HP 2005 Annual Report Download - page 86

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
monetary assets and liabilities, and historical exchange rates for nonmonetary assets and liabilities. Net
revenue, cost of sales and expenses are remeasured at average exchange rates in effect during each
period, except for those net revenue, cost of sales and expenses related to the previously noted balance
sheet amounts, which HP remeasures at historical exchange rates. HP includes gains or losses from
foreign currency remeasurement in net earnings. Certain foreign subsidiaries designate the local
currency as their functional currency, and HP records the translation of their assets and liabilities into
U.S. dollars at the balance sheet dates as translation adjustments and includes them as a component of
accumulated other comprehensive loss.
Retirement and Post-Retirement Plans
HP has various defined benefit, other contributory and noncontributory retirement and
post-retirement plans. HP generally amortizes unrecognized actuarial gains and losses on a straight-line
basis over the remaining estimated service life of participants. The measurement date for all plans is
September 30 for fiscal 2005 and fiscal 2004. See Note 15 for a full description of these plans and the
accounting and funding policies, which is incorporated herein by reference.
Recent Pronouncements
In May 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Staff Position
(‘‘FSP’’) No. 106-2 (‘‘FSP 106-2’’), ‘‘Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003’’ (the ‘‘Medicare Act’’). The Medicare
Act provides for certain federal subsidies on drug benefits in retiree health plans. In the third quarter
of fiscal 2004, HP adopted FSP 106-2 retroactive to December 8, 2003, the date of the enactment of
the Medicare Act. The expected subsidy reduced HP’s accumulated post-retirement benefit obligation
(‘‘APBO’’) by approximately $133 million, which HP recognized as a reduction in the unrecognized net
actuarial loss and is amortizing over the average remaining service life of HP’s employees eligible for
post-retirement benefits. HP’s adoption of FSP 106-2 reduced its net periodic post-retirement cost by
approximately $10 million in fiscal 2004.
These amounts were based on the estimated impact of the Medicare Act, pending issuance of final
regulations. On January 21, 2005, the Centers for Medicare and Medicaid Services released final
regulations on the requirements and operational mechanics for employers filing to receive the 28%
federal subsidy. As a result, HP remeasured its APBO considering the overall effect of the Medicare
Act. This remeasurement reduced the APBO by an additional $39 million and net periodic
post-retirement cost by an additional $10 million in fiscal 2005. The expense amounts shown in
Note 15, which is incorporated herein by reference, reflect the impact of the final regulations.
FSP No. 109-2, ‘‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004’’ (‘‘FSP 109-2’’), provides guidance under
SFAS No. 109, ‘‘Accounting for Income Taxes,’’ with respect to recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004 (the ‘‘Jobs Act’’) on income tax
expense and deferred tax liabilities. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the
effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of
applying SFAS No. 109. In the third quarter of fiscal 2005, HP’s CEO and Board of Directors approved
a domestic reinvestment plan as required by the Jobs Act to repatriate $14.5 billion in foreign earnings
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