Twenty-First Century Fox 2005 Annual Report Download - page 62

NEWS CORPORATION
Income Taxes
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions in which it operates. Significant judgment is required in
evaluating its tax positions and determining its provision for income taxes. During the normal course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on
evaluations of the probability of whether additional taxes and related interest and penalties will be due. The Company adjusts these reserves in
light of changing facts and circumstances.
An estimated effective tax rate for a year is applied to quarterly operating results. In the event there is a significant or unusual item
recognized in the quarterly operating results, the tax attributable to that item is separately calculated and recorded in the same quarter. A number
of years may elapse before a tax return containing tax matters, for which a reserve has been established, is audited and finally resolved. During
fiscal 2005, the Company recognized $125 million of tax benefits related to the resolution of a certain prior year foreign tax audits.
The Company estimates a valuation allowance to reduce the amount of its deferred tax assets to an amount the Company believes will more
likely than not be realized. In making this estimate, management analyzes future taxable income, reversing temporary differences and ongoing tax
planning strategies. In the event management determines the Company would not be able to realize all or part of the net deferred tax asset in the
future, a valuation allowance would be recorded against the deferred tax asset with a corresponding charge to Provision for income tax expense
recognized in the period such determination was made.
Employee Costs
The Company maintains defined benefit pension plans covering a majority of its employees and retirees. For financial reporting purposes, net
periodic pension expense (income) is calculated based upon a number of actuarial assumptions including a discount rate for plan obligations and
an expected rate of return on plan assets. The Company considers current market conditions, including changes in investment returns and
interest rates, in making these assumptions. In developing the expected long-term rate of return, the Company considered the pension portfolio’s
past average rate of returns, and future return expectations of the various asset classes. The expected long-term rate of return is based on an
asset allocation assumption of 63% equities, 35% fixed-income securities and 2% in real estate. The expected rate of return on plan assets is a
long-term assumption and generally does not change annually.
The discount rate reflects the market rate for high-quality fixed-income investments on the Company’s annual measurement date of June 30,
2005 and is subject to change each year. The discount rate assumptions used to account for pension and other postretirement benefit plans
reflect the rates at which the benefit obligations could be effectively settled. These rates were determined based on various high quality
investment grade indices and using a cash flow matching technique whereby a hypothetical portfolio of high quality debt securities was
constructed that mirrors the specific benefit obligations for each of the Company’s primary plans where appropriate.
The key assumptions used in developing the Company’s fiscal 2005, 2004 and 2003 net periodic pension expense (income) for its plans
consists of the following:
2005 2004 2003
($ in millions)
Discount rate 5.7% 5.6% 6.3%
Assets:
Expected rate of return 7.5% 7.5% 7.6%
Expected return $110 $ 90 $ 80
Actual return $160 $150 $(20)
Due to continuing declines in long-term interest rates, the Company will use a weighted average discount rate of 5.1% in calculating the
fiscal 2006 net periodic pension expense for its plans. As equity markets have stabilized, the Company plans to continue to use a weighted
average long term rate of return of 7.5% for 2006 net periodic pension expense for its plans. The unrecognized net losses on the Company’s
pension plans were $615 million at June 30, 2005, an increase from $463 million at June 30, 2004. These unrecognized losses mainly result from
the utilization of lower discount rates, and recent mortality tables as compared to previous years and from the actual plan asset returns being
below expected rates of return during fiscal years 2003 and 2002. These deferred losses are being systematically recognized in future net
periodic pension expense in accordance with Statement of Financial Accounting Standards No. 87, “Employers Accounting for Pensions” (SFAS
No. 87). Unrecognized losses in excess of 10 percent of the greater of the market-related value of plan assets or the plans projected benefit
obligation are recognized over the average future service of the plan participants.
The Company made contributions of $236 million, $214 million and $70 million to its pension plans in fiscal 2005, 2004 and 2003,
respectively. These were primarily voluntary contributions made to improve the funded status of the plans which have been impacted by declining
interest rate environment as well as the poor performance of the equity markets as noted above. Future plan contributions are dependent upon
actual plan asset returns and interest rate movements. Assuming that actual plan returns are consistent with the Company’s expected plan
returns in fiscal 2005 and beyond, and that interest rates remain constant, the Company would not be required to make any statutory
contributions to its U.S. pension plans for the foreseeable future.
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