DuPont 2011 Annual Report Download - page 33

Table of Contents
Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
probable that the pending judgment will be successfully overturned on appeal. A detailed discussion of significant litigation matters is contained in Note 15 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 taxes
the company will ultimately 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 in the normal course of business. The resolution of
these uncertainties may result in adjustments to the company's tax assets and tax liabilities. It is reasonably possible that changes to the company's global
unrecognized tax benefits could be significant, however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current
estimate of the range of increases or decreases 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, 2011 , the company had a deferred tax asset balance of $8.0 billion, net of valuation allowance of $2.0 billion. 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. See Note 5 to the Consolidated Financial Statements for additional details related to the deferred tax asset
balance.
Valuation of Assets
The assets and liabilities of acquired businesses are measured at their estimated fair values at the dates of acquisition. The excess of the purchase price over
the estimated fair value of the net assets acquired, including identified intangibles, is recorded as goodwill. The determination and allocation of fair value to
the assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment,
including estimates based on historical information, current market data and future expectations. The principal assumptions utilized in the company's
valuation methodologies include revenue growth rates, operating margin estimates and discount rates. Although the estimates were deemed reasonable by
management based on information available at the dates of acquisition, those estimates are inherently uncertain.
Assessment of the potential impairment of property, plant and equipment, goodwill, other intangible assets and investments in affiliates is an integral part of
the company's normal ongoing review of operations. Testing for potential impairment of these 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 diversified 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 well as the time in which such impairments are
recognized.
Based on the results of the company's annual goodwill impairment test in 2011, no impairments exist at this time. The company's methodology for estimating
the fair value of its reporting units is using the income approach based on the present value of future cash flows. The income approach has been generally
supported by additional market transaction analyses. There can be no assurance that the company's estimates and assumptions regarding forecasted cash flow
and revenue and operating income growth rates made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future.
The company believes the current assumptions and estimates utilized are both reasonable and appropriate.
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