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ACCOUNTING MATTERS
Critical Accounting Policies Our critical accounting policies involve a higher degree of judgment and estimates. They also have a high degree of complexity. In accounting, we base our judgments and estimates on: • historical experience; and • assumptions we believe are appropriate and reasonable under current circumstances. Actual results, however, may differ from the estimated amounts we have recorded. Our most critical accounting policies relate to our: • pension and postretirement benefit plans; • potential impairments of long-lived assets and goodwill; • legal, environmental and product liability reserves; and • depletion accounting. Details about our other significant accounting policies—what we use and how we estimate—are in Note 1: Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements. PENSION AND POSTRETIREMENT BENEFIT PLANS We sponsor several pension and postretirement benefit plans for our employees. Key assumptions we use in accounting for the plans include our: • discount rate; • expected rate of return; • anticipated trends in health care costs; • assumed increases in salaries; and • mortality rates. At the end of every year, we review our assumptions with external advisers and make adjustments as appropriate. Actual experience that differs from our assumptions or any changes in our assumptions could have a significant effect on our financial position and results and cash flows. Other factors that affect our accounting for the plans include: • actual pension fund performance; • plan changes; and • changes in plan participation or coverage. This section provides more information about our: • expected rate of return; • discount rate; and • cash contributions. Expected Long-Term Rate of Returns Our expected rate of return on our plan assets is 9.5 percent. Plan assets are assets of the pension plan trusts that fund the benefits provided under the pension plan. The expected long-term rate of return is our estimate of the long-term rate of return that our plan assets will earn. Every year, we review all available information – including returns for the last 23 years – and make the estimate accordingly. The review date for our current expected rate of return was December 30, 2007. Our expected rate of return is important in determining the cost of our plans. Every 0.5 percent decrease in our expected rate of return would increase expense or reduce a credit by approximately: • $26 million for our U.S. qualified pension plans; and • $5 million for our Canadian registered pension plans. Likewise, every 0.5 percent increase in our expected rate of return would decrease expense or increase a credit by those same amounts. Discount Rate Our discount rate as of December 30, 2007 is: • 6.5 percent for our U.S. plans – compared with 5.8 percent at December 31, 2006; and • 5.5 percent for our Canadian plans – compared with 5.15 percent at December 31, 2006. We review our discount rates annually and revise them as needed. The discount rates are selected at the measurement date by matching current spot rates of high-quality corporate bonds with maturities similar to the timing of expected cash outflows for benefits. Our discount rate is important in determining the cost of our plans. A 0.5 percent decrease in our discount rate would increase expense or reduce a credit by approximately: • $26 million for our U.S. qualified pension plans; and • $1 million for our Canadian registered pension plans. Pension and postretirement benefit expenses for 2008 will be based on the 6.5 percent assumed discount rate for U.S. plans and 5.5 percent for the Canadian plans. Contributions Made and Benefits Paid During 2007: • We were not required and did not make any contributions to our U.S. qualified plans. • We contributed approximately $22 million to our U.S. nonqualified plans. • We contributed approximately $14 million to our Canadian registered and nonregistered plans in accordance with minimum funding rules in accordance with the respective provincial regulations. • We contributed approximately $64 million to our U.S. and Canadian other postretirement plans. During 2008: • We do not expect to have to fund our U.S. qualified plans. • We expect to fund approximately $17 million to our U.S. nonqualified plans. • We expect to fund approximately $3 million to our Canadian plans (registered and nonregistered). • We expect to fund approximately $63 million to our U.S. and Canadian other postretirement plans. LONG-LIVED ASSETS AND GOODWILL We review the carrying value of our long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable through future operations. The carrying value is the amount assigned to long-lived assets – including goodwill – in our books. In addition, we review the amount of goodwill we carry on our books in the fourth quarter of every year. An impairment occurs when the fair market value of our goodwill drops below our carrying value or when the carrying value of long-lived assets will not be recovered from future cash flows. Fair market value is the amount we would get if we were to sell the assets. In determining fair market value and whether impairment has occurred, we are required to estimate: • future cash flows; • residual values; and • fair values of the assets. Key assumptions we use in developing the estimates include: • probability of alternative outcomes; • product pricing; • raw material costs; • product sales; and • discount rate. Effect of Acquisitions We have made substantial acquisitions in recent years. The acquisitions make up a large portion of the net book value – or carrying value – of our property and equipment and timber and timberlands. As a result, a large portion of our long-lived assets have carrying amounts that reflect relatively current values. Goodwill Update Our goodwill was $2.2 billion as of December 30, 2007. That amount represents approximately 9 percent of our consolidated assets. All of our reporting units passed the annual goodwill impairment test during the fourth quarter of 2007. During 2007, we recognized approximately $30 million of goodwill impairments in our Wood Products reporting units in connection with our building products distribution centers. Further restructuring activities, protracted economic weakness, or poor operating results, among other factors, could trigger an impairment of goodwill of the Wood Products reporting units in the near term. As of December 30, 2007, the carrying amount of goodwill for the Wood Products reporting units was $813 million. LEGAL, ENVIRONMENTAL AND PRODUCT LIABILITY RESERVES We record contingent liabilities when: • it becomes probable that we will have to make financial payments; and • the amount of loss can be reasonably estimated. Legal Matters Determining our liabilities for legal matters requires projections about the outcome of litigation and the amount of our financial responsibility. We base our projections on: • historical experience; and • recommendations of legal counsel. While we do our best in developing our projections, litigation is still inherently unpredictable, and excessive verdicts occur. Details about our legal exposures and proceedings are discussed in Note 16: Legal Proceedings, Commitments and Contingencies of Notes to Consolidated Financial Statements. These exposures and proceedings are significant. Ultimate negative outcomes could be material to our operating results or cash flow in any given quarter or year. Environmental Matters Determining our liabilities for environmental matters requires estimates of future remediation alternatives and costs. We base our estimates on: • detailed evaluations of relevant environmental regulations; • physical and risk assessments of our affected sites; • assumptions of probable financial participation by other known potentially responsible parties; and • amounts that we will receive from insurance carriers – though not recorded until we have a binding agreement with the carriers. Product Liability Matters We record reserves for contingent product liability matters when it becomes probable we will make financial payment. Determining the amount of reserves we record requires projections of future claims rates and amounts. The hardboard siding reserve is our sole material product liability reserve and is discussed in detail under Note 16: Legal Proceedings, Commitments and Contingencies of Notes to Consolidated Financial Statements. DEPLETION We record depletion – the costs attributed to timber harvested – as trees are harvested. To calculate our depletion rate, which is updated annually, we: • take the total cost of the timber, minus previously recorded depletion; and • divide by the total timber volume estimated to be harvested during the harvest cycle. Estimating the volume of timber available for harvest over the harvest cycle requires the consideration of many factors. They include: • changes in weather patterns; • effect of fertilizer and pesticide applications; • changes in environmental regulations and restrictions; • limits on harvesting certain timberlands; • changes in harvest plans; • scientific advancement in seedling and growing technology; and • changes in harvest cycles. In addition, the length of the harvest cycle varies by geographic region and species of timber. Depletion rate calculations do not include estimates for: • future silviculture – or sustainable forest management – costs associated with existing stands; • future reforestation costs associated with a stand’s final harvest; and • future volume in connection with the replanting of a stand subsequent to its final harvest. Prospective Accounting Pronouncements A summary of our prospective accounting pronouncements is in Note 1: Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements. |