Baker Hughes 2009 Annual Report Download - page 104

30 Baker Hughes Incorporated
generally determined using a percentage of revenues rather
than profits) and withholding taxes based on revenue. Deter-
mination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the
use of estimates and assumptions regarding significant future
events such as the amount, timing and character of deduc-
tions, permissible revenue recognition methods under the tax
law and the sources and character of income and tax credits.
Changes in tax laws, regulations, agreements and treaties, for-
eign currency exchange restrictions or our level of operations
or profitability in each taxing jurisdiction could have an impact
on the amount of income taxes that we provide during any
given year.
Our tax filings for various periods are subjected to audit
by the tax authorities in most jurisdictions where we conduct
business. These audits may result in assessments of additional
taxes that are resolved with the authorities or through the
courts. We believe these assessments may occasionally be
based on erroneous and even arbitrary interpretations of local
tax law. Resolution of these situations inevitably includes some
degree of uncertainty; accordingly, we provide taxes only for
the amounts we believe will ultimately result from these pro-
ceedings consistent with the requirements of ASC 740, Income
Taxes. The resulting change to our tax liability, if any, is depen-
dent on numerous factors that are difficult to estimate. These
include, among others, the amount and nature of additional
taxes potentially asserted by local tax authorities; the willing-
ness of local tax authorities to negotiate a fair settlement
through an administrative process; the impartiality of the local
courts; the sheer number of countries in which we do busi-
ness; and the potential for changes in the tax paid to one
country to either produce, or fail to produce, an offsetting tax
change in other countries. Our experience has been that the
estimates and assumptions we have used to provide for future
tax assessments have proven to be appropriate. However, past
experience is only a guide, and the potential exists, however
limited, that the tax resulting from the resolution of current
and potential future tax controversies may differ materially
from the amount accrued.
In addition to the aforementioned assessments that have
been received from various tax authorities, we provide for
taxes for uncertain tax positions where assessments have not
been received in accordance with ASC 740, Income Taxes. We
believe such tax reserves are adequate in relation to the poten-
tial for additional assessments. Once established, we adjust
these amounts only when more information is available or
when an event occurs necessitating a change to the reserves.
Future events such as changes in the facts or law, judicial deci-
sions regarding the application of existing law or a favorable
audit outcome will result in changes to the amounts provided.
We believe that the resolution of tax matters will not have a
material effect on the consolidated financial condition of the
Company, although a resolution could have a material impact
on our consolidated statement of operations for a particular
period and on our effective tax rate for any period in which
such resolution occurs.
Pensions and Postretirement Benefit Obligations
Pensions and postretirement benefit obligations and the
related plan expenses are calculated using actuarial models
and methods. This involves the use of two critical assumptions,
the discount rate and the expected rate of return on assets,
both of which are important elements in determining plan
expenses and in measuring plan assets and liabilities. We
evaluate these critical assumptions at least annually. Although
considered less critical, other assumptions used in determining
benefit obligations and plan expenses, such as demographic
factors like retirement age, mortality and turnover, are also
evaluated periodically and are updated to reflect our actual
and expected experience.
The discount rate enables us to state expected future cash
flows at a present value on the measurement date. The devel-
opment of the discount rate for our U.S. plans was based on a
bond matching model whereby a hypothetical bond portfolio
of high-quality, fixed-income securities is selected that will
match the cash flows underlying the projected benefit obliga-
tion. The discount rate assumption for our non-U.S. plans
reflects the market rate for high-quality, fixed-income securi-
ties. A lower discount rate increases the present value of bene-
fit obligations and increases plan expenses. We used a discount
rate of 6.4% in 2009 and 6.0% in 2008 and in 2007 to deter-
mine plan expenses. A 50 basis point reduction in the discount
rate would have decreased income before income taxes by
approximately $3 million in 2009.
To determine the expected rate of return on plan assets,
we consider the current and expected asset allocations, as
well as historical and expected returns on various categories
of plan assets. A lower rate of return increases plan expenses.
We assumed rates of return on our plan investments were
8.0% in 2009 and in 2008 and 8.5% in 2007. A 50 basis
point reduction in the expected rate of return on assets of our
principal plans would have decreased income before income
taxes by approximately $2 million in 2009.
NEW ACCOUNTING STANDARDS AND
ACCOUNTING STANDARDS UPDATES
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued ASC 105, Generally Accepted Accounting
Principles. The ASC identifies itself as the source of authorita-
tive accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted
accounting principles in the United States. Rules and interpre-
tive releases of the SEC under authority of federal securities
laws are also sources of authoritative GAAP. The ASC does
not change GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all the authoritative literature
related to a particular topic in one place. This statement is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. We have included
references to authoritative accounting literature in accordance
with the Codification. There are no other changes to the con-
tent of the Company’s financial statements or disclosures as a
result of the adoption.