Management's discussion analysis
Vendor allowances
Income taxes
Leases and sale and lease back transactions
claims incurred but not yet reported in addition to expenses
incurred in the claim settlement process that can be directly
associated with specific claims. We recognize estimates for
claims using actuarial information, which is based on
various assumptions that include, but are not limited to,
historical loss experience, projected loss development
factors, actual payroll costs, estimated changes in claim
reporting patterns, claim settlement patterns, judicial
decisions, legislation and economic conditions. The
provision is discounted based on the risk-free rate
associated with the estimated payments of the liability,
which, as of January 1, 2006, was 4.34%.
For a full discussion of our accounting treatment for claims
and provisions, including our self-insurance program, see
Notes 3 and 25 to our consolidated financial statements
included in this annual report.
We receive various types of vendor allowances, including
volume-based allowances and promotional allowances.
These allowances take the form of up-front payments (such
as lump sum payments or prepaid amounts), rebates (in the
form of cash or credits) or other forms of payment.
We treat the allowances we receive from vendors as a
reduction in the price paid for the product, unless there is
clear evidence that it should be classified as revenue or a
reimbursement of costs. We recognize vendor allowances
only where there is evidence of a binding arrangement with
the vendor and receipt is both probable and estimable.
Any allowances relating to product that is still in ending
inventories are deferred until the related product is sold.
The accounting for vendor allowances requires a number of
estimates. First, we must estimate the allowances that are
earned based on fulfillment of our related obligations, many
of which require us to estimate the volume of purchases that
will be made during a period of time. Secondly, we need to
estimate the amount of related product that was sold to the
customer and the amount that remains in ending inventories
and accordingly allocate the allowance to cost of sales or
inventories. We make this estimate based on the turnover of
the inventories and allocate a portion of the related vendor
allowance to ending inventories until such product is
estimated to be sold to customers.
The amounts posted for vendor allowances remain subject to
estimates that may differ from actual outcomes. We evaluate
our vendor allowance arrangements on a regular basis to
assess the probability that relevant volume milestones will
be achieved, based on actual sales and purchase levels to
date and expected sales or purchase levels for the remainder
of the year.
For a full discussion of our accounting treatment of vendor
allowances, see Note 3 to our consolidated financial
statements included in this annual report.
We are subject to income taxes in several tax jurisdictions
and have to comply with the tax laws of these jurisdictions.
Significant judgment is required in determining the
consolidated provision for income taxes. The ultimate
tax effects of certain transactions can be uncertain for a
considerable period of time, requiring management to
estimate the related current and deferred tax provisions. We
recognize liabilities for anticipated tax audit issues based on
estimates of whether additional taxes will be due. Where the
final tax outcome of such matters differs from the amounts
that were initially recognized, such differences will impact
the income tax expense and the deferred tax positions in
the period in which such determinations are made.
We have material tax loss carry forward positions, for which
deferred tax assets are recognized to the extent that it is
probable that future taxable income, as estimated from time
to time by management, will be available against which
these tax losses can be utilized.
For a full discussion of our accounting treatment of income
taxes, see Notes 3 and 11 to our consolidated financial
statements included in this annual report.
Determining whether a lease agreement is a finance or an
operating lease requires judgment as to whether the
agreement transfers substantially all the risks and rewards of
ownership to us. Judgment is required on various aspects
that include, but are not limited to, the fair value of the
leased asset, the economic life of the leased asset, whether
or not to include renewal options in the lease term and
determining an appropriate discount rate to calculate the
present value of the minimum lease payments. Classification
as a finance or operating lease determines whether the
leased asset is treated on-balance or off-balance.
In sale and leaseback transactions, the classification of the
leaseback determines how the gain or loss on the
transaction is recognized. It is either deferred and amortized
(finance lease) or recognized immediately (operating lease).
In classifying the leaseback, similar judgments have to be
made as described above.
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