OfficeMax 2009 Annual Report Download - page 46

Throughout the year, we perform physical inventory counts at a significant number of our
locations. For periods subsequent to each location’s last physical inventory count, an allowance for
estimated shrinkage is provided based on historical shrinkage results and current business trends.
If actual losses as a result of inventory shrinkage are different than management’s estimates,
adjustments to the allowance for inventory shrinkage may be required.
Pensions and Other Postretirement Benefits
The Company sponsors noncontributory defined benefit pension plans covering certain
terminated employees, vested employees, retirees, and some active OfficeMax, Contract
employees. At December 26, 2009, the funded status of our defined benefit pension and other
postretirement benefit plans was a liability of $230.5 million. Changes in assumptions related to the
measurement of funded status could have a material impact on the amount reported. We are
required to calculate our pension expense and liabilities using actuarial assumptions, including a
discount rate assumption and a long-term asset return assumption. We base our discount rate
assumption on the rates of return for a theoretical portfolio of high-grade corporate bonds (rated
Aa1 or better) with cash flows that generally match our expected benefit payments in future years.
We base our long-term asset return assumption on the average rate of earnings expected on
invested funds. We believe that the accounting estimate related to pensions is a critical accounting
estimate because it is highly susceptible to change from period to period, based on the
performance of plan assets, actuarial valuations and changes in interest rates, and the effect on our
financial position and results of operations could be material.
For 2010, our discount rate assumption used in the measurement of our net periodic benefit
cost is 6.15%, and our expected return on plan assets is 8.20%. Using these assumptions, our 2010
pension expense will be approximately $7.1 million. If we were to decrease our estimated discount
rate assumption used in the measurement of our net periodic benefit cost to 5.90% and our
expected return on plan assets to 7.95%, our 2010 pension expense would be approximately
$9.7 million. If we were to increase our discount rate assumption used in the measurement of our
net periodic benefit cost to 6.40% and our expected return on plan assets to 8.45%, our 2010
pension expense would be approximately $4.4 million.
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.
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