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($ in thousands in tables)
1. Summary
of Significant Accounting Policies
Nature of Operations Land O’Lakes, Inc. is
a diversified, farmer-owned food and agricultural cooperative serving
agricultural producers throughout the United States. Land O’Lakes
procures 13 billion pounds of member milk annually, markets more
than 300 dairy products and provides member cooperatives, farmers
and ranchers with an extensive line of agricultural supplies (including
feed, seed, crop nutrients and crop
protection products) and services.
Revenue Recognition Sales are recognized upon shipment
of product to the customer.
Statement Presentation The consolidated financial
statements include the accounts of Land O’Lakes, Inc. and
wholly-owned and majority-owned subsidiaries and limited liability
companies (“Land O’Lakes” or the “Company”).
Intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to the 2002 and 2001 consolidated
financial statements to conform to the 2003 presentation.
Cash and Short-Term Investments Cash and short-term
investments include short-term, highly liquid investments with original
maturities of three months or less.
Inventories Inventories are valued at the lower
of cost or market. Cost is determined on a first-in, first-out or
average cost basis.
Derivative Commodity Instruments The Company uses
derivative commodity instruments, primarily futures contracts, to
reduce the exposure to changes in commodity prices. These contracts
are not designated as hedges under Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” The futures contracts
are marked to market each month and gains and losses are recognized
in earnings.
Investments Investments in other cooperatives are
stated at cost plus unredeemed patronage refunds received, or estimated
to be received, in the form of capital stock and other equities.
Estimated patronage refunds are not recognized for tax purposes
until notices of allocation are received. The equity method of accounting
is used for investments in other companies in which Land O’Lakes
voting interest is 20 to 50 percent. Investments in less than 20
percent-owned companies are stated at cost.
Property, Plant and Equipment Property, plant and
equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful life (10 to 30 years
for land improvements and buildings and building equipment, 5 to
10 years for machinery and equipment and 3 to 5 years for software)
of the respective assets in accordance with the straight-line method.
Accelerated methods of depreciation are used for income tax purposes.
Goodwill and Other Intangible Assets Goodwill represents
the excess of the purchase price of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed. Upon
adoption of the remaining provisions of SFAS No. 142, “Goodwill
and Other Intangible Assets,” on January 1, 2002, the Company
no longer amortizes goodwill except for goodwill related to the
acquisition of cooperatives and the formation of joint ventures.
Other intangible assets consist primarily of trademarks, patents
and agreements not to compete. Certain trademarks are not amortized
because they have indefinite lives. The remaining other intangible
assets are amortized using the straight-line method over the estimated
useful lives, ranging from 2 to 15 years.
Recoverability of Long-Lived Assets The test for
goodwill impairment is a two-step process and is performed on at
least an annual basis. The first step is a comparison of the fair
value of the reporting unit with its carrying amount, including
goodwill. If this step reflects impairment, then the loss would
be measured as the excess of recorded goodwill over its implied
fair value. Implied fair value is the excess of fair value of the
reporting unit over the fair value of all identified assets and
liabilities. The Company assesses the recoverability of other long-lived
assets annually or whenever events or changes in circumstance indicate that
expected future undiscounted cash flows might not be sufficient
to support the carrying amount of an asset. The Company deems an
asset to be impaired if a forecast of undiscounted future operating
cash flows is less than its carrying amount. If an asset is determined
to be impaired, the loss is measured as the amount by which the
carrying value of the asset exceeds its fair value.
Income Taxes Land O’Lakes is a non-exempt
agricultural cooperative and is taxed on all non-member earnings
and any member earnings not paid or allocated to members by qualified
written notices of allocation as that term is used in section 1388(c)
of the Internal Revenue Code. The Company files a consolidated tax
return with its fully taxable subsidiaries.
The Company establishes deferred income tax assets and liabilities
based on the difference between the financial and income tax carrying
values of assets and liabilities using existing tax rates.
Advertising and Promotion Costs Advertising and
promotion costs are expensed as incurred. Advertising and promotion
costs were $52.1 million, $53.9 million and $48.8 million in 2003,
2002 and 2001, respectively.
Research and Development Expenditures for research
and development are charged to administrative expense in the year
incurred. Total research and development expenses were $29.0 million,
$33.3 million and $23.8 million in 2003, 2002 and 2001, respectively.
Recent Accounting Pronouncements On January 17,
2003, the Financial Accounting Standards Board (“FASB”)
issued Interpretation No. 46, “Consolidation of Variable Interest
Entities, an Interpretation of ARB 51,” (“FIN 46”).
The primary objectives of FIN 46 are to provide guidance on the
identification and consolidation of variable interest entities,
or VIEs, which are entities for which control is achieved through
means other than through voting rights. As permitted by the Interpretation,
the Company early-adopted FIN 46 as of July 1, 2003 and began consolidating
its joint venture interest in MoArk LLC (“MoArk”), an
egg production and marketing company. FIN 46 was revised in December
2003 and is effective for the Company on January 1, 2005. The revision
is not expected to have a significant impact on the Company.
In May, 2003, the FASB issued Statement of Financial Accounting
Standards 150, “Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity.” The
statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset
in some circumstances). The statement is effective for the Company
as of January 1, 2004. The Company has evaluated the standard and
has determined that it will not have an impact on its consolidated
financial statements.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, “Employers’ Disclosures about Pensions
and Other Postretirement Benefits.” The statement revises
the disclosures about pension and other postretirement benefit plans.
It requires additional disclosure regarding changes in benefit obligations
and fair value of plan assets. The statement was effective for the
Company as of December 31, 2003.
On January 12, 2004, the FASB issued FASB Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003”
(the “Act”). The position permits a sponsor of a postretirement
health care plan that provides a prescription drug benefit to make
a one-time election to defer accounting for the effects of the Act.
Regardless of whether a sponsor elects that deferral, the position
requires certain disclosures pending further consideration of the
underlying accounting issues. The position is effective for the
Company as of December 31, 2003.
Accounting Estimates The preparation of financial
statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities 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.
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