Sara Lee 2011 Annual Report Download - page 78

FINANCIAL REVIEW
not reasonably likely to have a material impact on future operating results. However, changes in estimates and assumptions related to previously issued performance based RSUs may have a material impact on future operating results. Defined Benefit Pension Plans See Note 16 to the Consolidated Financial Statements, titled “Defined Benefit Pension Plans,” for information regarding plan obligations, plan assets and the meas- urements of these amounts, as well as the net periodic benefit cost and the reasons for changes in this cost.
Pension costs and obligations are dependent on assumptions
used in calculating such amounts. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions used in developing the required esti- mates include the following key factors: discount rates, salary growth, expected return on plan assets, retirement rates and mortality.
In determining the discount rate, the corporation utilizes a yield
curve based on high-quality fixed-income investments that have a AA bond rating to discount the expected future benefit payments to plan participants. Salary increase assumptions are based on 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 rate of equity and fixed-income securities will predict the future returns of similar investments in the plan portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality. Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic benefit cost in future periods.
Net periodic benefit costs for the corporation’s defined benefit
pension plans related to continuing operations were $36 million in 2011, $99 million in 2010 and $59 million in 2009, and the pro- jected benefit obligation was $4.483 billion at the end of 2011 and $4.335 billion at the end of 2010. The corporation currently expects its net periodic benefit cost for 2012 to be approximately $8 million of income. The year-over-year change versus 2011 is due primarily to an increase in expected return on assets due to higher plan assets at the end of 2011 as compared to the prior year and a reduction in the amortization related to actuarial gains/losses as a result of actuarial gains during 2011 which reduced the amount of unamor- tized actuarial losses to be amortized.
• Facts and circumstances may change that cause the corporation to revise the conclusions on its ability to realize certain net operating losses and other deferred tax attributes. The corporation regularly reviews whether it will realize its deferred tax assets. Its review consists of determining whether sufficient taxable income of the appropriate character exists within the carryback and carryforward period available under respective tax statutes. The corporation considers all available evidence of recoverability when evaluating its deferred tax assets; however, the corporation’s most sensitive and critical factor in determining recoverability of deferred tax assets is the existence of historical and projected profitability in a particu- lar jurisdiction. As a result, changes in actual and projected results of the corporation’s various legal entities can create variability, as well as changes in the level of the corporation’s gross deferred tax assets, which could result in increases or decreases in the corpo- ration’s deferred tax asset valuation allowance.
As a multinational company, the corporation cannot predict with
reasonable certainty or likelihood future results considering the complexity and sensitivity of the assumptions above.
Note 18 to the Consolidated Financial Statements, titled “Income
Taxes,” sets out the factors which caused the corporation’s effective tax rate to vary from the statutory rate and certain of these factors result from finalization of tax audits and review and changes in esti- mates and assumptions regarding tax obligations and benefits. Stock Compensation The corporation issues restricted stock units (RSUs) and stock options to employees in exchange for employee services. See Note 9 to the Consolidated Financial Statements regarding stock-based compensation for further information on these awards. The cost of RSUs and stock option awards is equal to the fair value of the award at the date of grant, and compensation expense is recognized for those awards earned over the service period. Certain of the RSUs vest based upon the employee achieving certain defined performance measures. During the service period, management estimates the number of awards that will meet the defined performance measures. With regard to stock options, at the date of grant, the corporation determines the fair value of the award using the Black-Scholes option pricing formula. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of the corporation’s stock, each of which impacts the fair value of the stock options. The corporation believes that changes in the estimates and assumptions associated with prior non-performance based grants and stock option grants are