Xerox 2006 Annual Report Download - page 95

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
indemnification, we may have recourse against our
insurance carriers for certain payments made by us.
However, certain indemnification payments may not be
covered under our directors’ and officers’ insurance
coverage. In addition, we indemnify certain fiduciaries of
our employee benefit plans for liabilities incurred in their
service as fiduciary whether or not they are officers of the
Company.
Product Warranty Liabilities: In connection with our
normal sales of equipment, including those under sales-
type leases, we generally do not issue product warranties.
Our arrangements typically involve a separate full service
maintenance agreement with the customer. The
agreements generally extend over a period equivalent to
the lease term or the expected useful life under a cash
sale. The service agreements involve the payment of fees
in return for our performance of repairs and maintenance.
As a consequence, we do not have any significant product
warranty obligations including any obligations under
customer satisfaction programs. In a few circumstances,
particularly in certain cash sales, we may issue a limited
product warranty if negotiated by the customer. We also
issue warranties for certain of our lower-end products in
the Office segment, where full service maintenance
agreements are not available. In these instances, we
record warranty obligations at the time of the sale.
Aggregate product warranty liability expenses for the
three years ended as of December 31, 2006 were $43, $45
and $45, respectively. Total product warranty liabilities as
of December 31, 2006 and 2005 were $22 and $21,
respectively.
Other contingencies
Brazil Tax and Labor Contingencies: Our Brazilian
operations were involved in various litigation matters and
have received or been the subject of numerous
governmental assessments related to indirect and other
taxes as well as disputes associated with former
employees and contract labor. The tax matters, which
comprise a significant portion of the total contingencies,
principally relate to claims for taxes on the internal
transfer of inventory, municipal service taxes on rentals
and gross revenue taxes. We are disputing these tax
matters and intend to vigorously defend our position.
Based on the opinion of legal counsel, we do not believe
that the ultimate resolution of these matters will
materially impact our results of operations, financial
position or cash flows. The labor matters principally
relate to claims made by former employees and contract
labor for the equivalent payment of all social security and
other related labor benefits, as well as consequential tax
claims, as if they were regular employees. Following our
assessment of a negative trend in recent settlements and a
decision to change our legal strategy, we reassessed the
probable estimated loss on these matters and, as a result,
recorded an additional provision of $68 in 2006. As of
December 31, 2006, the total amounts related to the
unreserved portion of the tax and labor contingencies,
inclusive of any related interest, amounted to
approximately $960, with the increase from December 31,
2005 balance of $900 primarily related to indexation,
interest and currency partially offset by the additional
provision. In connection with the above proceedings,
customary local regulations may require us to make
escrow cash deposits or post other security of up to half of
the total amount in dispute. As of December 31, 2006 we
had $154 of escrow cash deposits for matters we are
disputing and there are liens on certain Brazilian assets
with a net book value of $18 and additional letters of
credit of approximately $60. Generally, any escrowed
amounts would be refundable and any liens would be
removed to the extent the matters are resolved in our
favor. We routinely assess all these matters as to
probability of ultimately incurring a liability against our
Brazilian operations and record our best estimate of the
ultimate loss in situations where we assess the likelihood
of an ultimate loss as probable of occurring.
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