Sara Lee 2008 Annual Report Download - page 70

Notes to financial statements
Dollars in millions except per share data
Concentrations of Credit Risk A large number of major international
financial institutions are counterparties to the corporation’s finan-
cial instruments. The corporation enters into financial instrument
agreements only with counterparties meeting very stringent credit
standards, limiting the amount of agreements or contracts it enters
into with any one party and, where legally available, executing master
netting agreements. These positions are continuously monitored.
While the corporation may be exposed to credit losses in the event
of nonperformance by these counterparties, it does not anticipate
material losses because of these control procedures.
Trade accounts receivable due from customers that the corporation
considers highly leveraged were $158 at June 28, 2008 and $109
at June 30, 2007. The financial position of these businesses has
been considered in determining allowances for doubtful accounts.
Note 19 – Defined Benefit Pension Plans
The corporation sponsors a number of U.S. and foreign pension plans
to provide retirement benefits to certain employees. The benefits
provided under these plans are based primarily on years of service
and compensation levels.
On June 30, 2007, the corporation adopted certain of the
provisions of Statement of Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans” (SFAS 158). See Note 2 – “Summary
of Significant Accounting Policies” for additional information
regarding the impact of the adoption of SFAS 158.
Measurement Date and Assumptions A March 31 measurement
date is utilized to value plan assets and obligations for all of the
corporation’s defined benefit pension plans. However, SFAS 158
requires entities to measure plan assets and benefit obligations as
of the date of its fiscal year-end statement of financial position for
fiscal years ending after December 15, 2008. As such, the company
expects to adopt the measurement date provision of SFAS 158 in
fiscal 2009. The impact of adopting the measurement date provision
of SFAS 158 will be recorded as an adjustment to beginning of year
retained earnings in 2009. The corporation does not believe the
impact will be material to the consolidated financial statements.
The weighted average actuarial assumptions used in measuring
the net periodic benefit cost and plan obligations of continuing oper-
ations for the three years ending June 28, 2008 were as follows:
2008 2007 2006
Net periodic benefit cost
Discount rate 5.4% 5.1% 5.2%
Long-term rate of return on plan assets 6.7 6.8 6.4
Rate of compensation increase 3.8 3.9 3.9
Plan obligations
Discount rate 6.3% 5.4% 5.1%
Rate of compensation increase 3.7 3.8 3.9
In determining the discount rate, the corporation utilizes the
yield on high-quality fixed-income investments that have a AA bond
rating and match the average duration of the pension benefit pay-
ments. Salary increase assumptions are based upon historical
experience and anticipated future management actions. In deter-
mining the long-term rate of return on plan assets, the corporation
assumes that the historical long-term compound growth rates of
equity and fixed-income securities and other plan investments will
predict the future returns of similar investments in the plan portfo-
lio. Investment management and other fees paid out of plan assets
are factored into the determination of asset return assumptions.
Net Periodic Benefit Cost and Funded Status The components of
the net periodic benefit cost for continuing operations were as follows:
2008 2007 2006
Components of defined benefit
net periodic benefit cost
Service cost $÷«91 $÷«97 $«104
Interest cost 267 253 230
Expected return on assets (293) (279) (226)
Amortization of
Prior service cost 882
Net actuarial loss 34 62 71
Net periodic benefit cost $«107 $«141 $«181
The corporation also recognized settlement losses of $16 in
2008, $15 of which related to the settlement of a pension plan in
the U.K. and is reported as part of discontinued operations. It also
recognized settlement, curtailment and termination losses of $12
in 2007 as a result of the termination of certain foreign employees
due to plant closures and employee terminations in the U.S. The
corporation had settlement and termination losses of $6 in 2006.
The amount of prior service cost and net actuarial loss that is
expected to be amortized from accumulated other comprehensive
income and reported as a component of net periodic benefit cost
during 2009 is $9 and $27, respectively.
The net periodic benefit cost of the corporation’s defined benefit
pension plans in 2008 was $34 lower than in 2007. The decline
was primarily due to a $28 reduction in amortization of net actuar-
ial losses due to net actuarial gains in the prior year, which reduced
the amount subject to amortization; and a $6 reduction in service
cost due to headcount reductions versus the prior year.
The net periodic benefit cost of the corporation’s defined benefit
pension plans in 2007 was $40 lower than in 2006. This was pri-
marily due to a $53 increase in the expected return on plan assets
in 2007 partially offset by higher interest expense. The greater asset
return resulted from the fact that plan assets at the start of 2007
were $741 greater than at the start of 2006, and the corporation
contributed $191 of cash to the plans during 2007.
68 Sara Lee Corporation and Subsidiaries