Proctor and Gamble 2005 Annual Report Download - page 41

Management’s฀Discussion฀and฀Analysis The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries 37
Significant฀Accounting฀Policies฀and฀Estimates
In฀preparing฀our฀financial฀statements฀in฀accordance฀with฀U.S.฀GAAP,฀
there฀are฀certain฀accounting฀policies฀that฀are฀particularly฀important.฀
These฀include฀revenue฀recognition,฀income฀taxes,฀certain฀employee฀฀
benefits฀ and฀ goodwill฀and฀intangible฀assets.฀We฀believe฀ these฀฀
accounting฀policies,฀and฀others฀set฀forth฀in฀Note฀1฀to฀the฀Consolidated฀
Financial฀Statements,฀should฀be฀reviewed฀as฀they฀are฀integral฀to฀฀
understanding฀the฀results฀of฀operations฀and฀financial฀condition฀of฀
the฀Company.฀In฀some฀cases,฀these฀policies฀simply฀represent฀required฀฀
accounting.฀In฀others,฀they฀may฀represent฀a฀choice฀between฀acceptable฀
accounting฀methods฀or฀may฀require฀substantial฀judgment฀or฀estimation฀
in฀their฀application.฀
฀
Due฀to฀the฀nature฀of฀our฀business,฀these฀estimates฀generally฀are฀not฀
considered฀highly฀uncertain฀at฀the฀time฀of฀estimation,฀meaning฀they฀
are฀not฀expected฀to฀result฀in฀a฀change฀that฀would฀materially฀affect฀our฀฀
results฀of฀operations฀or฀financial฀condition฀in฀any฀given฀year.฀
฀
The฀Company฀has฀discussed฀the฀selection฀of฀significant฀accounting฀
policies฀and฀the฀effect฀of฀estimates฀with฀the฀Audit฀Committee฀of฀the฀
Company’s฀Board฀of฀Directors.฀
Revenue฀Recognition
Most฀of฀our฀revenue฀transactions฀represent฀sales฀of฀inventory,฀and฀we฀
recognize฀revenue฀when฀title,฀ownership฀and฀risk฀of฀loss฀transfer฀to฀
the฀customer,฀which฀generally฀is฀on฀the฀date฀of฀shipment.฀A฀provision฀
for฀payment฀discounts฀and฀product฀return฀allowances฀is฀recorded฀as฀a฀
reduction฀of฀sales฀within฀the฀same฀period฀that฀the฀revenue฀is฀recognized.฀
We฀offer฀sales฀incentives฀through฀various฀programs,฀consisting฀primarily฀
of฀customer฀pricing฀allowances,฀merchandising฀funds฀and฀consumer฀
coupons.฀The฀cost฀of฀these฀programs฀is฀recorded฀as฀a฀reduction฀of฀sales.฀
Given฀the฀nature฀of฀our฀business,฀revenue฀recognition฀practices฀do฀not฀
contain฀estimates฀that฀materially฀affect฀results฀of฀operations.
