OfficeMax 2008 Annual Report Download - page 43

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to pension and postretirement benefits are also recorded based on estimates and assumptions. Key
factors used in developing estimates of these liabilities include assumptions related to discount
rates, rates of return on investments, future compensation costs, healthcare cost trends, benefit
payment patterns and other factors. At December 27, 2008, the funded status of our defined benefit
pension and other postretirement benefit plans was a liability of $452.6 million. Changes in
assumptions related to the measurement of funded status could have a material impact on the
amount reported.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is subject to tax audits in numerous jurisdictions in the U.S. and around the
world. Tax audits by their very nature are often complex and can require several years to complete.
In the normal course of business, the Company is subject to challenges from the IRS and other tax
authorities regarding amounts of taxes due. These challenges may alter the timing or amount of
taxable income or deductions, or the allocation of income among tax jurisdictions. We recognize
the benefits of tax positions that are more likely than not of being sustained upon audit based on
the technical merits of the tax position in the consolidated financial statements; positions that do
not meet this threshold are not recognized. For tax positions that are at least more likely than not of
being sustained upon audit, the largest amount of the benefit that is more likely than not of being
sustained is recognized in the consolidated financial statements.
Accruals for income tax exposures, including penalties and interest, expected to be settled
within the next year are included in accrued expenses and other current liabilities with the
remainder included in other long-term obligations in the Consolidated Balance Sheets. Interest and
penalties related to income tax exposures are recognized as incurred and included in income tax
expense in the Consolidated Statements of Income (Loss).
The determination of the Company’s provision for income taxes requires significant judgment,
the use of estimates, and the interpretation and application of complex tax laws. Significant
judgment is also required in assessing the timing and amounts of deductible and taxable items.
Facility Closure Reserves
The Company conducts regular reviews of its real estate portfolio to identify underperforming
facilities, and closes those facilities that are no longer strategically or economically viable. A liability
for the cost associated with such a closure is recorded at its fair value in the period in which it is
incurred. These costs are included in facility closure reserves in our Consolidated Balance Sheets
and include provisions for the present value of future lease obligations, less estimated sublease
income. At December 29, 2008, the vast majority of the reserve represents future lease obligations
of $106 million, net of anticipated sublease income of approximately $57 million. For each closed
location, we estimate future sublease income based on current real estate trends by market and
location-specific factors, including the age and quality of the location, as well as our historical
experience with similar locations. If we had used different assumptions to estimate future sublease
income our reserves would be different and the difference could be material. In addition, if actual
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