Kodak 2009 Annual Report Download - page 28

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Due to continued operating losses and increased uncertainty of future cash flows because of the economic environment in the fourth
quarter of 2008, the Company evaluated the long-lived assets of FPEG’s paper and output systems business and GCG’s
electrophotographic solutions business for impairment. Based on this evaluation, the Company concluded that there were no
impairments within these asset groups.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of operating losses, credit
carryforwards and temporary differences between the carrying amounts and tax basis of the Company’s assets and liabilities. The
Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be
realized. The Company has considered forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which
the Company operates and prudent and feasible tax planning strategies in determining the need for these valuation allowances. As
of December 31, 2009, the Company has net deferred tax assets before valuation allowances of approximately $2.8 billion and a
valuation allowance related to those net deferred tax assets of approximately $2.1 billion, resulting in net deferred tax assets of
approximately $700 million. If the Company were to determine that it would not be able to realize a portion of its net deferred tax
assets in the future, for which there is currently no valuation allowance, an adjustment to the net deferred tax assets would be
charged to earnings in the period such determination was made. Conversely, if the Company were to make a determination that it is
more likely than not that deferred tax assets, for which there is currently a valuation allowance, would be realized, the related
valuation allowance would be reduced and a benefit to earnings would be recorded.
The Company’s tax provision (benefit) considers the impact of undistributed earnings of subsidiary companies outside of the U.S.
Deferred taxes have not been provided for the potential remittance of such undistributed earnings, as it is the Company’s policy to
indefinitely reinvest its retained earnings. However, from time to time and to the extent that the Company can repatriate overseas
earnings on essentially a tax-free basis, the Company's foreign subsidiaries will pay dividends to the U.S.
The Company operates within multiple taxing jurisdictions worldwide and is subject to audit in these jurisdictions. These audits can
involve complex issues, which may require an extended period of time for resolution. Although management believes that adequate
provisions have been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse
effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provisions would
be reduced, thus having a positive impact on earnings.
Pension and Other Postretirement Benefits
The Company’s defined benefit pension and other postretirement benefit costs and obligations are dependent on the Company's key
assumptions. These assumptions, which are reviewed at least annually by the Company, include the discount rate, long-term
expected rate of return on plan assets (“EROA”), salary growth, healthcare cost trend rate and other economic and demographic
factors. Actual results that differ from our assumptions are recorded as unrecognized gains and losses and are amortized to
earnings over the estimated future service period of the active participants in the plan or, if almost all of a plan’s participants are
inactive, the average remaining lifetime expectancy of inactive participants, to the extent such total net unrecognized gains and
losses exceed 10% of the greater of the plan's projected benefit obligation or the calculated value of plan assets. Significant
differences in actual experience or significant changes in future assumptions would affect the Company’s pension and other
postretirement benefit costs and obligations.
The EROA assumption is based on a combination of formal asset and liability studies that include forward-looking return
expectations, given the current asset allocation. The EROA, once set, is applied to the calculated value of plan assets in the
determination of the expected return component of the Company’s pension income or expense. The Company uses a calculated
value of plan assets, which recognizes changes in the fair value of assets over a four-year period, to calculate expected return on
assets. At December 31, 2009, the calculated value of the assets of the major U.S. defined benefit pension plan (the Kodak
Retirement Income Plan “KRIP”) was approximately $5.6 billion and the fair value was approximately $4.6 billion. Asset gains and
losses that are not yet reflected in the calculated value of plan assets are not included in amortization of unrecognized gains and
losses until they are recognized as a part of the calculated value of plan assets.
The Company reviews its EROA assumption annually. To facilitate this review, every three years, or when market conditions change
materially, the Company’s larger plans will undertake asset allocation or asset and liability modeling studies. In early 2008, an asset
and liability modeling study for the KRIP was completed and resulted in a 9.0% EROA assumption, which is the same rate outcome
as concluded by the prior study in 2005.
During the fourth quarter of 2008, the Kodak Retirement Income Plan Committee (“KRIPCO,” the committee that oversees KRIP)
reevaluated certain portfolio positions relative to current market conditions and accordingly approved a change to the portfolio to
reduce risk associated with the volatility in the financial markets. The Company originally assumed an 8.0% EROA for 2009 for the
KRIP based on these changes and the resulting asset allocation at December 31, 2008. During the first quarter of 2009, as intended,
KRIPCO again approved a change in the asset allocation for the KRIP. A new asset and liability study was completed and resulted in
an 8.75% EROA. As the KRIP was remeasured as of March 31, 2009, the Company’s long term assumption for EROA for the