Twenty-First Century Fox 2006 Annual Report Download - page 63

Results of Operations (CONTINUED)
flows for that reporting unit. An impairmentcharge is recorded for the difference between the carrying value and the net
present value of estimated future cash flows, which represents the estimated fair value of the asset. The Company uses its
judgment in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected
adverse economic factors, unanticipated technological change or competitive activities, loss of key personnel and acts by
governments and courts, may signal that an asset has become impaired.
For all of its television station acquisitions through June 30, 2005, the Company utilized the “residual” method to
estimate the fair value of the stations’ FCC licenses. Effective July 1, 2005, the Company adopted Emerging Issues Task
Force Topic No. D-108 “Use of the Residual Method to Value Acquired Assets Other Than Goodwill” (“D-108”). D-108
requires companies who have applied the residual value method in the valuation of acquired identifiable intangibles for
purchase accounting and impairment testing to now use adirect valuation method. The direct valuation method used for
FCC licenses requires, among other inputs, the use of published industry data that are basedonsubjective judgments about
future advertising revenues in the markets where the Company owns television stations. This method also involves the use
of management’s judgment in estimating an appropriate discount rate reflecting the risk of amarket participant in the U.S.
broadcast industry. The resulting fair values for FCC licenses are sensitive to these long-term assumptions and any varia-
tions to such assumptions could result in an impairment toexisting carrying values in future periods.
Income Taxes
The Company is subject toincome taxesinthe U.S. and numerous foreign jurisdictionsinwhich it operates. The Company
computes its annual tax rate basedonthe statutory tax rates and tax planning opportunities available to it in the various
jurisdictions in which it earns income. Significant judgment is required in determining the Company’s annual provision
for income taxes and in evaluatingitstaxpositions. The Company establishes reserves for tax-related uncertainties based
on evaluationsofthe probability of whether additional taxes and related interest and penalties will be due.TheCompany
adjusts these reserves based on changing facts and circumstances and it is often difficult topredict the final outcome or the
timing of resolution of any particular tax matter. The Company believes that its reserves reflect the probable outcome of
known tax matters.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to
be realized. In making this assessment, management analyzes future taxable income,reversing temporary differences and
ongoing tax planning strategies. Should achange in circumstances lead to achange in judgment about the realizability of
deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in
circumstances occurs, along with a corresponding increase or charge to income.
Employee Costs
The Company maintains defined benefit pension plans covering amajority of its employees and retirees. For financial
reporting purposes, net periodic pension expense (income) is calculated based upon anumber of actuarial assumptions
including a discount rateforplan obligationsandan 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 pastaverage rate of returns, and
future return expectationsofthe various asset classes. The expected long-term rate of return is based on an asset allocation
assumption of 61% equities, 36% fixed-income securities and 3% in all other investments.
The discount rate reflects the market rateforhigh-quality fixed-income investments on the Company’s annual
measurement dateofJune 30 and is subject tochange each year. The discount rate assumptions used to account for pen-
sion andother postretirement benefit plans reflect the ratesatwhich the benefit obligations could be effectively settled.
The U.S. rate was determined based on acash flow matching technique whereby a hypothetical portfolio ofhigh quality
debt securities was constructed that mirrors the specific benefit obligations for each of the Company’s primary plans where
appropriate.
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