Kraft 2008 Annual Report Download - page 53

Revenue recognition:
We recognize revenues when title and risk of loss pass to customers, which generally occurs upon shipment or delivery of goods. Revenues are recorded net of
consumer incentives and trade promotions and include all shipping and handling charges billed to customers. Kraft’s shipping and handling costs are classified as
part of cost of sales. A provision for product return allowances is also recorded as a reduction of revenues within the same period that the revenue is recognized.
Marketing, administration and research costs:
Marketing - We promote our products with advertising, consumer incentives and trade promotions. These programs include, but are not limited to, discounts,
coupons, rebates, in-store display incentives and volume-based incentives. We expense advertising costs either in the period the advertising first takes place or 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. We base these estimates 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. We do
not defer amounts on our year-end consolidated balance sheet and all marketing costs are recorded as an expense in the year incurred. Advertising expense was
$1,554 million in 2007, $1,396 million in 2006 and $1,314 million in 2005.
Research - We expense costs as incurred for product research and development. Research and development expense was $447 million in 2007, $419 million in
2006 and $385 million in 2005.
Environmental costs:
We are subject to laws and regulations relating to the protection of the environment. We accrue for environmental remediation obligations on an undiscounted
basis when amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change. Recoveries
of environmental remediation costs from third parties are recorded as assets when their receipt is deemed probable. As of December 31, 2007, our subsidiaries
were involved in 70 active Superfund and other similar actions in the U.S. related to current operations and certain former or divested operations for which we
retain liability.
Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general
with environmental laws and regulations will not have a material effect on our financial results. However, we cannot quantify with certainty the potential impact
of future compliance efforts and environmental remediation actions.
Income taxes:
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Prior to the Distribution, we were included in Altria’s
consolidated federal income tax return. We generally computed income taxes on a separate company basis; however, some of our foreign tax credits, capital
losses and other credits could not have been used on a separate company basis. To the extent that Altria used our foreign tax credits and other tax benefits in its
consolidated federal income tax return, we recognized the benefit in the calculation of our provision for income taxes. This benefit was approximately $270
million in 2007 (both through the date of Distribution as well as post-Distribution carryback claims to pre-Distribution periods), $195 million in 2006 and
$225 in 2005. We made payments to, or were reimbursed by, Altria for the tax effects resulting from being included in Altria’s tax return. As of March 31, 2007,
we are no longer a member of the Altria consolidated tax return group and will file our own federal consolidated income tax return. Altria also previously carried
our federal tax contingencies on its balance sheet and reported them in its financial statements. As a result of the Distribution, Altria transferred our federal tax
contingencies of $375 million to our balance sheet and related interest income of $77 million. During the second quarter, Altria paid us $305 million for the
federal tax contingencies held by them, less the impact of federal reserves reversed due to the adoption of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48. This amount is reflected as a component of other within the net cash provided by operating activities section of the consolidated statement
of cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for the Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(“FIN 48”). We adopted the provisions of FIN 48 effective January 1, 2007. FIN 48 clarifies when tax benefits should be recorded in the financial statements and
provides measurement criteria for valuing such benefits. In order for us to recognize benefits, our tax position must be more likely than not to be sustained upon
audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Before the implementation of FIN 48, we established additional provisions for certain positions that were likely to be challenged
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Source: KRAFT FOODS INC, 10-K, February 25, 2008 Powered by Morningstar® Document Research℠