DuPont 2006 Annual Report Download - page 27

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
different measurement attribute to account for uncertainty in income taxes. While the company is still
evaluating the impact of adoption of FIN 48 on its consolidated financial statements, it believes that adoption
of FIN 48 will decrease the liabilities accrued for uncertainty in income taxes at December 31, 2006, by
$100 million to $125 million with a corresponding increase in reinvested earnings at January 1, 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair
Value Measurements,” which addresses how companies should measure fair value when required for
recognition or disclosure purposes under generally accepted accounting principles in the U.S. (GAAP). The
standard’s provisions will be applied to existing accounting measurements and related disclosures, that are
based on fair value. SFAS 157 does not require any new fair value measurements. The standard applies a
common definition of fair value to be used throughout GAAP, with emphasis on fair value as a “market-
based” measurement versus an entity-specific measurement and establishes a hierarchy of fair value
measurement methods. The disclosure requirements are expanded to include the extent to which companies
use fair value measurements, the methods and assumptions used to measure fair value and the effect of fair
value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007.
The new standard’s provisions applicable to the company will be applied prospectively and the company is
currently evaluating the impact of adoption on its consolidated financial statements.
Critical Accounting Estimates
The company’s significant accounting policies are more fully described in Note 1 to the Consolidated
Financial Statements. Management believes that the application of these policies on a consistent basis enables
the company to provide the users of the financial statements with useful and reliable information about the
company’s operating results and financial condition.
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts, including, but not limited to, receivable and
inventory valuations, impairment of tangible and intangible assets, pension and other postretirement benefit
obligations, income taxes, restructuring reserves, environmental matters and litigation. Management’s estimates
are based on historical experience, facts and circumstances available at the time and various other assumptions
that are believed to be reasonable. The company reviews these matters and reflects changes in estimates as
appropriate. Management believes that the following represents some of the more critical judgment areas in
the application of the company’s accounting policies which could have a material effect on the company’s
financial position, liquidity or results of operations.
Pension and Other Postretirement Benefits
Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and
expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the
company’s pension and other postretirement benefit plans. Management reviews these two key assumptions at
least annually. These and other assumptions are updated periodically to reflect the actual experience and
expectations on a plan specific basis as appropriate. As permitted by GAAP, actual results that differ from the
assumptions are accumulated on a plan by plan basis and to the extent that such differences exceed 10 percent
of the greater of the plan obligations or the applicable plan assets, the excess is amortized over the average
remaining working life of current employees.
About 80 percent of the company’s benefit obligation for pensions and essentially all of the company’s other
postretirement benefit obligations are attributable to the benefit plans in the U.S. The company utilizes
published long-term high quality bond indices to determine the discount rate at the balance sheet date. Where
commonly available, the company considers indices of various durations to reflect the timing of future benefit
payments.
27
Part II