Neiman Marcus 2003 Annual Report Download - page 30

expense. The estimates of the costs associated with the loyalty programs require the Company to make assumptions related to
customer purchasing levels, redemption rates and costs of awards to be chosen by its customers.
Pension Plan. The Company sponsors a noncontributory defined benefit pension plan covering substantially all full-time employees.
In calculating its pension obligations and related pension expense, the Company makes various assumptions and estimates, after
consulting with outside actuaries and advisors. The annual determination of pension expense involves calculating the estimated total
benefits ultimately payable to plan participants and allocating this cost to the periods in which services are expected to be rendered.
The Company uses the projected unit credit method in recognizing pension liabilities. The Pension Plan is valued annually as of the
beginning of each fiscal year.
Significant assumptions related to the calculation of the Company's pension obligation include the discount rate used to calculate the
actuarial present value of benefit obligations to be paid in the future, the expected long-term rate of return on assets held by the
Pension Plan and the average rate of compensation increase by plan participants. These actuarial assumptions are reviewed annually
based upon currently available information.
The assumed discount rate utilized is based, in part, upon the Moody's Aa corporate bond yield as of the measurement date. The
discount rate is utilized principally in calculating the actuarial present value of the Company's pension obligation and net pension
expense. At July 31, 2004, the discount rate was 6.25 percent. To the extent the discount rate increases or decreases, the Company's
pension obligation is decreased or increased, accordingly. The estimated effect of a 0.25 percent decrease in the discount rate would
increase the pension obligation by $10.1 million and increase annual pension expense by $1.1 million.
The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to
be invested to provide for the pension obligation. In 2005, the Company's target allocation is to invest the Pension Plan assets in
equity securities (approximately 80 percent) and in fixed income securities (approximately 20 percent). The Company periodically
evaluates the allocation between investment categories of the assets held by the Pension Plan. The expected average long-term rate of
return on assets is based principally on the counsel of the Company's outside actuaries and advisors. This rate is utilized primarily in
calculating the expected return on plan assets component of the annual pension expense. To the extent the actual rate of return on
assets realized over the course of a year is greater than the assumed rate, that year's annual pension expense is not affected. Rather,
this gain reduces future pension expense over a period of approximately 12 to 18 years. To the extent the actual rate of return on
assets is less than the assumed rate, that year's annual pension expense is likewise not affected. Rather, this loss increases pension
expense over approximately 12 to 18 years. During 2004, the Company utilized 8.0 percent as the expected long-term rate of return
on plan assets.
The assumed average rate of compensation increase is the average annual compensation increase expected over the remaining
employment periods for the participating employees. The Company utilized a rate of 4.5 percent for the periods beginning August 1,
2004. This rate is utilized principally in calculating the pension obligation and annual pension expense. The estimated effect of a 0.25
percent increase in the assumed rate of compensation increase would increase the pension obligation by $1.8 million and increase
annual pension expense by $0.4 million.
The Company had cumulative unrecognized expense for the Pension Plan of $83.9 million at August 1, 2004 primarily related to the
delayed recognition of differences between the Company's actuarial assumptions and actual results.
Self-insurance and Other Employee Benefit Reserves. Management uses estimates in the determination of the required accruals for
general liability, workers' compensation and health insurance as well as short-term disability, supplemental executive retirement
benefits and postretirement health care benefits. These estimates are based upon an examination of historical trends, industry claims
experience and, in certain cases, calculations performed by third-party experts. Projected claims information may change in the future
and may require management to revise these accruals.
Income Taxes. The Company is routinely under audit by federal, state or local authorities in the areas of income taxes. These audits
include questioning the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating
the exposure associated with various tax filing positions, the Company accrues charges for probable exposures. Based on its annual
evaluations of tax positions, the Company believes it has appropriately accrued for probable exposures. To the extent the Company
were to prevail in matters for which
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