OfficeMax 2009 Annual Report Download - page 38

Guaranteed Installment Note’’) . We are required for accounting purposes to assess the carrying
value of assets whenever circumstances indicate that a decline in value may have occurred. After
evaluating the situation, we concluded in late October 2008 that as a result of the Lehman
bankruptcy, it was probable that we would be unable to collect all amounts due according to the
contractual terms of the Lehman Guaranteed Installment Note. Accordingly, we evaluated the
carrying value of the Lehman Guaranteed Installment Note and reduced it to the estimated amount
we expect to collect ($81.8 million) by recording a non-cash impairment charge of $735.8 million,
pre-tax, in the third quarter of 2008. We based our estimate of the recoverable amount of the
Lehman Guaranteed Installment Note on a variety of factors, including consultations with financial
advisors and review of the trading prices on outstanding Lehman debt instruments with similar
contractual interest rates and maturities.
Measuring impairment of a loan requires judgment and estimates, and the eventual outcome
may differ from our estimate by a material amount. The Lehman Guaranteed Installment Note has
been pledged as collateral for the related Securitization Notes, and therefore it may not freely be
transferred to any party other than the indenture trustee for the Securitization Note holders.
Accordingly, the ultimate amount to be realized on the Lehman Guaranteed Installment Note
depends entirely on the proceeds from the Lehman bankruptcy estate, which may not be finally
determined for several years. At December 26, 2009 and December 27, 2008, the carrying value of
the Lehman Guaranteed Installment Note was $81.8 million. Going forward, we intend to adjust the
carrying value of the Lehman Guaranteed Installment Note as further information regarding our
share of the proceeds, if any, from the Lehman bankruptcy estate becomes available.
Recourse on the Securitization Notes is limited to the proceeds from the applicable pledged
Installment Notes and underlying Lehman or Wachovia guaranty. Accordingly, the Lehman
Guaranteed Installment Note and underlying guarantees by Lehman will be transferred to the
holders of the Securitization Notes guaranteed by Lehman in order to settle and extinguish that
liability. However, under current generally accepted accounting principles, we are required to
continue to recognize the liability related to the Securitization Notes guaranteed by Lehman until
such time as the liability has been extinguished, which will occur when the Lehman Guaranteed
Installment Note and the related guaranty are transferred to and accepted by the Securitization
Note holders. We expect that this will occur no later than the date when the assets of Lehman are
distributed and the bankruptcy is finalized. Accordingly, we expect to recognize a non-cash gain
equal to the difference between the carrying amount of the Securitization Notes guaranteed by
Lehman ($735.0 million at December 26, 2009) and the carrying value of the Lehman Guaranteed
Installment Note ($81.8 million at December 26, 2009) in a later period when the liability is legally
extinguished. The actual gain to be recognized in the future will be measured based on the carrying
amounts of the Lehman Guaranteed Installment Note and the Securitization Notes guaranteed by
Lehman at the date of settlement.
At the time of the sale of our timberland assets in 2004, we generated a significant tax gain. As
the timber installment notes structure allowed the Company to defer the resulting tax liability of
$543 million until 2020, the maturity date for the Installment Notes, we recognized a deferred tax
liability related to this gain in connection with the sale. Due to the Lehman bankruptcy and note
defaults, we initially concluded that approximately half of this gain would be accelerated into 2008
for tax purposes and we estimated and paid taxes on this gain in 2008. In estimating the cash
taxes, we considered our available alternative minimum tax credits, a portion of which resulted from
prior tax payments related to the sale of the timberland assets in 2004, which were used to reduce
the net tax payments. After extensive review with our outside tax advisors, we concluded that the
recognition of the Lehman portion of the gain was not triggered in 2008, but instead will be
triggered when the Lehman Guaranteed Installment Note is transferred to the Securitization Note
holders as payment and/or when the Lehman bankruptcy is resolved. Accordingly, we appropriately
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