NOTEs TO CONsOlIdATEd FINANCIAl sTATEMENTs NOTE 1 – sIgNIFICANTACCOuNTINg POlICIEs (Dollars in millions, except per share data) Principles of Consolidation:  The consolidated financial statements include the accounts and operations of The Timken Company and  its subsidiaries (the Company). All significant intercompany accounts and transactions are eliminated upon consolidation. Investments  in affiliated companies are accounted for by the equity method, except for Advanced Green Components (AGC), that qualified as a  variable interest entity, in which case the investments are consolidated in accordance with accounting rules relating to the consolidation  of variable interest entities. The net assets of AGC at December 31, 2011 were $0.6 million. Revenue Recognition:  The Company recognizes revenue when title passes to the customer. This occurs at the shipping point except  for certain exported goods and certain foreign entities, where title passes when the goods reach their destination. Selling prices are  fixed based on purchase orders or contractual arrangements. Shipping and handling costs billed to customers are included in net sales  and the related costs are included in cost of products sold in the Consolidated Statements of Income. The Company acquired the assets of Philadelphia Gear Corp. (Philadelphia Gear) in July, 2011. Philadelphia Gear recognizes a portion of  their revenues on the percentage-of-completion method. In 2011, the Company recognized approximately $40 million in net sales under  the percentage-of-completion method. Cash Equivalents:  The Company considers all highly liquid investments with a maturity of three months or less when purchased to  be cash equivalents. Allowance for Doubtful Accounts:  The Company maintains an allowance for doubtful accounts, which represents an estimate of  the losses expected from the accounts receivable portfolio, to reduce accounts receivable to their net realizable value. The allowance  was based upon historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and  management’s evaluation of business risk. The Company extends credit to customers satisfying pre-defined credit criteria. The Company  believes it has limited concentration of credit risk due to the diversity of its customer base. Inventories:  Inventories are valued at the lower of cost or market. The majority of domestic inventories are valued by the last-in,  first-out (LIFO) method and the balance of the Company’s inventories are valued by the first-in, first-out (FIFO) method. Investments:  Short-term investments are investments with maturities between four months and one year and are valued at amortized  cost, which approximates fair value. The Company held short-term investments as of December 31, 2011 and 2010 with a fair value  of $32.0 million and $15.0 million, respectively, and a cost basis of $32.0 million and $15.0 million, respectively, which were included  in other current assets on the Consolidated Balance Sheets. In addition, the Company’s business in India held investments in mutual  funds of $14.6 million and $6.9 million as of December 31, 2011 and 2010, respectively. These investments were classified as “available- for-sale” securities and were included in other current assets on the Consolidated Balance Sheets. Unrealized gains and losses were  included in accumulated other comprehensive loss, net of tax, on the Consolidated Balance Sheets. Realized gains and losses were  included in other (expense) income, net in the Consolidated Statements of Income. Property, Plant and Equipment:  Property, plant and equipment – net is valued at cost less accumulated depreciation. Maintenance  and repairs are charged to expense as incurred. The provision for depreciation is computed principally by the straight-line method based  upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings, five to seven years for computer  software and three to 20 years for machinery and equipment. The impairment of long-lived assets is evaluated when events or changes in circumstances indicate that the carrying amount of the  asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying  amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value. THE TIMKEN COMPANY 48