OI » Topics » Critical Accounting Estimates

This excerpt taken from the OI 10-Q filed May 6, 2009.

Critical Accounting Estimates

 

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

 

The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Property, Plant and Equipment

 

The net carrying amount of property, plant, and equipment (“PP&E”) at March 31, 2009 totaled $2,486.4 million, representing 32% of total assets.  Depreciation expense for the three months ended March 31, 2009 totaled $88.4 million, representing approximately 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

 

These excerpts taken from the OI 10-K filed Feb 17, 2009.

Critical Accounting Estimates

 

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

 

The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Property, Plant and Equipment

 

The net carrying amount of property, plant, and equipment (“PP&E”) at December 31, 2008 totaled $2,645.6 million, representing 33% of total assets.  Depreciation expense from continuing operations during 2008 totaled $431.0 million, representing approximately 5% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

 

Critical Accounting Estimates



 



The Company’s analysis and discussion of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP”).  The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities.  The Company
evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical
and other factors believed to be reasonable under the circumstances at the time
the financial statements are issued.  The
results of these estimates may form the basis of the carrying value of certain
assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and
circumstances different from those assumed, may differ from estimates.



 



The impact of, and any associated risks related to, estimates and
assumptions are discussed within Management’s Discussion and Analysis of
Financial Condition and Results of Operations, as well as in the Notes to the
Consolidated Financial Statements, if applicable, where estimates and
assumptions affect the Company’s reported and expected financial results.



 



The Company believes that accounting for property, plant and equipment,
impairment of long-lived assets, pension benefit plans, contingencies and
litigation, and income taxes involves the more significant judgments and
estimates used in the preparation of its consolidated financial statements.



 



Property, Plant and Equipment



 



The net carrying amount of
property, plant, and equipment (“PP&E”) at December 31, 2008 totaled
$2,645.6 million, representing 33% of total assets.  Depreciation expense from continuing
operations during 2008 totaled $431.0 million, representing approximately 5% of
total costs and expenses. Given the significance of PP&E and associated
depreciation to the Company’s consolidated financial statements, the
determinations of an asset’s cost basis and its economic useful life are
considered to be critical accounting estimates.



 



This excerpt taken from the OI 10-Q filed Nov 7, 2008.

Critical Accounting Estimates

 

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with

 

42



 

accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

 

The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Property, Plant, and Equipment

 

The net carrying amount of property, plant, and equipment (“PP&E”) at September 30, 2008 totaled $2,748.9 million, representing 30% of total assets.  Depreciation expense for the nine months ended September 30, 2008 totaled $339.3 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

 

This excerpt taken from the OI 10-Q filed Aug 8, 2008.

Critical Accounting Estimates

 

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

 

The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Property, Plant, and Equipment

 

The net carrying amount of property, plant, and equipment (“PP&E”) at June 30, 2008 totaled $3,003.7 million, representing 30% of total assets.  Depreciation expense for the six months ended June 30, 2008 totaled $229.2 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

 

This excerpt taken from the OI 10-Q filed May 9, 2008.

Critical Accounting Estimates

 

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

 

The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the

 

33



 

more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Property, Plant, and Equipment

 

The net carrying amount of property, plant, and equipment (“PP&E”) at March 31, 2008 totaled $2,995.2 million, representing 30% of total assets.  Depreciation expense for the three months ended March 31, 2008 totaled $113.6 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

 

This excerpt taken from the OI 10-K filed Feb 29, 2008.

Critical Accounting Estimates

 

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

 

The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

38



 

Property, Plant and Equipment

 

The net carrying amount of property, plant, and equipment (“PP&E”) at December 31, 2007 totaled $2,950.0 million, representing 32% of total assets.  Depreciation expense from continuing operations during 2007 totaled $423.4 million, representing over 5% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

 

This excerpt taken from the OI 10-Q filed Aug 7, 2007.

Critical Accounting Estimates

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

42




The impact of and any associated risks related to estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Property, Plant and Equipment

The net carrying amount of property, plant and equipment (“PP&E”) for continuing operations at June 30, 2007 totaled $2,857.4 million, representing 29% of total assets.  Depreciation expense for the first six months of 2007 for continuing operations totaled $209.7 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

This excerpt taken from the OI 10-Q filed May 10, 2007.

Critical Accounting Estimates

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

The impact of and any associated risks related to estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Property, Plant and Equipment

The net carrying amount of property, plant and equipment (“PP&E”) at March 31, 2007 totaled $3,158.1 million, representing 33% of total assets.  Depreciation expense for the first three months of 2007 totaled $110.7 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

This excerpt taken from the OI 10-K filed Mar 1, 2007.

Critical Accounting Estimates

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

The impact of and any associated risks related to estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

42




 

The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Property, Plant and Equipment

The net carrying amount of property, plant and equipment (“PP&E”) at December 31, 2006 totaled $3,193.7 million, representing 34% of total assets.  Depreciation expense during 2006 totaled $469.0 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting estimates.

This excerpt taken from the OI 10-Q filed Nov 9, 2006.

