Kraft 2005 Annual Report Download - page 60

MERRILL CORPORATION EYOUNG// 8-MAR-06 09:45 DISK126:[06CHI5.06CHI1135]DU1135A.;17
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DISK024:[PAGER.PSTYLES]UNIVERSAL.BST;51
KRAFT FOODS-FSC CERTIFIED-10K/AR Proj: P1102CHI06 Job: 06CHI1135 File: DU1135A.;17
Merrill Corporation/Chicago [phone] Page Dim: 8.250 X 10.750Copy Dim: 38. X 54.3
equity. Transaction gains and losses are recorded in the consolidated statements of earnings and were
not significant for any of the periods presented.
Guarantees:
The Company accounts for guarantees in accordance with Financial Accounting Standards Board
(‘‘FASB’’) Interpretation No. 45, ‘‘Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.’’ Interpretation No. 45 requires the disclosure
of certain guarantees and the recognition of a liability for the fair value of the obligation of qualifying
guarantee activities. See Note 18. Contingencies for a further discussion of guarantees.
Hedging instruments:
Derivative financial instruments are recorded at fair value on the consolidated balance sheets as
either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in
accumulated other comprehensive earnings (losses) or in earnings, depending on whether a derivative
is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction.
Gains and losses on derivative instruments reported in accumulated other comprehensive earnings
(losses) are reclassified to the consolidated statement of earnings in the periods in which operating
results are affected by the hedged item. Cash flows from hedging instruments are classified in the same
manner as the affected hedged item in the consolidated statements of cash flows.
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. 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.
Income taxes:
The Company accounts for income taxes in accordance with Statement of Financial Accounting
Standards (‘‘SFAS’’) No. 109, ‘‘Accounting for Income Taxes.’’ The U.S. accounts of the Company are
included in the consolidated federal income tax return of Altria Group, Inc. Income taxes are generally
computed on a separate company basis. To the extent that foreign tax credits, capital losses and other
credits generated by the Company, which cannot currently be utilized on a separate company basis, are
utilized in Altria Group, Inc.’s consolidated federal income tax return, the benefit is recognized in the
calculation of the Company’s provision for income taxes. Based on the Company’s current estimate, this
benefit is calculated to be approximately $225 million, $70 million and $100 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The increase in 2005 is driven primarily by dividend
repatriations and certain legal entity reorganizations. The Company makes payments to, or is
reimbursed by, Altria Group, Inc. for the tax effects resulting from its inclusion in Altria Group, Inc.’s
consolidated federal income tax return, including current taxes payable and net changes in tax
provisions. Significant judgment is required in determining income tax provisions and in evaluating tax
positions. The Company establishes additional provisions for income taxes when, despite the belief that
their tax positions are fully supportable, there remain certain positions that are likely to be challenged
and that may not be sustained on review by tax authorities. The Company evaluates and potentially
adjusts these provisions in light of changing facts and circumstances. The consolidated tax provision
includes the impact of changes to accruals that are considered appropriate. Upon the closure of current
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