E-Z-GO 2011 Annual Report Download - page 50

Retirement Benefits
We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and
postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these
obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost
projections. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover
and rate of compensation increases. We evaluate and update these assumptions annually.
To determine the weighted-average expected long-term rate of return on plan assets, we consider the current and expected asset
allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will
increase pension expense. For 2011, the assumed expected long-term rate of return on plan assets used in calculating pension
expense was 7.84%, compared with 8.26% in 2010. In 2011 and 2010, the assumed rate of return for our domestic plans, which
represent approximately 90% of our total pension assets, was 8.00% and 8.50%, respectively. A 50-basis-point decrease in this
long-term rate of return in 2011 would have increased pension expense for our domestic plans by approximately $22 million.
The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the
current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed
income investments available for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change.
A lower discount rate increases the present value of the benefit obligations and increases pension expense. In 2011, the weighted-
average discount rate used in calculating pension expense was 5.71%, compared with 6.20% in 2010. For our domestic plans, the
assumed discount rate was 5.75% in 2011, compared with 6.25% for 2010. A 50-basis-point decrease in this discount rate in 2011
would have increased pension expense for our domestic plans by approximately $23 million.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement liabilities. The 2011 medical
and prescription drug healthcare cost trend rates represent the weighted-average annual projected rate of increase in the per capita
cost of covered benefits. The 2011 medical rate of 9% is assumed to decrease to 5% by 2021 and then remain at that level. The
2011 prescription drug rate of 9% is assumed to decrease to 5% by 2021 and then remain at that level. See Note 13 to the
Consolidated Financial Statements for the impact of a one-percentage-point change in the cost trend rate.
Warranty Liabilities
We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods
ranging from one to five years. A significant portion of these liabilities arises from our commercial aircraft businesses. We also
may incur costs related to product recalls. We estimate the costs that may be incurred under warranty programs and record a
liability in the amount of such costs at the time product revenue is recognized. Factors that affect this liability include the number
of products sold, historical costs per claim, contractual recoveries from vendors, and historical and anticipated rates of warranty
claims, including production and warranty patterns for new models. During our initial aircraft model launches, we typically incur
higher warranty-related costs until the production process matures, at which point warranty costs moderate. We assess the
adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary.
Adjustments are made to accruals as claim data and actual experience warrant. Should future warranty experience differ materially
from our historical experience, we may be required to record additional warranty liabilities, which could have a material adverse
effect on our results of operations and cash flows in the period in which these additional liabilities are required.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of
assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted
tax rates in effect for the year taxes are expected to be paid or recovered. Deferred income tax assets represent amounts available
to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions
and credits by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing
taxable temporary differences, taxable income in carryback years, available tax planning strategies and estimated future taxable
income. We recognize net tax-related interest and penalties for continuing operations in income tax expense.
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 of the potential outcome for any uncertain tax issue is highly judgmental. We assess our
income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts,
circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax
benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon
settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where
applicable. We recognize net tax-related interest and penalties for continuing operations in income tax expense. If we do not
believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results
may include favorable or unfavorable adjustments to our estimated tax liabilities due to settlement of income tax examinations,
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