Kraft 2005 Annual Report Download - page 26

MERRILL CORPORATION ABLIJDE// 7-MAR-06 14:42 DISK126:[06CHI5.06CHI1135]DI1135A.;10
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DISK024:[PAGER.PSTYLES]UNIVERSAL.BST;51
KRAFT FOODS-FSC CERTIFIED-10K/AR Proj: P1102CHI06 Job: 06CHI1135 File: DI1135A.;10
Merrill Corporation/Chicago [phone] Page Dim: 8.250 X 10.750Copy Dim: 38. X 54.3
The remaining charge was recorded as asset impairment and exit costs on the 2004 consolidated
statement of earnings.
Impairment of Long-Lived Assets. The Company reviews long-lived assets, including amortizable
intangible assets, for impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted
operating cash flow analyses to determine if an impairment exists. These analyses are affected by
interest rates, general economic conditions and projected growth rates. For purposes of recognition and
measurement of an impairment for assets held for use, the Company groups assets and liabilities at the
lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any
related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of,
if any, are based on the estimated proceeds to be received, less costs of disposal.
Marketing and Advertising Costs. As required by U.S. GAAP, the Company records marketing
costs as an expense in the year to which such costs relate. The Company does not defer amounts on its
year-end consolidated balance sheet with respect to marketing costs. The Company expenses
advertising costs as incurred. Consumer incentive and trade promotion activities are recorded as a
reduction of revenues based on amounts estimated as being due to customers and consumers at the
end of a period, based principally on historical utilization and redemption rates. For interim reporting
purposes, advertising and consumer incentive expenses are charged to operations as a percentage of
volume, based on estimated volume and related expense for the full year.
Related Party Transactions. As discussed in Note 4 to the consolidated financial statements, Altria
Group, Inc.’s subsidiary, Altria Corporate Services, Inc., provides the Company with various services,
including planning, legal, treasury, auditing, insurance, human resources, office of the secretary,
corporate affairs, information technology, aviation and tax services. Billings for these services, which
were based on the cost to Altria Corporate Services, Inc. to provide such services and a management
fee, were $237 million, $310 million and $318 million for the years ended December 31, 2005, 2004 and
2003, respectively. The Company performed at a similar cost various functions in 2005 that previously
had been provided by Altria Corporate Services, Inc., resulting in a lower service charge in 2005. These
costs were paid to Altria Corporate Services, Inc. monthly. Although the cost of these services cannot be
quantified on a stand-alone basis, management has assessed that the billings are reasonable based on
the level of support provided by Altria Corporate Services, Inc., and that they reflect all services provided.
The cost and nature of the services are reviewed annually by the Company’s Audit Committee, which is
comprised of independent directors. The effects of these transactions are included in operating cash
flows in the Company’s consolidated statements of cash flows.
During 2005, the Company repatriated certain foreign earnings as part of Altria Group, Inc.’s
dividend repatriation plan under provisions of the American Jobs Creation Act. Increased taxes for this
repatriation of $21 million, were reimbursed by Altria Group, Inc. The reimbursement was reported in the
Company’s financial statements as an increase to additional paid-in capital.
In December 2005, the Company purchased an airport hangar and certain personal property
located at the hangar in Milwaukee, Wisconsin, from Altria Corporate Services, Inc. for an aggregate
purchase price of approximately $3.3 million.
In December 2004, the Company purchased two corporate aircraft from Altria Corporate
Services, Inc. for an aggregate purchase price of approximately $47 million. The Company also entered
into an Aircraft Management Agreement with Altria Corporate Services, Inc. in December 2004, pursuant
to which Altria Corporate Services, Inc. agreed to perform aircraft management, pilot services,
maintenance and other aviation services for the Company.
At December 31, 2005 and 2004, the Company had short-term amounts payable to Altria
Group, Inc. of $652 million and $227 million, respectively. The amounts payable to Altria Group, Inc.
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