Proctor and Gamble 2005 Annual Report Download - page 42
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Please find page 42 of the 2005 Proctor and Gamble annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Management’sDiscussionandAnalysisTheProcter&GambleCompanyandSubsidiaries
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ageandmortality;expectedreturnonassets;andhealthcarecost
trendrates.Theseandotherassumptionsaffecttheannualexpense
recognizedfortheseplans.Ourassumptionsreflectourhistoricalexperiences
andmanagement’sbestjudgmentregardingfutureexpectations.In
accordancewithU.S.GAAP,thenetamountbywhichactualresults
differfromourassumptionsisdeferred.Ifthisnetdeferredamount
exceeds10%ofthegreaterofplanassetsorliabilities,aportionofthe
deferredamountisincludedinexpenseforthefollowingyear.Thecost
orbenefitofplanchanges,suchasincreasingordecreasingbenefits
forprioremployeeservice(priorservicecost),isdeferredandincluded
inexpenseonastraight-linebasisovertheaverageremainingservice
periodoftheemployeesexpectedtoreceivebenefits.
Theexpectedreturnonplanassetsassumptionisimportant,sincemany
ofourdefinedbenefitplansandourprimaryOPEBplanarefunded.The
processforsettingtheexpectedratesofreturnisdescribedinNote8to
theConsolidatedFinancialStatements.For2005,theaveragereturnon
assetsassumptionforpensionplanassetsis7.2%.Achangeintherate
ofreturnof1%wouldimpactannualbenefitexpensebyapproximately
$17millionaftertax.For2005,thereturnonassetsassumptionfor
OPEBassetsis9.5%.A1%changeintherateofreturnwouldimpact
annualbenefitexpensebyapproximately$24millionaftertax.
SincepensionandOPEBliabilitiesaremeasuredonadiscountedbasis,
thediscountrateisasignificantassumption.Discountratesused
forourU.S.definedbenefitandOPEBplansarebasedonayield
curveconstructedfromaportfolioofhighqualitybondsforwhichthe
timingandamountofcashoutflowsapproximatetheestimatedpayouts
oftheplan.Forourinternationalplans,thediscountratesaresetby
benchmarkingagainstinvestmentgradecorporatebondsratedAAor
better.Theaveragediscountrateonthedefinedbenefitpensionplans
of4.5%representsaweightedaverageoflocalratesincountrieswhere
suchplansexist.A0.5%changeinthediscountratewouldimpact
annualafter-taxbenefitexpensebylessthan$35million.Therateon
theOPEBplanof5.1%reflectsthehigherinterestratesgenerallyavailable
intheU.S.,whichiswhereamajorityoftheplanparticipantsreceive
benefits.A0.5%changeinthediscountratewouldimpactannual
after-taxOPEBexpensebylessthan$20million.
CertaindefinedcontributionpensionandOPEBbenefitsintheU.S.are
fundedbytheEmployeeStockOwnershipPlan(ESOP),asdiscussedin
Note8totheConsolidatedFinancialStatements.
Wealsohaveemployeestockoptionplanswhichareaccountedfor
undertheintrinsicvaluerecognitionandmeasurementprovisions
ofAccountingPrinciplesBoard(APB)OpinionNo.25,“Accounting
forStockIssuedtoEmployees,”andrelatedinterpretations.Asstock
optionshavebeenissuedwithexercisepricesequaltothemarketvalue
oftheunderlyingsharesonthegrantdate,nocompensationexpense
wasrecognized.Notes1and7totheConsolidatedFinancialStatements
providesupplementalinformation,includingproformaearningsand
earningspershare,asiftheCompanyhadaccountedforoptions
basedonthefairvaluemethodprescribedbyStatementofFinancial
AccountingStandards(SFAS)No.123,“AccountingforStock-Based
Compensation.”Theestimateoffairvaluerequiresanumberof
assumptions,includingestimatedoptionlifeandfuturevolatilityofthe
underlyingstockprice.Changesintheseassumptionscouldsignificantly
impacttheestimatedfairvalueofthestockoptions.
EffectiveJuly1,2005,weareadoptingtheFinancialAccountingStandards
Board(FASB)SFASNo.123(Revised2004),“Share-BasedPayment”
(SFAS123(R)).ThisStatementrevisesSFASNo.123byeliminatingthe
optiontoaccountforemployeestockoptionsunderAPBNo.25and
generallyrequirescompaniestorecognizethecostofemployeeservices
receivedinexchangeforawardsofequityinstrumentsbasedonthe
grant-datefairvalueofthoseawards(the“fair-value-based”method).
WeplantoadoptSFAS123(R)usingthemodifiedretrospectivemethod,
wherebyallpriorperiodswillbeadjustedtogiveeffecttothe
fair-value-basedmethodofaccountingforawardsgrantedinfiscal
yearsbeginningonorafterJuly1,1995.TheimpactofadoptingSFAS
123(R)willbeconsistentwiththeproformadisclosurepresentedin
Note1totheConsolidatedFinancialStatements.
GoodwillandIntangibleAssets
TheCompanyseekstodelivervaluefrominnovationbybuildingbrands
andbusinesses.Inmanycases,brandsarecreatedinternally,andthe
costsareexpensedasincurred.Inothercases,brandsandbusinesses
maybeacquired,whichgenerallyresultsinintangibleassetsrecognizedin
thefinancialstatements.Theseintangiblesmayrepresentindefinite-lived
assets(e.g.,certaintrademarksorbrands),definite-livedintangibles
(e.g.,patents)orresidualgoodwill.Ofthese,onlythecostsofdefinite-lived
intangiblesareamortizedtoexpenseovertheirestimatedlife.The
classificationofintangiblesandthedeterminationoftheappropriate
liferequiressubstantialjudgment.Ourhistorydemonstratesthatmany
oftheCompany’sbrandshaveverylonglivesandourobjectiveisto
generallymaintainthemindefinitely.Foraccountingpurposes,we
evaluateanumberoffactorstodeterminewhetheranindefinitelife
isappropriate,includingthecompetitiveenvironment,marketshare,
brandhistory,operatingplanandthemacroeconomicenvironment
ofthecountriesinwhichthebrandissold.Ifitisdeterminedthat
anintangibledoesnothaveanindefinitelife,ourpolicyistoamortize
thebalanceovertheexpectedusefullife,whichgenerallyrangesfrom
5to20years.