Document xGdk41oZGXBr7ZQE9V09enBJ

elOvk Page 49 of 84 Table of Contents COOPER INDUSTRIES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis ofPresentation: The consolidated financial statements of Cooper Industries, Ltd, a Bermuda company ("Cooper"), have been prepared in accordance with generally accepted accounting principles in the United States Cooper is the parent company of Cooper Industries, Inc , an Ohio corporation ("Cooper Ohio"), following a corporate reorganization ("the reorganization") that became effective on May 22, 2002 The reorganization was effected through the merger of Cooper Mergerco, Inc , an Ohio corporation, into Cooper Ohio Cooper Ohio was the surviving company in the merger and became an indirect, wholly-owned subsidiary of Cooper All outstanding shares of Cooper Ohio common stock were automatically converted to Cooper Class A common shares Cooper and its subsidiaries continue to conduct the business previously conducted by Cooper Ohio and its subsidiaries The reorganization was accounted for as a reorganization of entities under common control and accordingly, did not result in changes in the historical consolidated carrying amounts of assets, liabilities and shareholders' equity Principles of Consolidation: The consolidated financial statements include the accounts of Cooper and its majority-owned subsidiaries Affiliated companies are accounted for on the equity method where Cooper owns 20% to 50% of the affiliate unless significant economic, political or contractual considerations indicate that the cost method is appropriate Use ofEstimates: 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: For purposes of the consolidated statements of cash flows, Cooper considers all investments purchased with original maturities of three months or less to be cash equivalents Accounts Receivable: Cooper provides an allowance for doubtful trade accounts receivable, determined under the specific identification method The allowance was $5 3 million and $6 3 million at December 31, 2004 and 2003, respectively Inventories: Inventories are carried at cost or, if lower, net realizable value On the basis of current costs, 57% and 58% of inventories at December 31, 2004 and 2003, respectively, were carried on the last-in, first-out (LIFO) method The remaining inventories are carried on the first-in, first-out (FIFO) method Cooper records provisions for potential obsolete and excess inventories See Note 4 of the Notes to the Consolidated Financial Statements Property, Plant and Equipment: Property, plant and equipment are stated at cost Depreciation is provided over the estimated useful lives of the related assets using primarily the straight-line method This method is applied to group asset accounts, which in general have the following lives buildings -- 10 to 40 years, machinery and equipment -- 3 to 18 years, and tooling, dies, patterns and other -- 3 to 10 years Goodwill: On January 1, 2002, Cooper adopted Statement of Financial Accounting Standards No 142, Goodwill and Other Intangible Assets ("SFAS No 142") Under SFAS No 142, goodwill is subject to an annual impairment test Cooper designated January 1 as the date of its annual goodwill impairment test If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, an interim impairment test would be performed between annual tests The first step of the SFAS No 142 two step goodwill impairment test compares the fair value of a reporting unit with its carrying value Cooper has designated seven reporting units, consisting of six units in the Electrical Products reportable operating segment plus the Tools & Flardware reportable operating segment If the carrying amount of a F-8 http //www sec gov/Archives/edgar/data/1141982/000095012905001490/h22660el0vk htm 2/6/2006