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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 30, 2007 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies describe: • how we report our results; • changes in how we report our results; and • how we account for various items. HOW WE REPORT OUR RESULTS We report our results using: • consolidated financial statements; • our business segments; • estimates; and • a fiscal year that ends on the last Sunday of the calendar year. CONSOLIDATION Our consolidated financial statements provide an overall view of our results and financial condition. They include our accounts and the accounts of entities that we control, including: • majority-owned domestic and foreign subsidiaries; and • variable interest entities in which we are the primary beneficiary. They do not include our intercompany transactions and accounts, which are eliminated. We account for investments in and advances to unconsolidated equity affiliates using the equity method, with taxes provided on undistributed earnings. This means that we record earnings and accrue taxes in the period that the earnings are recognized by our unconsolidated equity affiliates. We report our financial results and condition in two groups: • Weyerhaeuser – our forest products-based operations, principally the growing and harvesting of timber and the manufacture, distribution and sale of forest products; and • Real Estate – our real estate development and construction operations and our other real estate-related activities. Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “we” and “our” refer to the consolidated company, including both Weyerhaeuser and Real Estate. OUR BUSINESS SEGMENTS We are principally engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate development and construction. Our business segments are primarily organized based on products and services. Our Business Segments and Products  We also transfer raw materials, semifinished materials and end products between our business segments. Because of this intracompany activity, accounting for our business segments involves: • allocating joint conversion and common facility costs according to usage by our business segment product lines; and • using current market values for the pricing of products transferred between our business segments. FOREIGN CURRENCY TRANSLATION Local currencies are the functional currencies for most of our operations outside the U.S. We translate the local currencies into U.S. dollars as follows: • assets and liabilities – at the exchange rates in effect as of our balance sheet date; and • revenues and expenses – at average monthly exchange rates throughout the year. USE OF ESTIMATES We prepare our financial statements according to U.S. generally accepted accounting principles. This requires us to make estimates and assumptions during our reporting periods and at the date of our financial statements. The estimates and assumptions affect our: • reported amounts of assets, liabilities and equity; • disclosure of contingent assets and liabilities; and • reported amounts of revenues and expenses. Our actual results can and do differ from those estimates and assumptions. OUR FISCAL YEAR Our fiscal year ends on the last Sunday of the calendar year. As a result, our fiscal year can vary from 52 weeks to 53 weeks. For the last three years: • fiscal year 2007 had 52 weeks; • fiscal year 2006 had 53 weeks; and • fiscal year 2005 had 52 weeks. CHANGES IN HOW WE REPORT OUR RESULTS We implemented three accounting changes in 2007, none of which had a material effect on our financial position, results of operations or cash flows. There are four accounting changes that are scheduled to take effect in 2008 or 2009. In addition, we have reclassified certain balances and results from prior years to make them consistent with our current reporting. ACCOUNTING CHANGES WE IMPLEMENTED IN 2007 We changed how we account for the following in 2007: • income tax uncertainties; • planned major maintenance activities; and • oil and gas and leasing revenues. Accounting for Income Tax Uncertainties On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. Interpretation 48 clarifies how and when uncertain income tax positions are to be recognized and disclosed in financial statements. The cumulative effects of adopting this interpretation were a: • $1 million increase to beginning retained earnings; • $23 million decrease to net deferred tax liabilities; and • $22 million increase to current income taxes payable. Accounting for Planned Major Maintenance Activities Effective January 1, 2007, we changed to the expense-as-incurred method of accounting for planned annual maintenance costs in our primary manufacturing mills. We had been using the accrue-in-advance method of accounting during interim reporting periods. However, FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities – issued in September 2006 – disallowed the accrue-in-advance method. In applying the change for all 2006 interim periods, we: • eliminated the liability recorded from the accrue-in-advance methodology; and • recorded the annual maintenance costs in the interim periods in which they were incurred. There were no adjustments to our annual results of operations because of this accounting change. Accounting for Oil and Gas and Leasing Revenues During the second quarter of 2007, we changed to the accrual basis of accounting for oil and gas revenues, as well as for revenues associated