Proctor and Gamble 2014 Annual Report Download - page 41

The Procter & Gamble Company 39
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, primarily net operating loss and other
carryforwards, 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
10 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 9 to the Consolidated Financial
Statements. For 2014, the average return on assets
assumptions for pension plan assets and OPEB assets was
7.2% and 8.3%, 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
$111 million.
Since pension and OPEB liabilities are measured on a
discounted basis, the discount rate impacts our plan
obligations and expenses. Discount rates used for our U.S.
defined benefit pension 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
and OPEB plans of 3.5% and 4.4%, respectively, represents
a weighted average of local rates in countries where such
plans exist. A 100-basis point change in the pension
discount rate would impact annual after-tax defined benefit
pension expense by approximately $197 million. A change
in the OPEB discount rate of 100 basis points would impact
annual after-tax OPEB expense by approximately $79
million. For additional details on our defined benefit
pension and OPEB plans, see Note 9 to the Consolidated
Financial Statements.
Goodwill and Intangible Assets
Significant judgment is required to estimate the fair value of
intangible assets and in assigning their respective useful
lives. Accordingly, we typically obtain the assistance of
third-party valuation specialists for significant tangible and
intangible assets. The fair value estimates are based on
available historical information and on future expectations
and assumptions deemed reasonable by management, but are
inherently uncertain.
We typically use an income method to estimate the fair value
of intangible assets, which is based on forecasts of the
expected future cash flows attributable to the respective
assets. Significant estimates and assumptions inherent in the
valuations reflect a consideration of other marketplace
participants, and include the amount and timing of future
cash flows (including expected growth rates and
profitability), the underlying product or technology life
cycles, economic barriers to entry, a brand's relative market
position and the discount rate applied to the cash flows.