No. 146, costs are recognized when a liability has been incurred under general concepts. For instance, under pre-existing literature, plant closure costs would be accrued at the plan commitment date. Under SFAS No. 146, these costs would be recognized as clo- sure activities are performed. These provisions could be expected to have the general effect of delaying recognition of certain costs related to restructuring programs. However, adoption of this stan- dard did not have a significant impact on the Company’s 2003 fi- nancial results. Refer to Notes 2 and 3 for further information on the Company’s exit activities during the periods presented. With respect to guarantees entered into or modified after December 31, 2002, the Company has applied guidance con- tained in FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirement for recognition of a liability by a guarantor at the inception of the guarantee, based on the fair value of the non-con- tingent obligation to perform. Application of this guidance did not have a significant impact on the Company’s 2003 financial results. During January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities,” which was later amended by FIN 46-R issued in December 2003. Under previous practice, entities were included in consolidated financial state- ments based on controlling voting interests. Under this interpreta- tion, previously unconsolidated entities (referred to as “variable in- terest entities”) may be included in the consolidated financial statements of the “primary beneficiary” as a result of non-voting financial interests that are established through contractual or other means. This interpretation is generally effective with the Company’s fiscal 2004 first quarter. Management does not cur- rently believe these requirements are applicable to any existing fi- nancial arrangement of the Company. In May 2003, the EITF reached consensus on Issue No. 01-8 “Determining Whether an Arrangement Contains a Lease.” This con- sensus provides criteria for identifying “in-substance” leases of plant, property, and equipment within supply agreements, service contracts, and other arrangements not historically accounted for as leases. This guidance is generally applicable to arrangements entered into or modified in interim periods beginning after May 28, 2003. The Company has applied this consensus prospectively beginning in its fiscal third quarter of 2003. Management believes this guidance may apply to certain future agreements with contract manufacturers that produce or pack the Company’s products, potentially resulting in cap- ital lease recognition within the balance sheet. However, the impact of this consensus during 2003 was insignificant. On March 26, 2001, the Company acquired Keebler Foods Company (“Keebler”) in a cash transaction valued at $4.56 billion. The acquisition was accounted for under the purchase method and The preparation of financial statements in conformity with gener- ally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of as- sets and liabilities and disclosure of contingent assets and liabili- ties at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) became law. The Act in- troduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. At present, detailed regulations necessary to implement the Act have not been issued, including those that would specify the manner in which actuarial equivalency must be determined and the evidence required to demonstrate actuarial equivalency to the Secretary of Health and Human Services. Furthermore, the FASB has not yet issued authoritative guidance on accounting for subsidies provided by the Act. To address this uncertainty, in January 2004, the FASB issued Staff Position (FSP) FAS 106-1, which permits plan sponsors to make a one-time elec- tion to defer recognition of the effects of the Act in accounting for and making disclosures for postretirement benefit plans until au- thoritative guidance is issued. Accordingly, the Company has made this deferral election. However, when issued, this authoritative guidance could require the Company to change previously re- ported information. Based on current plan design, management believes certain health care benefit plans covering a significant portion of the Company’s U.S. workforce are likely to qualify for this subsidy, which once recognized, could result in a moderate re- duction in our annual health care expense. Kellogg Company 37 Note 2 Keebler acquisition Use of estimates Leasing Variable interest entities Medicare prescription benefits Guarantees Extinguishment of debt Net earnings for 2001 originally included an extraordinary loss of $7.4 million, net of tax benefit of $4.2 million ($.02 per share), re- lated to the extinguishment of $400 million of long-term debt. Effective with its 2003 fiscal year, the Company adopted SFAS No. 145, a technical corrections pronouncement which in part, re- scinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” Under SFAS No. 145, generally, debt ex- tinguishments are no longer classified as extraordinary items. Accordingly, the extraordinary loss for 2001 has been reclassified to conform to the presentation for 2003 and subsequent years.