Critical Accounting Estimates

The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to pension benefit plans, contingencies and litigation, goodwill, and deferred tax assets.  Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances.  The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources.  Actual results, under conditions and circumstances different from those assumed, may differ from estimates.  The impact and any associated risks related to estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements appearing in the Company’s Annual Report on Form 10-K, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.

The Company believes that accounting for pension benefit plans, contingencies and litigation, goodwill, and deferred tax assets involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Pension Benefit Plans

Significant Estimates - The determination of pension obligations and the related pension expense or credits to operations involves significant estimates.  The most significant estimates are the discount rate used to calculate the actuarial present value of benefit obligations and the expected long-term rate of return on assets used in calculating the pension charges or credits for the year.  The Company uses discount rates based on yields of highly rated fixed income debt securities at the end of the year.  At December 31, 2005, the weighted average discount rate for all plans was 5.3%.  The Company uses an expected long-term rate of return on assets that is based on both past performance of the various plans’ assets and estimated future performance of the assets.  Due to the nature of the plans’ assets and the volatility of debt and equity markets, results may vary significantly from year to year.  For example, actual returns in

48




the Company’s two largest plans were negative in each of the years 2000-2002.  The returns exceeded 20% in 2003, 18% in 2004 and 10% in 2005.  The Company refers to average historical returns over longer periods (up to 10 years) in determining its expected rates of return because short-term fluctuations in market values do not reflect the rates of return the Company expects to achieve based upon its long-term investing strategy.  For 2006, the Company’s estimated weighted average expected long-term rate of return on pension assets is 8.1% compared to 8.4% for the year ended December 31, 2005.  The Company recorded pension expense totaling approximately $25.7 million and $2.8 million for the first nine months of 2006 and 2005, respectively, from its principal defined benefit pension plans.  The increase in net pension expense resulted from lower return rates, the use of an updated mortality table reflecting longer lifetimes, and higher amortization.  Depending on currency translation rates, the Company expects to record approximately $34.4 million of pension expense for the full year of 2006, compared with expense of $4.0 million for 2005.

Future effects on reported results of operations depend on economic conditions and investment performance.  For example, a one-half percentage point change in the actuarial assumption regarding the expected return on assets would result in a change of approximately $18 million in pretax pension expense for the full year 2006.  In addition, changes in external factors, including the fair values of plan assets and the discount rates used to calculate plan liabilities, could have a significant effect on the recognition of funded status as described below.

Recognition of Funded Status — In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158 (“FAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”.   FAS 158 requires employers to adjust the assets and liabilities related to defined benefit plans so that the amounts reflected on the balance sheet represent the overfunded or underfunded status of the plans.  These funded status amounts will be measured as the difference between the fair value of plan assets and benefit obligations as of the balance sheet date.  For pension plans, the fair value of plan assets will be compared to the Projected Benefit Obligation (“PBO”).  For other postretirement benefit plans, the fair value of plan assets will be compared to the Accumulated Postretirement Benefit Obligation (“APBO”). In the Company’s case, the required adjustments will result in a non-cash charge to the Accumulated Other Comprehensive Income component of share owners’ equity.  FAS No. 158 is effective for fiscal years ending after December 15, 2006, and therefore the Company will adopt its provisions effective as of December 31, 2006.  The Company will be required to write off a significant portion of its prepaid pension asset at December 31, 2006, and significantly reduce its reported net worth.  The Company is unable to project the amount of such write-off because it will be determined by the fair value of plan assets at December 31, 2006 and the PBO at that date.  At September 30, 2006, the prepaid asset was $994.2 million.

Funding and Credit Compliance - The Company believes it will not be required to make cash contributions to the U.S. plans for at least several years.  The covenants under the Company’s Secured Credit Agreement would not be affected by a reduction in the Company’s net worth if a significant non-cash charge was taken to write off the prepaid pension assets.

Contingencies and Litigation

The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot be estimated with certainty. The Company’s ability to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the expanding list of non-traditional

49




defendants that have been sued in this litigation, the continued use of litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the growing number of co-defendants that have filed for bankruptcy. The Company believes that the bankruptcies of additional co-defendants have resulted in an acceleration of the presentation and disposition of a number of claims, which would otherwise have been presented and disposed of over the next several years.  The Company continues to monitor trends which may affect its ultimate liability and continues to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company.

The Company conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review.  If the results of an annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated future asbestos-related costs, then the Company will record an appropriate charge to increase the accrued liability.  The Company believes that an estimation of the reasonably probable amount of the contingent liability for claims not yet asserted against the Company is not possible beyond a period of several years.  Therefore, while the results of future annual comprehensive reviews cannot be determined, the Company expects the addition of one year to the estimation period will result in an annual charge.

In the fourth quarter of 2005, the Company recorded a charge of $135.0 million ($86.0 million after tax) to increase its accrued liability for asbestos-related costs. This amount was reduced from the 2004 charge of $152.6 million.  The factors and developments that particularly affected the determination of this increase in the accrual included the following: (i) the 10% decline in yearly cash outlays; (ii) the slight decline in serious disease filings against the Company and the significant decline in the non-malignancy filings; (iii) the Company’s successful litigation record during the year; and (iv) legislative developments in several states.

