Proctor and Gamble 2007 Annual Report Download - page 46

The Procter & Gamble Company
44 Management’s Discussion and Analysis
Contractual Commitments. The table below provides information on
our contractual commitments as of June 30, 2007.

In preparing our nancial statements in accordance with U.S. GAAP,
there are certain accounting policies that are particularly important.
These include revenue recognition, income taxes, certain employee
benets, acquisitions, 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 nancial
condition of the Company. In the case of revenue recognition, these
policies simply represent required accounting and there is minimal
judgment or estimation involved. In other areas, 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 changes that would materially affect our
results of operations or nancial condition in any given year.
The Company has discussed the selection of signicant accounting
policies and the effect of estimates with the Audit Committee of the
Company’s Board of Directors.

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 can be on the date of shipment or the date of
receipt by the customer. The revenue recorded is presented net of sales
and other taxes we collect on behalf of governmental authorities and
includes shipping and handling costs, which generally are included in
the list price to the customer. 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 to customers and consumers through various programs,
consisting primarily of customer pricing allowances, merchandising
funds and consumer coupons. The cost of these programs is
recognized as incurred and 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.

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 nancial reporting purposes. Tax law requires certain items to
be included in the tax return at different times than the items are
reected in the nancial statements. 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 benet in our income statement. Deferred tax
liabilities generally represent tax expense recognized in our nancial
statements for which payment has been deferred, or expenditures for
which we have already taken a deduction in our tax return but have
not yet been recognized in our nancial 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 sufcient 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.

Less Than 1–3 3–5 After
(in millions of dollars) Total 1 Year Years Years 5 Years
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Total debt $34,854 $11,888 $ 7,555 $1,859 $13,552
Capital leases 628 229 116 85 198

Interest payments relating to long-term debt 13,131 1,272 1,782 1,444 8,633
Operating leases (1) 1,446 316 446 276 408
Minimum pension funding (2) 1,439 468 971
— —
Purchase obligations (3) 4,421 1,360 1,548 853 660
 55,919 15,533 12,418 4,517 23,451
(1) Operating lease obligations are shown net of guaranteed sublease income.
(2) Represents future pension payments to comply with local funding requirements. The projected payments beyond scal year 2010 are not currently determinable.
(3) Primarily reects future contractual payments under various take-or-pay arrangements entered into as part of the normal course of business. Commitments made under take-or-pay obligations
represent future purchases in line with expected usage to obtain favorable pricing. Approximately 44% relates to service contracts for information technology, human resources management and
facilities management activities that were outsourced in recent years. While the amounts listed represent contractual obligations, we do not believe it is likely that the full contractual amount would
be paid if the underlying contracts were canceled prior to maturity. In such cases, we generally are able to negotiate new contracts or cancellation penalties, resulting in a reduced payment. The
amounts do not include obligations related to other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at
fair value that are part of normal operations and are reected in historical operating cash ow trends. We do not believe such purchase obligations will adversely affect our liquidity position.