E-Z-GO 2005 Annual Report Download - page 52

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in 2006, then decrease to 5% by 2013 and then remain at that level. See Note 14 to the Consolidated Financial Statements for the impact of a one-
percentage-point change in the cost trend rate.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and lia-
bilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of
available evidence, we recognized future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than
not that we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any
changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or Other Comprehensive Income (Loss), as
appropriate.
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in prior
carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes
to tax laws, changes to statutory tax rates and changes to future taxable income estimates. See Note 15 to the Consolidated Financial Statements
for further detail.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed
assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for
any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, or other relevant events. As a
result, our effective tax rate may fluctuate significantly on a quarterly basis.
Recently Adopted Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123-
R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”. SFAS No. 123-R requires companies to measure compensation costs for share-based payments to
employees, including stock options, at fair value and expense such compensation over the service period beginning with the first interim or
annual period after June 15, 2005. In April 2005, the Securities and Exchange Commission delayed the transition date for companies to the first
fiscal year beginning after June 15, 2005, effectively delaying Textron’s required adoption of SFAS No. 123-R until the first quarter of 2006.
Textron elected to adopt SFAS No. 123-R in the first quarter of 2005 using the modified prospective method. Under this transition method, com-
pensation expense recognized in 2005 includes: a) compensation cost for all stock options and restricted stock granted prior to but not yet vested
as of January 1, 2005, based on the grant-date fair value estimated and recognized in accordance with the provisions of SFAS No. 123 and b)
compensation cost for all stock options and restricted stock granted subsequent to January 1, 2005, and all share-based compensation awards
accounted for as liabilities, based upon the measurement and recognition provisions of SFAS No. 123-R. For awards granted or modified in 2005
and prospectively, compensation costs for awards with only service conditions that vest ratably are recognized on a straight-line basis over the
requisite service period for each separately vesting portion of the award. Compensation costs for awards granted prior to 2005 are recognized
using the attribution methods required under SFAS No. 123. Upon adoption, Textron re-measured its share-based compensation awards that are
accounted for as liabilities at fair value. The cumulative effect of adoption upon this re-measurement resulted in an increase to net income of
approximately $1 million in the first quarter of 2005, which is not considered to be material and is recorded in selling and administrative expense.
Adoption of SFAS No. 123-R resulted in recognition of stock option costs in 2005. The stock option costs are included primarily in selling and
administrative expense and totaled approximately $15 million for continuing operations and $2 million for discontinued operations in 2005. In
accordance with the modified prospective method, prior periods have not been restated. No compensation expense related to stock option grants
has been recorded in the Consolidated Statement of Operations for 2003 and 2004, as all of the options granted had an exercise price equal to the
market value of the underlying stock on the date of grant.
As of December 31, 2005, $58 million represents the total compensation cost associated with unvested share-based compensation awards sub-
ject only to service conditions that has not yet been recognized. Textron expects that this compensation will be recognized over a weighted-aver-
age period of approximately two years. As of December 31, 2005, $25 million represents the total compensation cost associated with unvested
share-based compensation awards subject to performance vesting conditions that has not yet been recognized. Textron expects that this compen-
sation will be recognized over a weighted-average period of approximately two years.
Textron Inc.