Emerson 2005 Annual Report Download - page 40

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rate of return on plan assets to 8.0 percent. Defined benefit pension plan expense is expected to increase
approximately $60 million in 2006. As of the June 30, 2005 measurement date, the fair value of plan assets
exceeded the accumulated benefit obligation for the primary defined benefit pension plan by approximately
$150 million. If the performance of the equity and bond markets in 2006 eliminates the excess, the
Company could be required to record an after-tax charge to equity of approximately $530 million. The
Company contributed $124 million to defined benefit plans in 2005 and expects to contribute approximately
$75 million to $150 million in 2006. See Note 10.
Income Taxes
Income tax expense and deferred tax assets and liabilities reflect management’s assessment of actual
future taxes to be paid on items reflected in the financial statements. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which the temporary differences between the
consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the
enactment date. No provision is made for U.S. income taxes on the undistributed earnings of non-U.S.
subsidiaries. These earnings are permanently invested or otherwise indefinitely retained for continuing
international operations. Determination of the amount of taxes that might be paid on these undistributed
earnings if eventually remitted is not practicable. See Note 13.
The American Jobs Creation Act of 2004 (the Act) was signed into law on October 22, 2004. The Act repeals
an export tax benefit, provides for a 9 percent deduction on U.S. manufacturing income, and allows the
repatriation of foreign earnings at a reduced rate for one year, subject to certain limitations. Based on
fiscal year 2005 and when fully phased-in, management estimates that the repeal of the export tax benefit
will increase income tax expense approximately $25 million per year but expects a significant portion of
this cost to be offset by the deduction on manufacturing income. During 2005, the Company repatriated
approximately $1.4 billion ($1.8 billion in total) of cash from undistributed earnings of non-U.S. subsidiaries
under the Act. As a result, the Company recorded a tax expense of $63 million, or $0.15 per share, in 2005.
New Accounting Pronouncements
Effective October 1, 2002, Emerson adopted the fair value method provisions of Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and began expensing options
granted, modified or settled after September 30, 2002, based on their fair value at date of grant over the
vesting period, generally three years. In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R).
FAS 123R requires recognizing compensation costs related to share-based payment transactions, including
previously issued unvested awards outstanding upon adoption of the statement, primarily based on the
grant-date fair value of the equity or liability instruments issued. In addition, liability awards are remeasured
based on their fair value each reporting period until settled. FAS 123R was adopted as of July 1, 2005, and did
not have a material impact on the financial statements.
In March 2005, the Financial Accounting Standards Board published FASB Interpretation No. 47, “Accounting
for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies the term “conditional asset retirement
obligation” used in FASB Statement No. 143, “Accounting For Asset Retirement Obligations,” and when
an entity would have sufficient information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47, which is effective for fiscal years ending after December 15, 2005, is not expected to have
a material impact on the financial statements.
Annual dividends increased to a
record $1.66 per share in 2005,
representing the 49th consecutive
year of increases.
Dividends Per Share
$1.60
$1.20
$0.80
$0.40
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