claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age group and other demo- graphic trends. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the un- derlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary, to remain consis- tent with our historical model, as well as any expectations regard- ing short-term future trends. Our 2004 initial trend rate of 8.5% compares to our recent five-year compound annual growth rate of approximately 7%. Our initial rate is trended downward by 1% per year, until the ultimate trend rate is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. The current ultimate trend rate of 4.5% is based on a long-term inflation assumption of 2.5% plus a 2% premium. To conduct our annual review of discount rates, we use several published market indices with appropriate duration weighting to assess prevailing rates on high quality debt securities. We also pe- riodically use third party financial consultants to model specific AA-rated (or the equivalent in foreign jurisdictions) bond issues against the expected settlement cash flows of our plans. The measurement dates for our benefit plans are generally consistent with our Company’s fiscal year end. Thus, we select discount rates to measure our benefit obligations that are consistent with market indices during December of each year. Despite the above-described rigorous policies for selecting major actuarial assumptions, we periodically experience differences be- tween assumed and actual experience. For 2004, we currently ex- pect incremental amortization of experience losses of approxi- mately $20 million, arising largely from a decline in discount rates at year-end 2003. Assuming actual future experience is consistent with our current assumptions, annual amortization of accumulated experience losses during each of the next several years would re- main approximately level with the 2004 amount. Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions Income taxes in which we operate. Significant judgement is required in deter- mining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are supportable, we believe that certain positions are likely to be challenged and that we may not succeed. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective income tax rate in- cludes the impact of reserve provisions and changes to reserves that we consider appropriate. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. Favorable resolution would be recog- nized as a reduction to our effective tax rate in the year of resolu- tion. Our tax reserves are presented in the balance sheet princi- pally within accrued income taxes. Medicare prescription benefits 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, we have made this de- ferral election. However, when issued, this authoritative guidance could require us to change previously reported information. Based on current plan design, we believe certain health care benefit plans covering a significant portion of our U.S. workforce are likely to qualify for this subsidy, which once recognized, could result in a moderate reduction in our annual health care expense. 29 Kellogg Company