Equifax 2006 Annual Report Download - page 45

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EQUIFAX 2006 ANNUAL REPORT 43
inherently subjective. Changes in these assumptions in
future periods or an outcome different than our assumption
may have a material impact on our Consolidated
Financial Statements. For additional information about our
contingencies, see Note 6 of the Notes to Consolidated
Financial Statements.
Income Taxes
We account for income taxes in accordance with SFAS
No. 109, “Accounting for Income Taxes.” As part of the pro-
cess of preparing our Consolidated Financial Statements, we
are required to estimate our income taxes in each of the
domestic and international jurisdictions in which we oper-
ate. This process involves us estimating our current tax expo-
sure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included in our Consolidated Balance
Sheets. We are required to assess the likelihood that our net
deferred tax assets will be recovered from future taxable
income or other tax planning strategies. To the extent we
believe that recovery is not likely, we must establish a valua-
tion allowance to reduce the deferred tax asset to the amount
we estimate will be recoverable. To the extent we establish a
valuation allowance or increase this allowance in a period,
we must include an expense within the tax provision in the
Consolidated Statement of Income. A valuation allowance
is currently set against certain net deferred tax assets
because we believe it is more likely than not that these
deferred tax assets will not be realized through the genera-
tion of future taxable income or other tax planning strate-
gies. Signifi cant management judgment is required in
determining our provision for income taxes, our deferred
tax assets and liabilities, and our future taxable income for
purposes of assessing our ability to realize any future bene-
fi t from our deferred tax assets.
Our income tax provisions are based on assumptions
and calculations which will be subject to examination by
various tax authorities. We record tax benefi ts for positions
in which we believe they are probable of being sustained
under such examinations. Regularly, we assess the potential
outcome of such examinations to determine the adequacy
of our income tax accruals. We adjust our income tax provi-
sion during the period in which we determine that the
actual results of the examinations may differ from our esti-
mates. Changes in tax laws and rates are refl ected in our
income tax provision in the period in which they occur.
Changes in these assumptions in future periods or actual
results different from our estimates may have a material
impact on our Consolidated Financial Statements. For addi-
tional information about our income taxes, see Note 7 of the
Notes to Consolidated Financial Statements.
Pension Plans
Our pension plans are accounted for using actuarial valua-
tions required by SFAS 87 and, for the twelve months ended
December 31, 2006, SFAS 158. Our prepaid pension asset
and total accrued pension benefi t liability (including short-
term and long-term liabilities), in accordance with SFAS 158,
as of December 31, 2006, were $47.7 million, or 3% of total
assets, and $51.2 million, or 5% of the total liabilities, respec-
tively, on our Consolidated Balance Sheet. We consider
accounting for our U.S. and Canadian pension plans critical
because our management is required to make signifi cant
subjective judgments about a number of actuarial assump-
tions, which include discount rates, salary growth, expected
return on plan assets, interest cost and mortality rates.
We believe that the most signifi cant assumptions related
to our net periodic benefi t cost are (1) the expected return on
plan assets and (2) the discount rate. The expected rate of
return on plan assets is primarily based on two methods pre-
pared by an external advisor which consider, among other
things, (1) the expected equity returns based on assumptions
such as dividend yield and growth rate, and (2) estimated
risk premium for various asset categories. These assump-
tions are projected using an asset/liability forecasting model,
which produces a range and distribution of values for the
assumed rate of return. Adjusting our expected long-term
rate of return (7.99% at December 31, 2006) by 0.5% would
change our estimated pension expense in 2007 by approxi-
mately $2.7 million. We determine our discount rates pri-
marily based on high-quality, fi xed-income investments and
yield-to-maturity analysis specifi c to our estimated future
benefi t payments. Adjusting our weighted-average discount
rate (5.86% at December 31, 2006) by 0.5% would change
our estimated pension expense in 2007 by approximately
$2.6 million.
Depending on the assumptions and estimates used,
the pension expense could vary within a range of out-
comes and have a material impact on our Consolidated
Financial Statements. For additional information about
our pension plans, see Note 9 of the Notes to Consolidated
Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
In the normal course of our business, we are exposed to
market risk, primarily from changes in foreign currency
exchange rates and, to a lesser extent, to changes in interest
rates, that could impact our results of operations and fi nan-
cial position. We manage our exposure to these market
risks through our regular operating and fi nancing activities,
and, when deemed appropriate, through the use of derivative
fi nancial instruments, such as interest rate swaps, to hedge
certain of these exposures. We use derivative fi nancial instru-
ments as risk management tools and not for speculative or
trading purposes.