Sprint - Nextel 2006 Annual Report Download - page 118

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partially offset by a realized loss of $251 million from the change in fair value of the option contracts,
resulting in a net gain of $145 million recorded to other income. We also recorded $53 million of income tax
expense in the fourth quarter 2006 relating to this transaction as a result of the sale of the NII Holdings shares
and the settlement of the option contracts, as well as the reversal of a deferred tax liability relating to the NII
Holdings shares. The use of borrowed shares to settle the option contracts was accounted for as a collateralized
borrowing, resulting in an increase of $866 million to prepaid expenses and other current assets and other
current liabilities for the fair value of the underlying shares. We recognized a financing cash inflow of
$866 million related to the borrowing and an equal investing cash outflow related to collateral posted for the
borrowed shares. The collateralized borrowing was terminated in January 2007.
Foreign Currency Forward and Option Contracts
Foreign currency forward and option contracts held during 2006 and 2005 were not designated as hedges as
defined in SFAS No. 133, as amended, and changes in the fair value of these derivative instruments are
recognized in earnings during the period of change. The activity associated with these contracts was
immaterial in all periods presented.
Note 11. Employee Benefit Information
We adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, as of December 31, 2006.This statement requires us to recognize the funded status of defined benefit
pension and postretirement plans on our consolidated balance sheet and to recognize changes in the funded
status that arise during the period in other comprehensive income (loss).
Defined Benefit Pension Plan
Most of our employees who were employed by us prior to the Sprint-Nextel merger are participants in a
noncontributory defined benefit pension plan. At the time of the Sprint-Nextel merger, we did not extend plan
participation to Nextel employees. Additionally, as of December 31, 2005, the pension plan was amended to
freeze benefit accruals for plan participants not designated to work for Embarq following the spin-off. This
amendment was treated as a curtailment under SFAS No. 88, and resulted in a $233 million reduction in the
projected benefit obligation as of December 31, 2005, which was offset against existing unrecognized losses.
Benefits for employees participating in the plan are based on years of service and the participants’
compensation through December 31, 2005.
As of May 17, 2006, in connection with the spin-off of Embarq, accrued pension benefit obligations for
participants designated to work for Embarq and related plan assets were transferred to Embarq. This event
required a remeasurement of benefit obligations associated with remaining Sprint Nextel employees in
accordance with SFAS No. 87, Employers’ Accounting for Pensions. The value of pension assets transferred to
Embarq was determined using a valuation methodology consistent with Section 4044 of the Employee
Retirement Income Security Act.
Postretirement Benefits
We provide postretirement medical benefits to certain employees. Employees who retired before certain dates
were eligible for medical benefits at no cost, or at a reduced cost. Employees who retire after certain dates are
eligible for medical benefits on a shared-cost basis. We also provide postretirement life insurance to employees
who retired before certain dates. We fund the accrued costs as benefits are paid.
At the time of the Sprint-Nextel merger, we did not extend plan participation in the retiree medical plan to
Nextel employees and we amended the plan to only include employees designated to work for Embarq and
employees who were both employed by us prior to the Sprint-Nextel merger and born before 1956. Because
the attribution period used to accrue retiree medical benefits begins at age 50, this amendment had no
immediate impact on the accumulated postretirement benefit obligation or benefit expense.
F-41
SPRINT NEXTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)