Sunoco 2007 Annual Report Download - page 34

Critical Accounting Policies
A summary of the Company’s significant accounting policies is included in Note 1 to the
consolidated financial statements. Management believes that the application of these poli-
cies on a consistent basis enables the Company to provide the users of the financial state-
ments with useful and reliable information about the Company’s operating results and
financial condition. The preparation of Sunoco’s consolidated financial statements re-
quires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosures of contingent assets and li-
abilities. Significant items that are subject to such estimates and assumptions consist of re-
tirement benefit liabilities, long-lived assets and environmental remediation activities.
Although management bases its estimates on historical experience and various other as-
sumptions that are believed to be reasonable under the circumstances, actual results may
differ to some extent from the estimates on which the Company’s consolidated financial
statements are prepared at any point in time. Despite these inherent limitations, manage-
ment believes the Company’s Management’s Discussion and Analysis of Financial Con-
dition and Results of Operations and consolidated financial statements provide a
meaningful and fair perspective of the Company. Management has reviewed the assump-
tions underlying its critical accounting policies with the Audit Committee of Sunoco’s
Board of Directors.
Retirement Benefit Liabilities
Sunoco has both funded and unfunded noncontributory defined benefit pension plans
which provide retirement benefits for approximately one-half of its employees. Sunoco also
has postretirement benefit plans which provide health care benefits for substantially all of
its retirees. The postretirement benefit plans are unfunded and the costs are shared by
Sunoco and its retirees. The levels of required retiree contributions to these plans are ad-
justed periodically, and the plans contain other cost-sharing features, such as deductibles
and coinsurance. In addition, in 1993, Sunoco implemented a dollar cap on its future con-
tributions for its principal postretirement health care benefits plan, which significantly
reduces the impact of future cost increases on the estimated postretirement benefit expense
and benefit obligation.
The principal assumptions that impact the determination of both expense and benefit obli-
gations for Sunoco’s pension plans are the discount rate, the long-term expected rate of
return on plan assets and the rate of compensation increase. The discount rate and the
health care cost trend are the principal assumptions that impact the determination of ex-
pense and benefit obligations for Sunoco’s postretirement health care benefit plans.
The discount rates used to determine the present value of future pension payments and
medical costs are based on a portfolio of high-quality (AA rated) corporate bonds with
maturities that reflect the duration of Sunoco’s pension and other postretirement benefit
obligations. The present values of Sunoco’s future pension and other postretirement obliga-
tions were determined using discount rates of 6.25 and 6.10 percent, respectively, at De-
cember 31, 2007 and 5.85 and 5.80 percent, respectively, at December 31, 2006. Sunoco’s
expense under these plans is determined using the discount rate as of the beginning of the
year, which for pension plans was 5.85 percent for 2007, 5.60 percent for 2006, 5.75 percent
for 2005, and will be 6.25 percent for 2008, and for postretirement plans was 5.80 percent
for 2007, 5.50 percent for 2006, 5.50 percent for 2005, and will be 6.10 percent for 2008.
The long-term expected rate of return on plan assets was assumed to be 8.25 percent for
both 2007 and 2006 and 8.50 percent for 2005, while the rate of compensation increase
was assumed to be 4.00 percent for each of the last three years. A long-term expected rate
of return of 8.25 percent on plan assets and a rate of compensation increase of 4.00 percent
will be used to determine Sunoco’s pension expense for 2008. The expected rate of return
on plan assets is estimated utilizing a variety of factors including the historical investment
return achieved over a long-term period, the targeted allocation of plan assets and expect-
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