Foot Locker 2011 Annual Report Download - page 51

Discount Rate — An assumed discount rate is used to measure the present value of future cash flow
obligations of the plans and the interest cost component of pension expense and postretirement income.
The cash flows are then discounted to their present value and an overall discount rate is determined. In
2011, the Company changed how the discount rate was selected to measure the present value of U.S.
benefit obligations from the Citibank Pension Discount curve to Towers Watson’s Bond:Link model. The
current discount rate is determined by reference to the Bond:Link interest rate model based upon a
portfolio of highly rated U.S. corporate bonds with individual bonds that are theoretically purchased to
settle the plan’s anticipated cash outflows. The discount rate selected to measure the present value of the
Company’s Canadian benefit obligations was developed by using the plan’s bond portfolio indices, which
match the benefit obligations.
The fluctuations in stock and bond markets could cause actual investment results to be significantly
different from those assumed, and therefore, significantly impact the valuation of the assets in our pension
trust. The weighted-average discount rates used to determine the 2011 benefit obligations related to the
Company’s pension and postretirement plans were 4.16 percent and 4.00 percent, respectively. A decrease
of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit
obligation of the pension plans at January 28, 2012 by approximately $32 million, and would have
increased the accumulated benefit obligation on the postretirement plan by approximately $1 million. Such
a decrease would not have significantly changed 2011 pension expense or postretirement income.
The Company maintains two postretirement medical plans, one covering executive officers and certain key
employees of the Company, (‘‘SERP Medical Plan’’), and the other covering all other associates. With
respect to the SERP Medical Plan, a one percent change in the assumed health care cost trend rate would
change this plan’s accumulated benefit obligation by approximately $2 million. With respect to the
postretirement medical plan covering all other associates, there is limited risk to the Company for
increases in health care costs since, beginning in 2001, new retirees have assumed the full expected costs
and then-existing retirees have assumed all increases in such costs.
The Company expects to record postretirement income of approximately $4 million and pension expense
of approximately $17 million in 2012.
Income Taxes
In accordance with GAAP, deferred tax assets are recognized for tax credit and net operating loss
carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Management is required to estimate
taxable income for future years by taxing jurisdiction and to use its judgment to determine whether or not
to record a valuation allowance for part or all of a deferred tax asset. Estimates of taxable income are based
upon the Company’s strategic long-range plans. A one percent change in the Company’s overall statutory
tax rate for 2011 would have resulted in a $7 million change in the carrying value of the net deferred tax
asset and a corresponding charge or credit to income tax expense depending on whether the tax rate
change was a decrease or an increase.
The Company has operations in multiple taxing jurisdictions and is subject to audit in these jurisdictions.
Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax
contingencies require management to make estimates and judgments with respect to the ultimate outcome
of tax audits. Actual results could vary from these estimates.
The Company expects its 2012 effective tax rate to approximate 37 percent. The actual rate will vary
depending primarily on the percentage of the Company’s income earned in the United States as compared
with its international operations.
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