American Airlines 2004 Annual Report Download - page 37

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The health care cost trend rate is based upon an evaluation of the Company's historical trends and
experience taking into account current and expected market conditions. Increasing the assumed health
care cost trend rate by 1.0 percent would increase estimated 2005 postretirement benefits expense by $40
million.
The Company has pension and postretirement benefit unrecognized net actuarial losses as of December
31, 2004, of approximately $1.7 billion and $311 million, respectively. The unrecognized net actuarial losses
represent changes in the amount of the projected benefit obligation, the postretirement accumulated benefit
obligation and plan assets resulting from (i) changes in assumptions and (ii) actual experience differing from
assumptions. The amortization of unrecognized net actuarial loss component of the Company’s 2005
pension and postretirement benefit net periodic benefit costs are expected to be approximately $52 million
and $2 million, respectively. The Company’s total 2005 defined benefit pension expense and postretirement
expense is currently estimated to be approximately $380 million and $250 million.
The Company records an additional minimum pension liability when its accumulated benefit obligation
exceeds the pension plans’ assets in excess of amounts previously accrued for pension costs. As of
December 31, 2004, the Company’s additional minimum pension liability was $1.0 billion, down from $1.1
billion as of December 31, 2003, primarily as a result of significantly improved asset performance. The
decrease in the Company’s minimum pension liability resulted in a 2004 credit to equity of approximately
$129 million. An additional minimum pension liability is recorded as an increase to the pension liability, an
increase to other assets (to the extent that a plan has unrecognized prior service costs) and a charge to
stockholders’ equity (deficit) as a component of Accumulated other comprehensive loss. See Note 10 to the
consolidated financial statements for additional information regarding the Company's pension and other
postretirement benefits.
Income taxes – The Company accounts for income taxes in accordance with Financial Accounting
Standards No. 109, “Accounting for Income Taxes”. Accordingly, the Company records a deferred tax asset
valuation allowance when it is more likely than not that some portion or all of its deferred tax assets will not
be realized. The Company considers its historical earnings, trends, and outlook for future years in making
this determination. The Company had a deferred tax valuation allowance of $833 million and $663 million as
of December 31, 2004 and 2003, respectively. See Note 8 to the consolidated financial statements for
additional information.
Tax contingencies – The Company has reserves for taxes and associated interest that may become payable
in future years as a result of audits by tax authorities. Although the Company believes that the positions
taken on previously filed tax returns are reasonable, it nevertheless has established tax and interest
reserves in recognition that various taxing authorities may challenge the positions taken by the Company
resulting in additional liabilities for taxes and interest. The tax reserves are reviewed as circumstances
warrant and adjusted as events occur that affect the Company’s potential liability for additional taxes, such
as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on
current calculations, identification of new issues, release of administrative guidance, or rendering of a court
decision affecting a particular tax issue. In 2003, the Company reached an agreement with the IRS covering
tax years 1990 through 1995 and as a result, recorded an $80 million tax benefit to reduce previously
accrued income tax liabilities and an $84 million reduction in interest expense to reduce previously accrued
interest related to accrued tax liabilities.
New Accounting Pronouncement In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)).
SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. Prior to SFAS 123(R), companies could elect to
account for share-based payments under APB 25 (described in Note 1 to the consolidated financial statements)
and provide the pro forma disclosures required by SFAS 123 (described in Note 1 to the consolidated financial
statements). SFAS 123(R) is effective for public companies beginning with the first interim period that begins after
June 15, 2005 (July 1, 2005 for AMR). Under SFAS 123(R), compensation expense will be recognized for the
portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date
fair value of those awards calculated under SFAS 123 for pro forma disclosures. The Company has not completed
its evaluation of the impact of SFAS 123(R) on its financial statements.