AT&T Wireless 2007 Annual Report Download - page 73

2007 AT&T Annual Report
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A reconciliation of income tax expense and the amount
computed by applying the statutory federal income tax rate
(35%) to income before income taxes, income from
discontinued operations, extraordinary items and cumulative
effect of accounting changes is as follows:
2007 2006 2005
Taxes computed at federal
statutory rate $6,371 $3,809 $2,001
Increases (decreases) in
income taxes resulting from:
State and local income
taxes – net of federal
income tax benefit 549 234 176
Effects of international operations (178) (200) (70)
Medicare reimbursements (120) (123) (95)
Equity in net income of affiliates — (218) (35)
Tax settlements — — (902)
Other – net (369) 23 (143)
Total $6,253 $3,525 $ 932
Effective Tax Rate 34.4% 32.4% 16.3%
In December 2005, we reached an agreement with the IRS to
settle certain claims, principally related to the utilization of
capital losses and tax credits for years 1997 – 1999. Included
in the settlement was relief from previous assessments and
agreement on multiple items challenged by the IRS in the
course of routine audits. As we had previously paid the
assessments in full and filed refund claims with the IRS, the
settlement resulted in our recognition of approximately $902
of reduced income tax expense in 2005.
Effects of international operations include items such as
foreign tax credits, sales of foreign investments and the
effects of undistributed earnings from international operations.
We do not provide deferred taxes on the undistributed
earnings of subsidiaries operating outside the United States
that have been or are intended to be permanently reinvested.
The amount of undistributed earnings for which we have not
recorded deferred taxes is not material.
NOTE 11. PENSION AND POSTRETIREMENT BENEFITS
Pension Benefits
Substantially all of our U.S. employees are covered by one of
our noncontributory pension and death benefit plans. Many of
our management employees participate in pension plans that
have a traditional pension formula (i.e., a stated percentage
of employees’ adjusted career income) and a frozen cash
balance or defined lump sum formula. In 2005, the
management pension plan for those employees was amended
to freeze benefit accruals previously earned under a cash
balance formula. Each employee’s existing cash balance
continues to earn interest at a variable annual rate. After this
change, those management employees, at retirement, may
elect to receive the portion of their pension benefit derived
under the cash balance or defined lump sum as a lump sum
or an annuity. The remaining pension benefit, if any, will be
paid as an annuity if its value exceeds a stated monthly
amount. Management employees of former ATTC, BellSouth
and AT&T Mobility participate in cash balance pension plans.
Nonmanagement employees’ pension benefits are generally
calculated using one of two formulas: benefits are based on
a flat dollar amount per year according to job classification or
are calculated under a cash balance plan that is based on an
initial cash balance amount and a negotiated annual pension
band and interest credits. Most nonmanagement employees
can elect to receive their pension benefits in either a lump
sum payment or an annuity.
In April 2007, we announced a one-time increase to certain
retiree pension annuity payments, an average increase of
3.2% by group of retiree count. This pension adjustment is for
pre-1996 retirees and is reflected below as a plan amendment.
At December 31, 2007, defined pension plans formerly
sponsored by Ameritech Publishing Ventures and AT&T
Mobility were merged in the AT&T Pension Benefit Plan.
At December 31, 2006, certain defined pension plans
formerly sponsored by ATTC and AT&T Mobility were also
merged into the AT&T Pension Benefit Plan.
Postretirement Benefits
We provide a variety of medical, dental and life insurance
benefits to certain retired employees under various plans
and accrue actuarially-determined postretirement benefit
costs as active employees earn these benefits.
Obligations and Funded Status
For defined benefit pension plans, the benefit obligation is
the “projected benefit obligation,” the actuarial present value,
as of our December 31 measurement date, of all benefits
attributed by the pension benefit formula to employee service
rendered to that date. The amount of benefit to be paid
depends on a number of future events incorporated into the
pension benefit formula, including estimates of the average
life of employees/survivors and average years of service
rendered. It is measured based on assumptions concerning
future interest rates and future employee compensation levels.
For postretirement benefit plans, the benefit obligation is
the “accumulated postretirement benefit obligation,” the
actuarial present value as of a date of all future benefits
attributed under the terms of the postretirement benefit plan
to employee service rendered to that date.
In conjunction with the 2006 BellSouth acquisition, AT&T
Mobility became a wholly-owned subsidiary. BellSouth and
AT&T Mobility sponsored noncontributory defined benefit
pension plans covering the majority of their U.S. employees.
In accordance with GAAP, when an employer is acquired as part
of a merger, any excess of projected benefit obligation over the
plan assets is recognized as a liability and any excess of plan
assets over the projected benefit obligation is recognized as a
plan asset. The recognition of a new liability or a new asset by
the acquirer, at the date of the merger, results in the elimina-
tion of any (a) previously existing unrecognized net gain or loss,
(b) unrecognized prior service cost and (c) unrecognized net
transition obligation. In addition, the accumulated postretire-
ment benefit obligations are to be measured using actuarial
assumptions and terms of the substantive plans, as determined
by the purchaser. As such, and consistent with our practice, we
did not account for the annual dollar value cap of medical and
dental benefits in the value of the accumulated postretirement
benefit obligation for the BellSouth or AT&T Mobility post-
retirement benefit plans (i.e., we assumed the cap would be
waived in the future). All other significant weighted-average
assumptions used were determined based on our policies that
are discussed below in “Assumptions.”