Proctor and Gamble 2008 Annual Report Download - page 54

52 TheProcter&GambleCompany Management’sDiscussionandAnalysis
Inherentindeterminingourannualtaxratearejudgmentsregarding
businessplans,planningopportunitiesandexpectationsaboutfuture
outcomes.Realizationofcertaindeferredtaxassetsisdependentupon
generatingsufcienttaxableincomeintheappropriatejurisdictionprior
totheexpirationofthecarry-forwardperiods.Althoughrealizationis
notassured,managementbelievesitismorelikelythannotthatour
deferredtaxassets,netofvaluationallowances,willberealized.
Weoperateinmultiplejurisdictionswithcomplexregulatoryenviron-
mentssubjecttodifferentinterpretationsbythetaxpayerandrespective
governmentaltaxingauthorities.Incertainofthesejurisdictionswe
maytakepositionsthatmanagementbelievesaresupportable,but
arepotentiallysubjecttosuccessfulchallengebytheapplicabletaxing
authority.Weevaluateourtaxpositionsandestablishliabilitiesinaccor-
dancewithFinancialAccountingStandardsBoardInterpretationNo.48,
“AccountingforUncertaintyinIncomeTaxes”(FIN48).Wereview
thesetaxuncertaintiesinlightofthechangingfactsandcircumstances,
suchastheprogressoftaxaudits,andadjustthemaccordingly.We
haveanumberofauditsinprocessinvariousjurisdictions.Although
theresolutionofthesetaxpositionsisuncertain,basedoncurrently
availableinformation,webelievethattheultimateoutcomeswillnot
haveamaterialadverseeffectonournancialposition,resultsof
operationsorcashows.
Becausethereareanumberofestimatesandassumptionsinherentin
calculatingthevariouscomponentsofourtaxprovision,certainchanges
orfutureeventssuchaschangesintaxlegislation,geographicmixof
earnings,completionoftaxauditsorearningsrepatriationplanscould
haveanimpactonthoseestimatesandoureffectivetaxrate.

Wesponsorvariouspost-employmentbenetsthroughouttheworld.
Theseincludepensionplans,bothdenedcontributionplansand
denedbenetplans,andotherpost-employmentbenet(OPEB)plans,
consistingprimarilyofhealthcareandlifeinsuranceforretirees.For
accountingpurposes,thedenedbenetandOPEBplansrequire
assumptionstoestimatetheprojectedandaccumulatedbenet
obligations,includingthefollowingvariables:discountrate;expected
salaryincreases;certainemployee-relatedfactors,suchasturnover,
retirementageandmortality;expectedreturnonassetsandhealth
carecosttrendrates.Theseandotherassumptionsaffecttheannual
expenseandobligationsrecognizedfortheunderlyingplans.Our
assumptionsreectourhistoricalexperiencesandmanagement’sbest
judgmentregardingfutureexpectations.InaccordancewithU.S.GAAP,
thenetamountbywhichactualresultsdifferfromourassumptionsis
deferred.Ifthisnetdeferredamountexceeds10%ofthegreaterof
planassetsorliabilities,aportionofthedeferredamountisincluded
inexpenseforthefollowingyear.Thecostorbenetofplanchanges,
suchasincreasingordecreasingbenetsforprioremployeeservice
(priorservicecost),isdeferredandincludedinexpenseonastraight-
linebasisovertheaverageremainingserviceperiodoftheemployees
expectedtoreceivebenets.
Theexpectedreturnonplanassetsassumptionisimportant,sincemany
ofourdenedbenetplansandourprimaryOPEBplanarefunded.
Theprocessforsettingtheexpectedratesofreturnisdescribedin
Note9totheConsolidatedFinancialStatements.For2008,theaverage
returnonassetsassumptionforpensionplanassetsandOPEBassets
was7.4%and9.3%,respectively.Achangeintherateofreturnof
0.5%forbothpensionandOPEBassetswouldimpactannualbenet
expensebylessthan$50millionaftertax.
SincepensionandOPEBliabilitiesaremeasuredonadiscounted
basis,thediscountrateisasignicantassumption.Discountrates
usedforourU.S.denedbenetandOPEBplansarebasedonayield
curveconstructedfromaportfolioofhighqualitybondsforwhich
thetimingandamountofcashoutowsapproximatetheestimated
payoutsoftheplan.Forourinternationalplans,thediscountratesare
setbybenchmarkingagainstinvestmentgradecorporatebondsrated
AAorbetter.Theaveragediscountrateonthedenedbenetpension
plansof6.3%representsaweightedaverageoflocalratesincountries
wheresuchplansexist.A0.5%changeinthediscountratewould
impactannualafter-taxbenetexpensebylessthan$50million.
TherateontheOPEBplanof6.9%reectsthehigherinterestrates
generallyapplicableintheU.S.,whichiswhereamajorityoftheplan
participantsreceivebenets.A0.5%changeinthediscountrate
wouldimpactannualafter-taxOPEBexpensebylessthan$10million.
CertaindenedcontributionpensionandOPEBbenetsintheU.S.are
fundedbytheEmployeeStockOwnershipPlan(ESOP),asdiscussedin
Note9totheConsolidatedFinancialStatements.

Weaccountforacquiredbusinessesusingthepurchasemethodof
accounting.Underthepurchasemethod,ourConsolidatedFinancial
Statementsreecttheoperationsofanacquiredbusinessstartingfrom
thecompletionoftheacquisition.Inaddition,theassetsacquiredand
liabilitiesassumedmustberecordedatthedateofacquisitionattheir
respectiveestimatedfairvalues,withanyexcessofthepurchaseprice
overtheestimatedfairvaluesofthenetassetsacquiredrecordedas
goodwill.
Signicantjudgmentisrequiredinestimatingthefairvalueofintan-
gibleassetsandinassigningtheirrespectiveusefullives.Accordingly,
wetypicallyobtaintheassistanceofthird-partyvaluationspecialists
forsignicantitems.Thefairvalueestimatesarebasedonavailable
historicalinformationandonfutureexpectationsandassumptions
deemedreasonablebymanagement,butareinherentlyuncertain.
Wetypicallyuseanincomemethodtoestimatethefairvalueof
intangibleassets,whichisbasedonforecastsoftheexpectedfuture
cashowsattributabletotherespectiveassets.Signicantestimates
andassumptionsinherentinthevaluationsreectaconsiderationof
othermarketplaceparticipants,andincludetheamountandtimingof
futurecashows(includingexpectedgrowthratesandprotability),
theunderlyingproductortechnologylifecycles,economicbarriersto
entry,abrand’srelativemarketpositionandthediscountrateapplied
tothecashows.Unanticipatedmarketormacroeconomicevents
andcircumstancesmayoccur,whichcouldaffecttheaccuracyor
validityoftheestimatesandassumptions.