Archer Daniels Midland 2006 Annual Report Download - page 35

2006 Annual Report 33
Employee Benefit Plans
The Company provides substantially all domestic employees and
employees at certain international subsidiaries with pension
benefits. The Company also provides substantially all domestic
salaried employees with postretirement health care and life
insurance benefits. In order to measure the expense and funded
status of these employee benefit plans, management makes several
estimates and assumptions, including interest rates used to discount
certain liabilities, rates of return on assets set aside to fund these
plans, rates of compensation increases, employee turnover rates,
anticipated mortality rates, and anticipated future health care
costs. These estimates and assumptions are based on the Company’s
historical experience combined with management’s knowledge and
understanding of current facts and circumstances. Management
also uses third-party specialists to assist in measuring the expense
and funded status of these employee benefit plans. If management
used different estimates and assumptions regarding these plans, the
funded status of the plans could vary significantly, and the Company
could recognize different amounts of expense over future periods.
Income Taxes
The Company frequently faces challenges from domestic and foreign
tax authorities regarding the amount of taxes due. These challenges
include questions regarding 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 records reserves for probable exposures. Deferred tax
assets represent items to be used as tax deductions or credits in future
tax returns, and the related tax benefit has already been recognized
in the Company’s income statement. Realization of certain deferred
tax assets reflects the Company’s tax planning strategies. Valuation
allowances related to these deferred tax assets have been established
to the extent the realization of the tax benefit is not probable. Based
on management’s evaluation of the Company’s tax position, it is
believed the amounts related to these tax exposures are appropriately
accrued. To the extent the Company were to favorably resolve matters
for which accruals have been established or be required to pay
amounts in excess of the aforementioned reserves, the Company’s
effective tax rate in a given financial statement period may
be impacted.
Undistributed earnings of the Company’s foreign subsidiaries and
affiliated corporate joint ventures accounted for on the equity method
are considered to be permanently reinvested, and accordingly, no
provision for U.S. income taxes has been provided thereon. If the
Company were to receive distributions from any of these foreign
subsidiaries or affiliates or determine the undistributed earnings
of these foreign subsidiaries or affiliates to not be permanently
reinvested, the Company could be subject to U.S. tax liabilities which
have not been provided for in the consolidated financial statements.
Asset Abandonments and Write-Downs
The Company is principally engaged in the business of procuring,
transporting, storing, processing, and merchandising agricultural
commodities and products. This business is global in nature and
is highly capital-intensive. Both the availability of the Company’s
raw materials and the demand for the Company’s finished products
are driven by unpredictable factors such as weather, plantings,
government (domestic and foreign) farm programs and policies,
changes in population growth, changes in standards of living, and
production of similar and competitive crops. These aforementioned
unpredictable factors, therefore, may cause a shift in the supply/
demand dynamics for the Company’s raw materials and final
products. Any such shift will cause management to evaluate the
efficiency and profitability of the Company’s fixed asset base in terms
of geographic location, size, and age of its factories. The Company,
from time to time, will also invest in equipment and technology
related to new, value-added products produced from agricultural
commodities and products. These new products are not always
successful from either a commercial production or marketing
perspective. Management evaluates the Company’s property, plant,
and equipment for impairment whenever indicators of impairment
exist. Assets are abandoned after consideration of the ability to
utilize the assets for their intended purpose or to employ the assets
in alternative uses or sell the assets to recover the carrying value.
If management used different estimates and assumptions in its
evaluation of this fixed asset base, then the Company could recognize
different amounts of expense over future periods.