American Airlines 2005 Annual Report Download - page 45

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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 100 basis points would increase estimated 2006 postretirement benefits expense by
$40 million.
The Company has pension and postretirement benefit unrecognized net actuarial losses as of December
31, 2005, of approximately $2.2 billion and $300 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 2006 pension and postretirement benefit net periodic benefit costs are expected to be
approximately $81 million and $1 million, respectively. The Company’s total 2006 pension expense and
postretirement expense is currently estimated to be approximately $467 million and $248 million,
respectively.
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, 2005, the Company’s additional minimum pension liability was $1.4 billion, up from $1.0
billion as of December 31, 2004, primarily as a result of a decrease in the discount rate. The increase in
the Company’s minimum pension liability resulted in a 2005 debit to equity of approximately $379 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 $1.3 billion and $833
million as of December 31, 2005 and 2004, 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 and provide the pro forma disclosures required by SFAS 123
(described in Note 1 to the consolidated financial statements). SFAS 123(R) is effective January 1, 2006 for AMR.
Under SFAS 123(R), compensation expense will be recognized for the portion of outstanding awards as service
is provided, based on the grant-date fair value of those awards calculated under SFAS 123 for pro forma
disclosures. The Company expects that the impact of adoption on its first quarter 2006 results will be similar to
the amounts disclosed in each quarterly period during 2005. However, subsequent to the first quarter of 2006,
the impact of SFAS 123(R) will decrease significantly due to the vesting period ending for stock options issued
under the 2003 Employee Stock Incentive Plan.