Equifax 2010 Annual Report Download - page 34

We also use our judgment to determine whether it is more likely than
not that we will sustain positions that we have taken on tax returns
and, if so, the amount of benefit to initially recognize within our
financial statements. We review our uncertain tax positions and adjust
our unrecognized tax benefits in light of changes in facts and
circumstances, such as changes in tax law, interactions with taxing
authorities and developments in case law. These adjustments to our
unrecognized tax benefits may affect our income tax expense. Settle-
ment of uncertain tax positions may require use of our cash. At
December 31, 2010, $27.9 million was recorded for uncertain tax
benefits, including interest and penalties, of which it is reasonably
possible that up to $7.1 million of our unrecognized tax benefit may
change within the next twelve months.
Effect if actual results differ from assumptions — Although manage-
ment believes that the judgments and estimates discussed herein are
reasonable, actual results could differ, and we may be exposed to
increases or decreases in income tax expense that could be material.
Pension and Other Postretirement Plans
We consider accounting for our U.S. and Canadian pension and
other postretirement plans critical because management is required
to make significant subjective judgments about a number of actuarial
assumptions, which include discount rates, salary growth, expected
return on plan assets, interest cost and mortality and retirement rates.
Actuarial valuations are used in determining our benefit obligation and
net periodic benefit cost.
Judgments and uncertainties — We believe that the most significant
assumptions related to our net periodic benefit cost are (1) the
discount rate and (2) the expected return on plan assets.
We determine our discount rates primarily based on high-quality,
fixed-income investments and yield-to-maturity analysis specific to
our estimated future benefit payments available as of the measure-
ment date. Discount rates are updated annually on the measurement
date to reflect current market conditions. We use a publicly published
yield curve to develop our discount rates. The yield curve provides
discount rates related to a dedicated high-quality bond portfolio
whose cash flows extend beyond the current period, from which we
choose a rate matched to the expected benefit payments required for
each plan.
The expected rate of return on plan assets is based on both our
historical returns and forecasted future investment returns by asset
class, as provided by our external investment advisor. In setting the
long-term expected rate of return, management considers capital
markets future expectations and the asset mix of the plan invest-
ments. Prior to 2008, the U.S. Pension Plans investment returns were
10.9%, 13.0% and 7.5% over three, five and ten years, respectively.
The returns exceeded the S&P 500 returns for similar periods of time
primarily due to an asset allocation strategy where large allocations to
alternative asset classes (hedge fund of funds, private equity, real
estate and real assets) provided consistently higher returns with a low
correlation to equity market returns. These returns historically
demonstrate a long-term record of producing returns at or above the
expected rate of return. However, the dramatic adverse market
conditions in 2008 skewed the traditional measures of long-term
performance, such as the ten-year average return. The severity of the
2008 losses, approximately negative 20%, makes the historical ten-
year average return a less accurate predictor of future return
expectations. Our weighted-average expected rate of return for 2011
is 7.75% which is the same as the 2010 expected rate. In 2009, the
investment returns were approximately 16%, reflecting a partial
recovery of the 2008 losses. Our weighted-average expected rate of
return declined from 8.02% in 2009 to approximately 7.75% for 2010
primarily related to the U.S. Retirement Income Plan which
experienced lower growth due to our migration to a lower risk invest-
ment strategy, with increased allocation to lower risk/lower return
asset classes, as well as the current forecast of expected future
returns for our asset classes, which is lower than the prior year.
Annual differences, if any, between the expected and actual returns
on plan assets are included in unrecognized net actuarial gain. In
calculating the annual amortization of the unrecognized net actuarial
gain or loss, we use a market-related value of assets that smoothes
actual investment gains and losses on plan assets over a period up
to five years. The resulting unrecognized net actuarial gain or loss
amount is recognized in net periodic pension expense over the aver-
age remaining life expectancy of the participant group since almost all
participants are inactive. The market-related value of our assets was
$632.3 million at December 31, 2010. We do not expect our 2011
net periodic benefit cost, which includes the effect of the market-
related value of assets, to be materially different than our 2010 cost.
See Note 10 of the Notes to the Consolidated Financial Statements
for details on changes in the pension benefit obligation and the fair
value of plan assets.
Effect if actual results differ from assumptions — We do not believe
there is a reasonable likelihood that there will be a material change in
the future estimates or assumptions that are used in our actuarial
valuations. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to changes in pen-
sion expense that could be material. Adjusting our expected long-
term rate of return (7.73% at December 31, 2010) by 50 basis points
would change our estimated pension expense in 2011 by
approximately $3.1 million. Adjusting our weighted-average discount
rate (5.77% at December 31, 2010) by 50 basis points would change
our estimated pension expense in 2011 by approximately
$1.1 million.
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 inter-
est rates, that could impact our results of operations and financial
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
EQUIFAX 2010 ANNUAL REPORT
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