and other investments. We follow SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” for the measurement and recognition of obligations and expense re- lated to our retiree benefit plans. Embodied in both of these stan- dards is the concept that the cost of benefits provided during re- tirement should be recognized over the employees’ active working life. Inherent in this concept, therefore, is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuar- ial assumptions that require significant management judgment and have a material impact on the measurement of our consoli- dated benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom, and Canada. ture price discounts on our products; consumer coupons, contests, and loyalty programs; and similar activities. The costs of these ac- tivities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. Therefore, the recognition of these costs requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences be- tween estimated expense and actual redemptions are normally in- significant and recognized as a change in management estimate in a subsequent period. However, as our Company’s total promo- tional expenditures represented nearly 30% of 2003 net sales, the likelihood exists of materially different reported results if different assumptions or conditions were to prevail. Beginning in 2002, we follow SFAS No. 142 in evaluating impair- ment of goodwill and other intangible assets. Under this standard, goodwill impairment testing first requires a comparison between the carrying value and fair value of a reporting unit with associ- ated goodwill. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. The fair value of a reporting unit is based primarily on our assessment of profitability multiples likely to be achieved in a the- oretical sale transaction. Similarly, impairment testing of other in- tangible assets requires a comparison of carrying value to fair value of that particular asset. Fair values of non-goodwill intangi- ble assets are based primarily on projections of future cash flows to be generated from that asset. For instance, cash flows related to a particular trademark would be based on a projected royalty stream attributable to branded product sales. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. We periodically engage third party valuation consult- ants to assist in this process. At December 27, 2003, intangible as- sets, net, were $5.1 billion, consisting primarily of goodwill, trade- marks, and DSD delivery system associated with the Keebler acquisition. While we currently believe that the fair value of all of our intangibles exceeds carrying value, materially different as- sumptions regarding future performance of our snacks business or the weighted average cost of capital used in the valuations could result in significant impairment losses. To conduct our annual review of the long-term rate of return on plan assets, we work with third party financial consultants to model expected returns over a 20-year investment horizon with respect to the specific investment mix of our major plans. The return assump- tions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets includ- ing consideration of current yields on long-term bonds, price-earn- ings ratios of the major stock market indices, and long-term infla- tion. Our model currently incorporates a long-term inflation assumption of 2.5% and an active management premium of 1% (net of fees) validated by historical analysis. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are generally not revised, provided these rates continue to fall within a “more likely than not” corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our current assumed rate of return of 9.3% presently equates to approximately the 50th percentile expectation. Any future variance between the assumed and actual rates of re- turn on our plan assets is recognized in the calculated value of plan assets over a five-year period and once recognized, experi- ence gains and losses are amortized using a declining-balance method over the average remaining service period of active plan participants. Under this recognition method, a 100 basis point shortfall in actual versus assumed performance of all of our plan assets in year one would result in an arising experience loss of ap- proximately $20 million. The unfavorable impact on earnings in year two would be less than $1 million, increasing to approxi- mately $3 million in year five. Approximately 80% of this experi- ence loss would be amortized through earnings at the end of year 20. Experience gains are recognized similarly. To conduct our annual review of health care cost trend rates, we work with third party financial consultants to model our actual Our Company sponsors a number of U.S. and foreign defined ben- efit employee pension plans and also provides retiree health care and other welfare benefits in the United States and Canada. Plan funding strategies are influenced by tax regulations. A substantial majority of plan assets are invested in a globally diversified portfo- lio of equity securities with smaller holdings of bonds, real estate, Retirement benefits Intangibles 28 Earning Our Stripes