Lexmark 2009 Annual Report Download - page 36

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management contract that includes specific investment guidelines, requiring among other actions,
adequate diversification, prudent use of derivatives and standard risk management practices such as
portfolio constraints relating to established benchmarks. The U.S. pension plan currently uses a
combination of both active management and passive index funds to achieve its investment goals.
The Company has elected to primarily use the market-related value of plan assets rather than fair value to
determine expense which, under the accounting guidance, allows gains and losses to be recognized in a
systematic and rational manner over a period of no more than five years. As a result of this deferral
process, for the U.S. pension plan, pension expense was increased by $5 million in 2009 and $4 million in
2010, due to the recognition of the gains and losses for the respective prior five years. The expected
increase in the 2010 pension expense for U.S. pension plan would have been approximately $10 million
had the Company not deferred the differences between actual and expected asset returns on equity
investments.
Actual results that differ from assumptions that fall outside the “10% corridor,” as defined by accounting
guidance on employers’ accounting for pensions, are accumulated and amortized over the estimated
future service period of active plan participants. For 2009, a 25 basis point change in the assumptions for
asset return and discount rate would not have had a significant impact on the Company’s results of
operations.
The accounting guidance for employers’ defined benefit pension and other postretirement plans requires
recognition of the funded status of a benefit plan in the statement of financial position and recognition in
other comprehensive earnings of certain gains and losses that arise during the period, but are deferred
under pension accounting rules.
Income Taxes
The Company estimates its tax liability based on current tax laws in the statutory jurisdictions in which it
operates. These estimates include judgments about deferred tax assets and liabilities resulting from
temporary differences between assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, as well as about the realization of deferred tax assets. If the
provisions for current or deferred taxes are not adequate, if the Company is unable to realize certain
deferred tax assets or if the tax laws change unfavorably, the Company could potentially experience
significant losses in excess of the reserves established. Likewise, if the provisions for current and deferred
taxes are in excess of those eventually needed, if the Company is able to realize additional deferred tax
assets or if tax laws change favorably, the Company could potentially experience significant gains.
Under the accounting guidance regarding uncertainty in income taxes, a tax position must meet the
minimum recognition threshold of “more-likely-than-not” before being recognized in the financial
statements. The evaluation of a tax position in accordance with this guidance is a two-step process.
The first step is recognition: The enterprise determines whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any litigation. The second step is measurement:
A tax position that meets the more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. The tax position is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution.
Uncertain tax positions at year-end 2009 and 2008 were evaluated using the two-step process described
in the paragraphs above.
The Company adopted the guidance on accounting for uncertainty in income taxes on January 1, 2007. As
a result, the Company reduced its liability for unrecognized tax benefits and related interest and penalties
by $7.3 million, which resulted in a corresponding increase in the Company’s January 1, 2007 retained
earnings balance. The Company also recorded an increase in its deferred tax assets of $8.5 million and a
corresponding increase in its liability for unrecognized tax benefits as a result of adoption.
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