Xerox 2007 Annual Report Download - page 77

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.
Other Contingencies and Commitments: As more
fully discussed in Note 16 – Contingencies in the
Consolidated Financial Statements, we are involved in a
variety of claims, lawsuits, investigations and
proceedings concerning securities law, intellectual
property law, environmental law, employment law and
the Employee Retirement Income Security Act (“ERISA”).
In addition, guarantees, indemnifications and claims
may arise during the ordinary course of business from
relationships with suppliers, customers and
nonconsolidated affiliates. Nonperformance under a
contract including a guarantee, indemnification or claim
could trigger an obligation of the Company. We
determine whether an estimated loss from a contingency
should be accrued by assessing whether a loss is deemed
probable and can be reasonably estimated. Should
developments in any of these areas cause a change in
our determination as to an unfavorable outcome and
result in the need to recognize a material accrual, or
should any of these matters result in a final adverse
judgment or be settled for significant amounts, they
could have a material adverse effect on our results of
operations, cash flows and financial position in the
period or periods in which such change in determination,
judgment or settlement occurs.
Unrecognized Tax Benefits: As of December 31,
2007, we had $303 million of unrecognized tax benefits.
This represents the tax benefits associated with various
tax positions taken, or expected to be taken, on domestic
and international tax returns that have not been
recognized in our financial statements due to uncertainty
regarding their resolution. The resolution or settlement of
these tax positions with the taxing authorities is at
various stages and therefore we are unable to make a
reliable estimate of the eventual cash flows by period
that may be required to settle these matters. In addition,
certain of these matters may not require cash settlement
due to the existence of credit and net operating loss
carryforwards as well as other offsets, including the
indirect benefit from other taxing jurisdictions that may
be available.
Off-Balance Sheet Arrangements
Although we generally do not utilize off-balance
sheet arrangements in our operations, we enter into
operating leases in the normal course of business. The
nature of these lease arrangements is discussed in Note
6-Land, Buildings and Equipment, Net in the
Consolidated Financial Statements. Additionally, we have
utilized special purpose entities (“SPEs”) in conjunction
with certain financing transactions. The SPEs utilized in
conjunction with these transactions are consolidated in
our financial statements in accordance with applicable
accounting standards. These transactions, which are
discussed further in Note 4 – Receivables, Net in the
Consolidated Financial Statements, have been accounted
for as secured borrowings with the debt and related
assets remaining on our balance sheets. Although the
obligations related to these transactions are included in
our balance sheet, recourse is generally limited to the
secured assets and no other assets of the Company.
Refer to Note 16 – Contingencies in the
Consolidated Financial Statements for further
information regarding our guarantees, indemnifications
and warranty liabilities.
Financial Risk Management
We are exposed to market risk from foreign currency
exchange rates and interest rates, which could affect
operating results, financial position and cash flows. We
manage our exposure to these market risks through our
regular operating and financing activities and, when
appropriate, through the use of derivative financial
instruments. These derivative financial instruments are
utilized to hedge economic exposures as well as reduce
earnings and cash flow volatility resulting from shifts in
market rates. Refer to Note 13 – Financial Instruments in
the Consolidated Financial Statements for further
discussion on our financial risk management.
Assuming a 10% appreciation or depreciation in
foreign currency exchange rates from the quoted foreign
currency exchange rates at December 31, 2007, the
potential change in the fair value of foreign currency-
denominated assets and liabilities in each entity would
not be significant because all material currency asset and
liability exposures were economically hedged as of
December 31, 2007. A 10% appreciation or depreciation
of the U.S. dollar against all currencies from the quoted
foreign currency exchange rates at December 31, 2007
would have a $709 million impact on our cumulative
translation adjustment portion of equity. The amount
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