Proctor and Gamble 2012 Annual Report Download - page 43
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SIGNIFICANT ACCOUNTING POLICIES AND
ESTIMATES
In preparing our financial statements in accordance with
U.S. GAAP, there are certain accounting policies that may
require a choice between acceptable accounting methods or
may require substantial judgment or estimation in their
application. These include income taxes, certain employee
benefits and acquisitions, 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.
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.
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 be included in the
tax return at different times than the items are reflected in
the financial 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 the tax effect of 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, the tax effect of expenditures for
which a deduction has already been taken in our tax return
but has not yet been recognized in our financial statements
or assets recorded at fair value in business combinations for
which there was no corresponding tax basis adjustment.
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 carryforward 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.
We operate in multiple jurisdictions with complex tax policy
and regulatory environments. In certain of these
jurisdictions, we may take tax positions that management
believes are supportable, but are potentially subject to
successful challenge by the applicable taxing authority.
These interpretational differences with the respective
governmental taxing authorities can be impacted by the local
economic and fiscal environment. We evaluate our tax
positions and establish liabilities in accordance with the
applicable accounting guidance on uncertainty in income
taxes. We review these tax uncertainties in light of changing
facts and circumstances, such as the progress of tax audits,
and adjust them accordingly. We have a number of audits in
process in various jurisdictions. Although the resolution of
these tax positions is uncertain, based on currently available
information, we believe that the ultimate outcomes will not
have a material adverse effect on our financial position,
results of operations or cash flows.
Because there are a number of estimates and assumptions
inherent in calculating the various components of our tax
provision, 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 those estimates and our effective tax rate. For
additional details on the Company's income taxes, see Note
9 to the Consolidated Financial Statements.
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 pension and OPEB plans
require assumptions to estimate the projected and
accumulated benefit obligations, including the following
variables: discount rate; expected salary increases; certain
employee-related factors, such as turnover, retirement age
and mortality; expected return on assets and health care cost
trend rates. These and other assumptions affect the annual
expense and obligations recognized for the underlying plans.
Our assumptions reflect our historical experiences and
management's best judgment regarding future expectations.
As permitted by 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 impacts our
defined benefit expense, since many of our defined benefit
pension plans and our primary OPEB plan are partially
funded. The process for setting the expected rates of return is
described in Note 8 to the Consolidated Financial
Statements. For 2012, the average return on assets
assumptions for pension plan assets and OPEB assets were
7.4% and 9.2%, respectively. A change in the rate of return
of 100 basis points for both pension and OPEB assets would
impact annual after-tax benefit expense by approximately
$90 million.
Since pension and OPEB liabilities are measured on a