Proctor and Gamble 2005 Annual Report Download - page 42

Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
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age฀and฀mortality;฀expected฀return฀on฀assets;฀and฀health฀care฀cost฀
trend฀rates.฀These฀and฀other฀assumptions฀affect฀the฀annual฀expense฀฀
recognized฀for฀these฀plans.฀Our฀assumptions฀reflect฀our฀historical฀experiences฀฀
and฀management’s฀best฀judgment฀regarding฀future฀expectations.฀In฀฀
accordance฀with฀U.S.฀GAAP,฀the฀net฀amount฀by฀which฀actual฀results฀฀
differ฀from฀our฀assumptions฀is฀deferred.฀If฀this฀net฀deferred฀amount฀฀
exceeds฀10%฀of฀the฀greater฀of฀plan฀assets฀or฀liabilities,฀a฀portion฀of฀the฀
deferred฀amount฀is฀included฀in฀expense฀for฀the฀following฀year.฀The฀cost฀
or฀benefit฀of฀plan฀changes,฀such฀as฀increasing฀or฀decreasing฀benefits฀
for฀prior฀employee฀service฀(prior฀service฀cost),฀is฀deferred฀and฀included฀
in฀expense฀on฀a฀straight-line฀basis฀over฀the฀average฀remaining฀service฀
period฀of฀the฀employees฀expected฀to฀receive฀benefits.
฀
The฀expected฀return฀on฀plan฀assets฀assumption฀is฀important,฀since฀many฀
of฀our฀defined฀benefit฀plans฀and฀our฀primary฀OPEB฀plan฀are฀funded.฀The฀
process฀for฀setting฀the฀expected฀rates฀of฀return฀is฀described฀in฀Note฀8฀to฀
the฀Consolidated฀Financial฀Statements.฀For฀2005,฀the฀average฀return฀on฀
assets฀assumption฀for฀pension฀plan฀assets฀is฀7.2%.฀A฀change฀in฀the฀rate฀
of฀return฀of฀1%฀would฀impact฀annual฀benefit฀expense฀by฀approximately฀
$17฀million฀after฀tax.฀For฀2005,฀the฀return฀on฀assets฀assumption฀for฀
OPEB฀assets฀is฀9.5%.฀A฀1%฀change฀in฀the฀rate฀of฀return฀would฀impact฀
annual฀benefit฀expense฀by฀approximately฀$24฀million฀after฀tax.฀
฀
Since฀pension฀and฀OPEB฀liabilities฀are฀measured฀on฀a฀discounted฀basis,฀
the฀discount฀rate฀is฀a฀significant฀assumption.฀Discount฀rates฀used฀฀
for฀our฀U.S.฀defined฀benefit฀and฀OPEB฀plans฀are฀based฀on฀a฀yield฀
curve฀constructed฀from฀a฀portfolio฀of฀high฀quality฀bonds฀for฀which฀the฀฀
timing฀and฀amount฀of฀cash฀outflows฀approximate฀the฀estimated฀payouts฀
of฀the฀plan.฀For฀our฀international฀plans,฀the฀discount฀rates฀are฀set฀by฀
benchmarking฀against฀investment฀grade฀corporate฀bonds฀rated฀AA฀or฀฀
better.฀The฀average฀discount฀rate฀on฀the฀defined฀benefit฀pension฀plans฀
of฀4.5%฀represents฀a฀weighted฀average฀of฀local฀rates฀in฀countries฀where฀
such฀plans฀exist.฀A฀0.5%฀change฀in฀the฀discount฀rate฀would฀impact฀฀
annual฀after-tax฀benefit฀expense฀by฀less฀than฀$35฀million.฀The฀rate฀on฀
the฀OPEB฀plan฀of฀5.1%฀reflects฀the฀higher฀interest฀rates฀generally฀available฀
in฀the฀U.S.,฀which฀is฀where฀a฀majority฀of฀the฀plan฀participants฀receive฀
benefits.฀A฀0.5%฀change฀in฀the฀discount฀rate฀would฀impact฀annual฀฀
after-tax฀OPEB฀expense฀by฀less฀than฀$20฀million.฀
Certain฀defined฀contribution฀pension฀and฀OPEB฀benefits฀in฀the฀U.S.฀are฀
funded฀by฀the฀Employee฀Stock฀Ownership฀Plan฀(ESOP),฀as฀discussed฀in฀
Note฀8฀to฀the฀Consolidated฀Financial฀Statements.฀
We฀also฀have฀employee฀stock฀option฀plans฀which฀are฀accounted฀for฀
under฀the฀intrinsic฀value฀recognition฀and฀measurement฀provisions฀
of฀Accounting฀Principles฀Board฀(APB)฀Opinion฀No.฀25,฀“Accounting฀
