## Notes to Consolidated Financial Statements 

## Note 1 Accounting policies 

## Basis of presentation 

The consolidated financial statements include the accounts of Kellogg Company and its majority-owned subsidiaries. Intercompany balances and transactions are eliminated. Certain amounts in the prior-year financial statements have been reclassi- fied to conform to the current-year presentation. 

Beginning in 2002, the Company’s fiscal year normally ends on the last Saturday of December and as a result, a 53rd week is added every fifth or sixth year. The Company’s 2002 and 2003 fis- cal years ended on December 28 and 27, respectively. The Company’s 2004 fiscal year will end on January 1, 2005, and in- clude a 53rd week. Prior to 2002, the Company had a calendar year end. 

## Cash and cash equivalents 

Highly liquid temporary investments with original maturities of less than three months are considered to be cash equivalents. The car- rying amount approximates fair value. 

## Inventories 

Inventories are valued at the lower of cost (principally average) or market. 

## Property and other long-lived assets 

Fixed assets are recorded at cost and depreciated over estimated useful lives using straight-line methods for financial reporting and accelerated methods for tax reporting. Cost includes an amount of interest associated with significant capital projects. 

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for Impairment or Disposal of Long-lived Assets” on January 1, 2002. This standard is gener- ally effective for the Company on a prospective basis. SFAS No. 144 clarifies and revises existing guidance on accounting for im- pairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other ac- counting literature. Significant changes include 1) establishing cri- teria beyond those previously specified in pre-existing literature for determining when a long-lived asset is held for sale, and 2) requir- ing that the depreciable life of a long-lived asset to be abandoned is revised. SFAS No. 144 also broadens the presentation of discon- tinued operations to include a component of an entity (rather than only a segment of a business). 

## Goodwill and other intangible assets 

The Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” on January 1, 2002. This standard provides ac- counting and disclosure guidance for acquired intangibles. Under this standard, goodwill and “indefinite-lived” intangibles are no longer amortized, but are tested at least annually for impairment. Goodwill impairment testing first requires a comparison between the carrying value and fair value of a reporting unit, including goodwill allocated to it. If carrying value exceeds fair value, good- will is considered impaired. The amount of impairment loss is measured as the difference between carrying value and implied fair value of goodwill, which is determined in the same manner as the amount of goodwill recognized in a business combination. Impairment testing for non-amortized intangibles requires a com- parison between the fair value and carrying value of the intangible asset. If carrying value exceeds fair value, the intangible is consid- ered impaired and is reduced to fair value. The Company uses vari- ous market valuation techniques to determine fair value of good- will and other intangible assets and periodically engages third party valuation consultants for this purpose. Transitional impair- ment tests of goodwill and non-amortized intangibles were re- quired to be performed upon adoption of SFAS No. 142, with any recognized impairment loss reported as the cumulative effect of an accounting change in the first period of adoption. The Company was not required to recognize any impairment losses under these transitional tests. 

SFAS No. 142 also provides separability criteria for recognizing in- tangible assets apart from goodwill. Under these provisions, as- sembled workforce is no longer considered a separate intangible. Accordingly, effective January 1, 2002, the Company reclassified approximately $46 million from other intangibles to goodwill. Refer to Note 15 for further information on the Company’s good- will and other intangible assets. 

For periods prior to 2002, intangible assets were amortized on a straight-line basis over the estimated periods benefited, generally 40 years for goodwill and periods ranging from 5 to 40 years for other intangible assets. 

## Revenue recognition and measurement 

The Company recognizes sales upon delivery of its products to customers net of applicable provisions for discounts, returns, and allowances. 

Beginning January 1, 2002, the Company has applied the consen- sus reached by the Emerging Issues Task Force (EITF) of the FASB in Issue No. 01-9 “Accounting for Consideration Given by a Vendor 