The Company’s estimates are based on a number of factors as described further in Note 7 to the Consolidated Financial Statements.

Goodwill

As required by FAS No. 142, “Goodwill and Other Intangibles,” the Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment.  The Company conducts its evaluation as of October 1 of each year.  Goodwill impairment testing is performed using the business enterprise value (“BEV”) of each reporting unit which is calculated as of a measurement date by determining the present value of debt-free, after-tax projected future cash flows, discounted at the weighted average cost of capital of a hypothetical third party buyer.  This BEV is then compared to the book value of each reporting unit as of the measurement date to assess whether an impairment of goodwill may exist.

During the fourth quarter of 2005, the Company completed its annual testing and determined that impairment existed in the goodwill of its Asia Pacific Glass business unit.  Following a review of the unit’s identifiable assets, the Company recorded an impairment charge of $494.0 million to reduce the reported value of its goodwill.

If the Company’s projected future cash flows were substantially lower, or if the assumed weighted average cost of capital were substantially higher, the testing performed as of October

50




1, 2005, may have indicated an impairment of one or more of the Company’s other reporting units and, as a result, the related goodwill would also have been impaired.  However, based on the Company’s testing as of that date, modest changes in the projected future cash flows or cost of capital would not have created impairment in any other reporting unit.

The Company is in the process of performing its annual impairment testing as of October 1, 2006.  If the results of impairment testing confirm that a write down of goodwill is necessary, then the Company will record a charge in the fourth quarter of 2006.  In the event the Company would be required to record a significant write down of goodwill, the charge would have a material adverse effect on reported results of operations and net worth.

Deferred Tax Assets

FAS No. 109, “Accounting for Income Taxes,” requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  This assessment is largely dependent upon projected near-term profitability including the effects of tax planning.  Deferred tax assets and liabilities are determined separately for each tax jurisdiction in which the Company conducts its operations or otherwise incurs taxable income or losses.  In the United States, the Company has recorded significant deferred tax assets, the largest of which relate to net operating losses, capital losses, tax credits and the accrued liability for asbestos-related costs that are not deductible until paid.  The deferred tax assets are partially offset by deferred tax liabilities, the most significant of which relate to the prepaid pension asset and accelerated depreciation.  The Company has recorded a valuation allowance for the portion of U.S. deferred tax assets not offset by deferred tax liabilities.  Under the new accounting standard for recognition of the funded status of postretirement benefit plans (as described above under Pension Benefit Plans), the Company will be required to write off a significant portion of its prepaid pension asset, principally related to the U.S. pension plans.  The related deferred tax liability will also be written off.  As a result, the Company will likely be required to record an additional valuation allowance of as much as $350 million.

This excerpt taken from the OI 8-K filed Feb 2, 2006.

Critical Accounting Estimates

 

The Company recorded three non-cash charges in the fourth quarter of 2005 related to Critical Accounting Estimates disclosed in its Form 10-K for the year ended December 31, 2004 and Forms 10-Q for the first three quarterly reporting periods in 2005.

 

Asbestos

The Company conducted its annual comprehensive review of its asbestos-related liabilities and costs in connection with finalizing and reporting its results for the full year 2005. As a result of that review, the Company recorded a non-cash charge of $135.0 million to increase the accrual for future asbestos-related costs.  In 2004, the Company increased its accrual for future asbestos-related costs by $152.6 million. As of December 31, 2005, the Company’s accrual for future asbestos-related costs is $730.1 million of which $158.0 million is classified as a current liability.

 

Goodwill

As required by FAS No. 142, “Goodwill and Other Intangibles,” the Company evaluates goodwill annually for impairment. During the fourth quarter of 2005, the Company completed its annual impairment test of goodwill using business enterprise values.  As a result of that review, the Company recorded a non-cash charge of $494.0 million to write down a portion of the goodwill in its Asia Pacific Glass business unit. The primary reason for the decline in business enterprise value is lower

 



 

projected cash flows caused by competitive pricing pressures in the Company’s Australian glass operations.

 

Deferred Tax Assets

In accordance with FAS No. 109, “Accounting for Income Taxes,” the Company recorded a non-cash charge of $306.6 million in the fourth quarter of 2005 to increase the valuation allowance against its accumulated net deferred tax assets in the United States.  The Company had recorded net deferred tax assets related principally to asbestos charges and net operating losses in recent years.  The amount of valuation allowance required under the provisions of FAS No. 109 is dependent upon projected near-term U.S. profitability including the effects of tax planning.  During the fourth quarter of 2005, the Company determined that an additional valuation allowance was necessary because of the near-term effects on U.S. profitability of continued asbestos-related payments, significant interest expense, rising energy costs and other cost increases.

 

As a result of not being able to provide a tax benefit on its U.S. losses, the Company expects that its global effective tax rate will be in the range of 38% to 40% for 2006.  The Company believes that its global cash tax payments in 2006 should remain within prior year levels of $125 million to $135 million.

 

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