for฀Stock฀Issued฀to฀Employees,”฀and฀related฀interpretations.฀As฀stock฀฀
options฀have฀been฀issued฀with฀exercise฀prices฀equal฀to฀the฀market฀value฀
of฀the฀underlying฀shares฀on฀the฀grant฀date,฀no฀compensation฀expense฀
was฀recognized.฀Notes฀1฀and฀7฀to฀the฀Consolidated฀Financial฀Statements฀
provide฀supplemental฀information,฀including฀pro฀forma฀earnings฀and฀
earnings฀per฀share,฀as฀if฀the฀Company฀had฀accounted฀for฀options฀฀
based฀on฀the฀fair฀value฀method฀prescribed฀by฀Statement฀of฀Financial฀
Accounting฀Standards฀(SFAS)฀No.฀123,฀“Accounting฀for฀Stock-Based฀
Compensation.”฀The฀estimate฀of฀fair฀value฀requires฀a฀number฀of฀฀
assumptions,฀including฀estimated฀option฀life฀and฀future฀volatility฀of฀the฀
underlying฀stock฀price.฀Changes฀in฀these฀assumptions฀could฀significantly฀
impact฀the฀estimated฀fair฀value฀of฀the฀stock฀options.฀
Effective฀July฀1,฀2005,฀we฀are฀adopting฀the฀Financial฀Accounting฀Standards฀
Board฀(FASB)฀SFAS฀No.฀123฀(Revised฀2004),฀“Share-Based฀Payment”฀
(SFAS฀123(R)).฀This฀Statement฀revises฀SFAS฀No.฀123฀by฀eliminating฀the฀
option฀to฀account฀for฀employee฀stock฀options฀under฀APB฀No.฀25฀and฀
generally฀requires฀companies฀to฀recognize฀the฀cost฀of฀employee฀services฀
received฀in฀exchange฀for฀awards฀of฀equity฀instruments฀based฀on฀the฀
grant-date฀fair฀value฀of฀those฀awards฀(the฀“fair-value-based”฀method).฀
We฀plan฀to฀adopt฀SFAS฀123(R)฀using฀the฀modified฀retrospective฀method,฀฀
whereby฀all฀prior฀periods฀will฀be฀adjusted฀to฀give฀effect฀to฀the฀฀
fair-value-based฀method฀of฀accounting฀for฀awards฀granted฀in฀fiscal฀
years฀beginning฀on฀or฀after฀July฀1,฀1995.฀The฀impact฀of฀adopting฀SFAS฀
123(R)฀will฀be฀consistent฀with฀the฀pro฀forma฀disclosure฀presented฀in฀
Note฀1฀to฀the฀Consolidated฀Financial฀Statements.฀
Goodwill฀and฀Intangible฀Assets
The฀Company฀seeks฀to฀deliver฀value฀from฀innovation฀by฀building฀brands฀
and฀businesses.฀In฀many฀cases,฀brands฀are฀created฀internally,฀and฀the฀
costs฀are฀expensed฀as฀incurred.฀In฀other฀cases,฀brands฀and฀businesses฀
may฀be฀acquired,฀which฀generally฀results฀in฀intangible฀assets฀recognized฀in฀
the฀financial฀statements.฀These฀intangibles฀may฀represent฀indefinite-lived฀
assets฀(e.g.,฀certain฀trademarks฀or฀brands),฀definite-lived฀intangibles฀
(e.g.,฀patents)฀or฀residual฀goodwill.฀Of฀these,฀only฀the฀costs฀of฀definite-lived฀
intangibles฀are฀amortized฀to฀expense฀over฀their฀estimated฀life.฀The฀
classification฀of฀intangibles฀and฀the฀determination฀of฀the฀appropriate฀
life฀requires฀substantial฀judgment.฀Our฀history฀demonstrates฀that฀many฀
of฀the฀Company’s฀brands฀have฀very฀long฀lives฀and฀our฀objective฀is฀to฀
generally฀maintain฀them฀indefinitely.฀For฀accounting฀purposes,฀we฀
evaluate฀a฀number฀of฀factors฀to฀determine฀whether฀an฀indefinite฀life฀
is฀appropriate,฀including฀the฀competitive฀environment,฀market฀share,฀
brand฀history,฀operating฀plan฀and฀the฀macroeconomic฀environment฀
of฀the฀countries฀in฀which฀the฀brand฀is฀sold.฀If฀it฀is฀determined฀that฀฀
an฀intangible฀does฀not฀have฀an฀indefinite฀life,฀our฀policy฀is฀to฀amortize฀
the฀balance฀over฀the฀expected฀useful฀life,฀which฀generally฀ranges฀from฀
5฀to฀20฀years.฀