Honda 2009 Annual Report Download - page 62

(Income Taxes)
Honda adopted the provision of FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes” (FIN No. 48) on
April 1, 2007. Honda is subject to income tax examinations in
many tax jurisdictions because Honda conducts its operations
in various regions of the world. We recognize the tax benefi t
from an uncertain tax position based on the technical merits of
the position when the position is more likely than not to be
sustained upon examination. Benefi ts from tax positions that
meet the more likely than not recognition threshold are
measured at the largest amount of benefi t that is greater than
50% likelihood of being realized upon ultimate resolution. We
performed a comprehensive review of any uncertain tax
positions in accordance with FIN No. 48.
We believe our accounting for tax uncertainties is a “critical
accounting estimate” because it requires us to evaluate and
assess the probability of the outcome that could be realized
upon ultimate resolution. Our estimates may change in the
future due to new developments.
We believe that our estimates and assumptions of
unrecognized tax benefi ts are reasonable, however, if our
estimates of unrecognized tax benefi ts and potential tax
benefi ts are not representative of actual outcomes, our
consolidated fi nancial statements could be materially affected
in the period of settlement or when the statutes of limitations
expire, as we treat these events as discrete items in the period
of resolution.
(Pension and Other Postretirement Benefi ts)
We have various pension plans covering substantially all of our
employees in Japan and certain employees in foreign countries.
Benefi t obligations and pension costs are based on
assumptions of many factors, including the discount rate, the
rate of salary increase and the expected long-term rate of
return on plan assets. The discount rate is determined mainly
based on the rates of high quality corporate bonds or
governmental bonds currently available and expected to be
available during the period to maturity of the defi ned benefi t
pension plans. The salary increase assumptions refl ect our
actual experience as well as near-term outlook. Honda
determines the expected long-term rate of return based on the
investment policies. Honda considers the eligible investment
assets under investment policies, historical experience,
expected long-term rate of return under the investing
environment, and the long-term target allocations of the various
asset categories. Our assumed discount rate and rate of salary
increase as of March 31, 2009 were 2.0% and 2.3%,
respectively, and our assumed expected longterm rate of return
for the year ended March 31, 2009 was 4.0% for Japanese
plans. Our assumed discount rate and rate of salary increase
as of March 31, 2009 were 6.9-8.0% and 1.5-6.4%,
respectively, and our assumed expected long-term rate of
return for fi scal 2009 was 6.5-8.0% for foreign plans.
We believe that the accounting estimates related to our
pension plans is “critical accounting estimate” because
changes in these estimates can materially affect our fi nancial
condition and results of operations.
Actual results may differ from our assumptions, and the
difference is accumulated and amortized over future periods.
Therefore, the difference generally will be refl ected as our
recognized expenses and recorded obligations in future
periods. We believe that the assumptions currently used are
appropriate, however, differences in actual expenses or
changes in assumptions could affect our pension costs and
obligations, including our cash requirements to fund such
obligations.
The following table shows the effect of a 0.5% change in the
assumed discount rate and the expected long-term rate of
return on our funded status, equity, and pension expense.
Japanese Plans Yen (billions)
Assumptions Percentage point change (%) Funded status Equity Pension expense
Discount rate +0.5/–0.5 –87.0/+88.6 +40.9/–46.8 –4.5/+5.5
Expected long-term rate of return +0.5/–0.5 — — –3.8/+3.8
Foreign Plans Yen (billions)
Assumptions Percentage point change (%) Funded status Equity Pension expense
Discount rate +0.5/–0.5 –14.0/+16.9 +18.7/–20.9 –3.7/+4.2
Expected long-term rate of return +0.5/–0.5 — — –2.1/+2.1
*1 Note that this sensitivity analysis may be asymmetric, and are specifi c to the base conditions at March 31, 2009.
*2 Funded status for fi scal 2009 is affected by March 31, 2009 assumptions.
Pension expense for fi scal 2009 is affected by March 31, 2009 assumptions.
Annual Report 2009
60