Sara Lee 2008 Annual Report Download - page 46

Notes to financial statements
Dollars in millions except per share data
Note 1 – Nature of Operations and Basis of Presentation
Nature of Operations Sara Lee Corporation (the corporation or
Sara Lee) is a U.S.-based multinational corporation. The corporation’s
principal product lines are branded packaged meat products, fresh
and frozen bakery products, roast and ground coffee and household
and body care products. The relative importance of each operation
over the past three years, as measured by sales and operating
segment income, is presented in Note 22, “Business Segment
Information,” of these financial statements. Food and beverage sales
are made in both the retail channel, to supermarkets, warehouse
clubs and national chains, and the foodservice channel. Household
and body care products are primarily sold through the retail channel.
Basis of Presentation The Consolidated Financial Statements
include Sara Lee Corporation and its controlled subsidiaries and have
been prepared in accordance with generally accepted accounting
principles (GAAP) in the U.S. The results of the corporation’s Mexican
Meats, Direct Selling, U.S. Retail Coffee, European Branded Apparel,
European Nuts and Snacks, U.K. Apparel, U.S. Meat Snacks,
European Meats and Branded Apparel Americas/Asia businesses
are reported as discontinued operations in all years.
The preparation of the Consolidated Financial Statements in
conformity with GAAP requires management to make use of estimates
and assumptions that affect the reported amount of assets and
liabilities, revenues and expenses and certain financial statement
disclosures. Significant estimates in these Consolidated Financial
Statements include allowances for doubtful accounts receivable, net
realizable value of inventories, the cost of sales incentives, useful
lives of property and identifiable intangible assets, the evaluation of
impairments of property, identifiable intangible assets and goodwill,
self-insurance reserves, income tax and valuation reserves, the
valuation of assets and liabilities acquired in business combinations,
assumptions used in the determination of the funded status and
annual expense of pension and postretirement employee benefit
plans, and the volatility, expected lives and forfeiture rates for stock
compensation instruments granted to employees. Actual results
could differ from these estimates.
The corporation’s fiscal year ends on the Saturday closest to
June 30. Fiscal years 2008, 2007 and 2006 were 52-week years.
Unless otherwise stated, references to years relate to fiscal years.
Discontinued Operations The results of the corporation’s Mexican
Meats business have been reported as a discontinued operation as
a result of its sale in 2008. The corporation’s Direct Selling, U.S.
Retail Coffee, European Branded Apparel, European Nuts and Snacks,
U.K. Apparel, U.S. Meat Snacks, European Meats, and Branded
Apparel Americas/Asia businesses had previously been reported
as discontinued operations in the corporation’s 2007 annual report.
The results of operations of all of these businesses through the
date of sale or spin off are presented as discontinued operations
in the Consolidated Statements of Income. Prior to disposition, the
assets and liabilities of discontinued operations are aggregated
and reported on separate lines of the Consolidated Balance Sheets.
Prior periods have been reclassified to reflect this presentation.
Balance Sheet Revision – Income Taxes In the third quarter of
2008, the corporation determined that a $420 deferred income tax
liability related to the anticipated repatriation of foreign earnings
was misclassified as a noncurrent deferred income tax liability on
the consolidated balance sheet at June 30, 2007. Because these
deferred income tax amounts are settled at the time the earnings
are repatriated and it was anticipated the repatriation would occur
within twelve months, the deferred income tax liability should have
been classified as current. Additionally, during the third quarter
2008 financial statement closing process, the corporation reviewed
the detail of its balance sheet classification of other significant
deferred tax items and identified $30 of additional items that were
incorrectly classified as noncurrent at June 30, 2007. Correction
of these classification errors moves most of the balance from long-
term deferred income tax liabilities to current deferred income tax
assets because the tax jurisdiction the corrections pertain to is in
a net current deferred income tax asset position. These classifica-
tion errors resulted in a $435 overstatement of current deferred
income tax assets, a $450 overstatement of noncurrent deferred
tax liabilities, and a $15 understatement of income taxes payable
but had no impact on net income, common stockholders’ equity or
cash flows. While the corporation has concluded that this misclas-
sification did not materially misstate any previously issued financial
statements, the June 30, 2007 balance sheet was revised in order
to provide consistency and comparability in the presentation of
deferred income tax balances. The impact of this revision on the
relevant lines in the balance sheet (as adjusted for discontinued
operations) is summarized below:
Balances at June 30, 2007 As Reported As Adjusted
Current deferred income tax asset $««««468 $««««««33
Total current assets 5,643 5,208
Total assets 12,190 11,755
Income taxes payable and current deferred taxes 74 89
Total current liabilities 4,301 4,388
Noncurrent deferred income taxes 578 128
Total liabilities and equity 12,190 11,755
Balance Sheet Revision – Dividends In the fourth quarter of 2008,
the corporation determined that dividends presented in the consoli-
dated balance sheets and consolidated statements of common
stockholders’ equity only included dividends recorded on the divi-
dend record date. Dividends should have been recorded in retained
earnings at the dividend declaration date rather than the dividend
record date. As a result, retained earnings at July 2, 2005 were
overstated by $155, dividends for 2006 were overstated by $155,
dividends for 2007 were understated by $72, and at June 30, 2007,
retained earnings were overstated and accounts payable understated
by $72. This error did not impact net income or cash flows. While
the corporation has concluded that this error did not materially mis-
state any previously issued financial statements, the July 2, 2005
and June 30, 2007 consolidated balance sheet and 2005 through
2007 consolidated statements of common stockholders’ equity
were revised in order to provide consistency and comparability in
44 Sara Lee Corporation and Subsidiaries