Income฀Taxes
Our฀annual฀tax฀rate฀is฀determined฀based฀on฀our฀income,฀statutory฀
tax฀rates฀and฀the฀tax฀impacts฀of฀items฀treated฀differently฀for฀tax฀฀
purposes฀than฀for฀financial฀reporting฀purposes.฀Tax฀law฀requires฀฀
certain฀items฀to฀be฀included฀in฀the฀tax฀return฀at฀different฀times฀than฀the฀
items฀are฀reflected฀in฀the฀financial฀statements.฀As฀a฀result,฀our฀annual฀
tax฀rate฀reflected฀in฀our฀financial฀statements฀is฀different฀than฀reported฀฀
on฀our฀tax฀return฀(our฀cash฀tax฀rates).฀Some฀of฀these฀differences฀are฀
permanent,฀such฀as฀expenses฀that฀are฀not฀deductible฀in฀our฀tax฀฀
return,฀and฀some฀differences฀are฀temporary,฀reversing฀over฀time,฀such฀as฀฀
depreciation฀expense.฀These฀temporary฀differences฀create฀deferred฀tax฀฀
assets฀and฀liabilities.฀
฀
Deferred฀tax฀assets฀generally฀represent฀items฀that฀can฀be฀used฀as฀฀
a฀tax฀deduction฀or฀credit฀in฀future฀years฀for฀which฀we฀have฀already฀฀
recorded฀the฀tax฀benefit฀in฀our฀income฀statement.฀Deferred฀tax฀liabilities฀
generally฀represent฀tax฀expense฀recognized฀in฀our฀financial฀statements฀
for฀which฀payment฀has฀been฀deferred,฀or฀expenditures฀which฀we฀have฀
already฀taken฀a฀deduction฀for฀in฀our฀tax฀return฀but฀have฀not฀yet฀been฀
recognized฀in฀our฀financial฀statements.฀
฀
Inherent฀in฀determining฀our฀annual฀tax฀rate฀are฀judgments฀regarding฀
business฀plans,฀planning฀opportunities฀and฀expectations฀about฀future฀
outcomes.฀Realization฀of฀certain฀deferred฀tax฀assets฀is฀dependent฀upon฀
generating฀sufficient฀taxable฀income฀in฀the฀appropriate฀jurisdiction฀prior฀
to฀the฀expiration฀of฀the฀carry-forward฀periods.฀Although฀realization฀is฀
not฀assured,฀management฀believes฀it฀is฀more฀likely฀than฀not฀that฀our฀
deferred฀tax฀assets,฀net฀of฀valuation฀allowances,฀will฀be฀realized.฀
฀
Changes฀in฀existing฀tax฀laws,฀tax฀rates฀and฀their฀related฀interpretations฀
may฀also฀affect฀our฀ability฀to฀successfully฀manage฀the฀impacts฀of฀regulatory฀฀
matters฀around฀the฀world.฀We฀establish฀reserves฀for฀tax฀positions฀that฀฀
management฀believes฀are฀supportable,฀but฀are฀potentially฀subject฀to฀฀
successful฀challenge฀by฀the฀applicable฀taxing฀authority.฀We฀review฀these฀
in฀light฀of฀the฀changing฀facts฀and฀circumstances,฀such฀as฀the฀progress฀of฀
tax฀audits,฀and฀adjust฀them฀when฀significant฀changes฀in฀risk฀warrant฀it.฀฀
We฀have฀a฀number฀of฀audits฀in฀process฀in฀various฀jurisdictions.฀Although฀
the฀results฀of฀these฀audits฀are฀uncertain,฀based฀on฀currently฀available฀
information,฀we฀believe฀that฀the฀ultimate฀outcomes฀will฀not฀have฀a฀฀
material฀adverse฀effect฀on฀the฀Company’s฀results฀of฀operations,฀financial฀
condition฀or฀cash฀flows.฀
฀
Our฀accounting฀represents฀management’s฀best฀estimate฀of฀future฀events฀
that฀can฀be฀appropriately฀reflected฀in฀the฀accounting฀estimates.฀Certain฀
changes฀or฀future฀events,฀such฀as฀changes฀in฀tax฀legislation,฀geographic฀
mix฀of฀earnings,฀completion฀of฀tax฀audits฀or฀earnings฀repatriation฀฀
plans฀could฀have฀an฀impact฀on฀our฀estimates฀and฀effective฀tax฀rate.
Employee฀Benefits
We฀sponsor฀various฀post-employment฀benefits฀throughout฀the฀world.฀
These฀include฀pension฀plans,฀both฀defined฀contribution฀plans฀and฀฀
defined฀benefit฀plans,฀and฀other฀post-employment฀benefit฀(OPEB)฀
plans,฀consisting฀primarily฀of฀health฀care฀and฀life฀insurance฀for฀retirees.฀
For฀accounting฀purposes,฀the฀defined฀benefit฀and฀OPEB฀plans฀require฀฀
assumptions฀ to฀estimate฀the฀projected฀and฀accumulated฀benefit฀฀
obligations,฀including฀the฀following:฀discount฀rate;฀expected฀salary฀฀
increases;฀certain฀employee-related฀factors,฀such฀as฀turnover,฀retirement฀
฀