1994.

Fully diluted earnings per common share reflect the maximum dilution that would have resulted from the exercise of stock options and the convertible debentures (see Note 8). Fully diluted earnings per common share are computed by dividing net earnings after adding back the after-tax interest on the convertible debentures, by the weighted average number of common shares and all dilutive securities. The number of shares used to compute fully diluted earnings per common share were (in thousands) 51,299 in 1994. Fully diluted earnings per common share were not reported in 1996 and 1995 because they were greater than primary earnings per common share.

New Accounting Standards:
Effective January 1, 1996, the Company adopted Financial Accounting Standards Board Statements No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and No. 123, "Accounting for Stock-Based Compensation" (FAS 123). The adoption of these standards had no impact on the financial position or the results of operations of the Company in 1996. Under FAS 123, the Company has elected not to adopt the new accounting method and will continue to account for its stock-based compensation under the existing provisions of Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Accordingly, the Company has provided pro-forma disclosures of net earnings and earnings per share assuming FAS 123 had been adopted. (See
Note 10 for the additional disclosures required by FAS 123.)




Polaroid Corporation Annual Report 1996
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