Proctor and Gamble 2006 Annual Report Download - page 61

Millions of dollars except per share amounts or otherwise specified.
Notes to Consolidated Financial Statements The Procter &Gamble Company and Subsidiaries 59
As permitted by SOP 93-6, “Employers Accounting for Employee
Stock Ownership Plans,” we have elected, where applicable, to
continue our practices, which are based on SOP 76-3, “Accounting
Practices for Certain Employee Stock Ownership Plans.” ESOP debt,
which is guaranteed by the Company, is recorded as debt (see Note
5). Preferred shares issued to the ESOP are offset by the Reserve for
ESOP Debt Retirement in the Consolidated Balance Sheets and the
Consolidated Statements of Shareholders‘ Equity. Advances to the
ESOP are recorded as an increase in the Reserve for ESOP Debt
Retirement. Interest incurred on the ESOP debt is recorded as interest
expense. Dividends on all preferred shares, net of related tax benefits,
are charged to retained earnings.
The preferred shares of the ESOP are allocated to employees based
on debt service requirements, net of advances made by the Company
to the Trust. The number of preferred shares outstanding at June 30
was as follows:
Shares in thousands; June 30 2006 2005 2004
Allocated 61,614 61,904 62,511
Unallocated 23,125 25,623 28,296
TOTAL SERIES A 84,739 87,527 90,807
Allocated 21,733 21,989 21,399
Unallocated 45,594 46,338 48,528
TOTAL SERIES B 67,327 68,327 69,927
For purposes of calculating diluted net earnings per common share,
the preferred shares held by the ESOP are considered converted from
inception. Diluted net earnings are calculated assuming that all
preferred shares are converted to common, and therefore are adjusted
to reflect the incremental ESOP funding that would be required due
to the prior year difference in dividend rate between preferred and
common shares (see Note 7).
In connection with the Gillette acquisition, we assumed the Gillette
ESOP, which was established to assist Gillette employees in financing
retiree medical costs. These ESOP accounts are held by participants and
must be used to reduce the Company’s other retiree benefit obligations.
Such accounts reduced our obligation by $212 at June 30, 2006.
NOTE 10
INCOME TAXES
Under SFAS 109, “Accounting for Income Taxes,” income taxes are
recognized for the amount of taxes payable for the current year and for
the impact of deferred tax liabilities and assets, which represent future
tax consequences of events that have been recognized differently in
the financial statements than for tax purposes. Deferred tax assets and
liabilities are established using the enacted statutory tax rates and are
adjusted for any changes in such rates in the period of change.
Management judgment is required in evaluating tax positions and
other items that factor into determining tax provisions. Management
believes its tax positions and related provisions reflected in the
consolidated financial statements are fully supportable. We establish
reserves for additional income taxes related to positions that may be
challenged by local authorities and may not be fully sustained, despite
our belief that the underlying tax positions are fully supportable.
In such cases, the reserves for additional taxes are based on
management‘s best estimate of the ultimate outcome. These reserves
are reviewed on an ongoing basis and are adjusted in light of
changing facts and circumstances, including progress on tax audits,
changes in interpretations of tax laws, developments in case law and
closing of statutes of limitation. Our tax provision includes the impact
of recording reserves and any changes thereto. We have a number of
tax audits in process and have open tax years with various significant
taxing jurisdictions that range primarily from 1995 to 2006. Based on
currently available information, we do not believe the ultimate
outcome of these tax audits and other tax positions related to open
tax years, when finalized, will have a material adverse effect on our
financial position, results of operations or cash flows.
Earnings before income taxes consisted of the following:
Years ended June 30 2006 2005 2004
United States $ 7,410 $6,266 $5,760
International 5,003 3,715 3,145
12,413 9,981 8,905