Sears 2011 Annual Report Download - page 48

For 2012 and beyond, the domestic weighted-average health care cost trend rates used in measuring the
postretirement benefit expense are a 9% trend rate in 2012 to an ultimate trend rate of 7% in 2016. A
one-percentage-point change in the assumed health care cost trend rate would have the following effects on the
postretirement liability:
millions
1 percentage-point
Increase
1 percentage-point
Decrease
Effect on total service and interest cost components .......... $ 2 $ (2)
Effect on postretirement benefit obligation ................. $30 $(26)
Income Taxes
We account for income taxes according to accounting standards for such taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the book basis and
tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. If future utilization of deferred tax assets is uncertain, the Company may record a valuation allowance
against certain deferred tax assets. In evaluating our ability to recover our deferred tax assets within the
jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent
operations. In projecting future taxable income, we begin with historical results adjusted for the results of
discontinued operations and changes in accounting policies and incorporate assumptions including the amount of
future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies. In evaluating the objective evidence that
historical results provide, we consider cumulative operating income (loss) over the past several years. These
assumptions require significant judgment about the forecasts of future taxable income. After consideration of
evidence regarding the ability to realize our deferred tax assets, we recorded a charge of $1.8 billion to establish
a valuation allowance against certain deferred income tax assets in 2011.
In accordance with accounting standards for uncertain tax positions, we record unrecognized tax benefits for
positions taken or expected to be taken on tax returns, including the decision to exclude certain income or
transactions from a return, when a more-likely-than-not threshold is met for a tax position and management
believes that the position will be sustained upon examination by the taxing authorities. Further, we record the
largest amount of the unrecognized tax benefit that is greater than 50% likely of being realized upon settlement.
Management evaluates each position based solely on the technical merits and facts and circumstances of the
position, assuming the position will be examined by a taxing authority having full knowledge of all relevant
information. Significant management judgment is required to determine whether the recognition threshold has
been met and, if so, the appropriate amount of unrecognized tax benefits to be recorded in the Consolidated
Financial Statements. Management reevaluates tax positions each period in which new information about
recognition or measurement becomes available.
Significant management judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities and the valuation allowance recorded against our net deferred tax assets, if any. As further
described above, management considers estimates of the amount and character of future taxable income in
assessing the likelihood of realization of deferred tax assets. Our actual effective tax rate and income tax expense
could vary from estimated amounts due to the future impacts of various items, including changes in income tax
laws, tax planning and the Company’s forecasted financial condition and results of operations in future periods.
Although management believes current estimates are reasonable, actual results could differ from these estimates.
Domestic and foreign tax authorities periodically audit our income tax returns. These audits include
questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposures associated with our various tax filing
positions, we record reserves in accordance with accounting standards for uncertain tax positions. A number of
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