DuPont 2007 Annual Report Download - page 28

Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations, continued
Legal Contingencies
The company’s results of operations could be affected by significant litigation adverse to the company, including
product liability claims, patent infringement claims and antitrust claims. The company records accruals for legal
matters when the information available indicates that it is probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact
and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain
to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure
involves substantial uncertainties that could cause actual costs to vary materially from estimates. In making
determinations of likely outcomes of litigation matters, management considers many factors. These factors include,
but are not limited to, the nature of specific claims including unasserted claims, the company’s experience with
similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of
resolving the matter through alternative dispute resolution mechanisms and the matter’s current status.
Considerable judgment is required in determining whether to establish a litigation accrual when an adverse
judgment is rendered against the company in a court proceeding. In such situations, the company will not
recognize a loss if, based upon a thorough review of all relevant facts and information, management believes
that it is probable that the pending judgment will be successfully overturned on appeal. A detailed discussion of
significant litigation matters is contained in Note 19 to the Consolidated Financial Statements.
Income Taxes
The breadth of the company’s operations and the global complexity of tax regulations require assessments of
uncertainties and judgments in estimating the ultimate taxes the company will pay. The final taxes paid are
dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax
litigation and resolution of disputes arising from federal, state and international tax audits. The resolution of these
uncertainties may result in adjustments to the company’s tax assets and tax liabilities. It is reasonably possible that
changes from future completed tax examinations could be significant when compared to the company’s global
unrecognized tax benefits, however due to the uncertainty regarding the timing of completion of these audits and the
possible outcomes, a current estimate of the range of increase or decrease that may occur within the next twelve
months cannot be made.
Deferred income taxes result from differences between the financial and tax basis of the company’s assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances
are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances
against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as
well as successful implementation of various tax planning strategies. For example, changes in facts and
circumstances that alter the probability that the company will realize deferred tax assets could result in
recording a valuation allowance, thereby reducing the deferred tax asset and generating a deferred tax
expense in the relevant period. In some situations these changes could be material.
At December 31, 2007, the company had a net deferred tax asset balance of $4,750 million, net of valuation
allowance of $1,424 million. Realization of these assets is expected to occur over an extended period of time. As a
result, changes in tax laws, assumptions with respect to future taxable income and tax planning strategies could
result in adjustments to these assets.
Valuation of Assets
Assessment of the potential impairment of property, plant and equipment, goodwill, other purchased intangible
assets and investments in affiliates is an integral part of the company’s normal ongoing review of operations. Testing
for potential impairment of long-lived assets is significantly dependent on numerous assumptions and reflects
management’s best estimates at a particular point in time. The dynamic economic environments in which the
company’s businesses operate and key economic and business assumptions with respect to projected selling
prices, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based
on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in
assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as
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Part II