DuPont 2010 Annual Report Download - page 23

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Part II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Critical Accounting Estimates
The company’s significant accounting policies are more fully described in Note 1 to the Consolidated Financial
Statements. Management believes that the application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable information about the company’s operating results
and financial condition.
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles
in the United States of America (GAAP) requires management to make estimates and assumptions that affect the
reported amounts, including, but not limited to, receivable and inventory valuations, impairment of tangible and
intangible assets, long-term employee benefit obligations, income taxes, restructuring liabilities, environmental matters
and litigation. Management’s estimates are based on historical experience, facts and circumstances available at the
time and various other assumptions that are believed to be reasonable. The company reviews these matters and
reflects changes in estimates as appropriate. Management believes that the following represents some of the more
critical judgment areas in the application of the company’s accounting policies which could have a material effect on
the company’s financial position, liquidity or results of operations.
Long-term Employee Benefits
Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected
return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the company’s
pension and other long-term employee benefit plans. Management reviews these two key assumptions annually as of
December 31st. These and other assumptions are updated periodically to reflect the actual experience and
expectations on a plan specific basis as appropriate. As permitted by GAAP, actual results that differ from the
assumptions are accumulated on a plan by plan basis and to the extent that such differences exceed 10 percent of the
greater of the plan obligations or the applicable plan assets, the excess is amortized over the average remaining
service period of active employees.
About 80 percent of the company’s benefit obligation for pensions and essentially all of the company’s other long-term
employee benefit obligations are attributable to the benefit plans in the U.S. The company utilizes published long-term
high quality corporate bond indices to determine the discount rate at measurement date. Where commonly available,
the company considers indices of various durations to reflect the timing of future benefit payments.
Within the U.S., the company establishes strategic asset allocation percentage targets and appropriate benchmarks for
significant asset classes with the aim of achieving a prudent balance between return and risk. Strategic asset
allocations in other countries are selected in accordance with the laws and practices of those countries. Where
appropriate, asset-liability studies are also taken into consideration. The long-term expected return on plan assets in
the U.S. is based upon historical real returns (net of inflation) for the asset classes covered by the investment policy,
expected performance, and projections of inflation over the long-term period during which benefits are payable to plan
participants. Consistent with prior years, the long-term expected return on plan assets in the U.S. reflects the asset
allocation of the plan and the effect of the company’s active management of the plans’ assets.
In determining annual expense for the principal U.S. pension plan, the company uses a market-related value of assets
rather than its fair value. The market-related value of assets is calculated by averaging market returns over 36 months.
Accordingly, there may be a lag in recognition of changes in market valuation. As a result, changes in the fair value of
assets are not immediately reflected in the company’s calculation of net periodic pension cost. The following table
shows the market-related value and fair value of plan assets for the principal U.S. pension plan:
Principal U.S. Pension Plan
(Dollars in billions) 2010 2009 2008
Market-related value of assets $13.9 $14.0 $16.2
Fair value of plan assets $14.8 $13.9 $13.5
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