with leasing our timberlands for recreational use. We previously used the cash basis of accounting for these activities. This accounting change resulted in a pretax charge of $7 million during the second quarter of 2007. ACCOUNTING CHANGES THAT TAKE EFFECT IN 2008 AND 2009 The four accounting changes that are scheduled to take effect in 2008 or 2009 relate to: • Fair value measurements; • Fair value option; • Business combinations; and • Noncontrolling interests. Fair Value Measurements Statement 157 – Statement of Financial Accounting Standards No. 157, Fair Value Measurements – is partially effective in the first quarter of our fiscal year 2008 and will be fully effective by the first quarter of our fiscal year 2009. Issued by the FASB in September 2006, Statement 157: • provides a common definition of fair value; • establishes a framework for measuring fair value in generally accepted accounting principles; and • expands disclosure about fair value instruments. It applies when other accounting standards require or permit fair value measurements. However, it will not require new fair value measurements. We expect Statement 157 will not have a material effect on our financial position, results of operations or cash flows, but may require additional disclosures. Fair Value Option Statement 159 – Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 – takes effect in the first quarter of our fiscal year 2008. Issued by the FASB in February 2007, Statement 159 provides an option – through an initial irrevocable instrument-by-instrument election – for entities to carry most financial assets and liabilities at fair value. Any changes in the fair value are recorded in earnings. The statement also establishes some additional disclosure requirements. We will not adopt the fair value option for any of our existing financial instruments. Business Combinations Statement 141R – Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations – takes effect in the first quarter of our fiscal year 2009. Issued by the FASB in December 2007, Statement 141R will be applied to business combinations occurring after the effective date. Statement 141R: • expands the definition of a business; and • changes the accounting for business combinations, including how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. Statement 141R will be applicable to future business combinations, but will not have a material effect on our financial position, results of operations or cash flows prior to such acquisitions. Noncontrolling Interests Statement 160 – Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 – takes effect in the first quarter of our fiscal year 2009. Issued by the FASB in December 2007, Statement 160: • changes the accounting for noncontrolling (minority) interests in consolidated financial statements; • requires noncontrolling interests to be presented as a separate component of equity; • changes the income statement presentation of income or losses attributable to noncontrolling interests; and • revises the accounting for both increases and decreases in a parent’s controlling ownership interest. We are currently assessing the effect Statement 160 may have on our financial position, results of operations or cash flows. RECLASSIFICATIONS We have reclassified certain balances and results from prior years for consistency with our fiscal year 2007 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on net earnings or shareholders’ interest. • Note 3: Discontinued Operations and Assets Held for Sale provides a summary of the results of discontinued operations, certain assets held for sale and the balances and results associated with discontinued operations. • Intercompany loans and advances between Weyerhaeuser and Real Estate have been classified as operating, investing or financing activities in the Consolidated Statement of Cash Flows based on the perspective of each entity and the characteristics of the underlying cash flows. HOW WE ACCOUNT FOR VARIOUS ITEMS This section provides information about how we account for certain key items related to: • capital investments; • financing our business; and • operations. ITEMS RELATED TO CAPITAL INVESTMENTS Key items related to accounting for capital investments pertain to property and equipment, timber and timberlands, impairment of long-lived assets, goodwill and real estate. Property and Equipment We maintain property accounts on an individual asset basis. Here’s how we handle major items: • Improvements to and replacements of major units of property are capitalized. • Maintenance, repairs and minor replacements are expensed. • Depreciation is calculated using a straight-line method at rates based on estimated service lives. • Logging railroads and truck roads are generally amortized as timber is harvested at rates based on the volume of timber estimated to be removed. • For property sold or retired, cost and accumulated depreciation are removed from the accounts and the gain or loss is included in earnings. Timber and Timberlands We carry timber and timberlands at cost less depletion charged to disposals. Depletion refers to the carrying value of timber that is harvested, lost as a result of casualty, or sold. Key activities affecting how we account for timber and timberlands include: • reforestation; • depletion; and • forest management in Canada. Reforestation. Generally, we capitalize as reforestation all initial site preparation and planting costs. We transfer reforestation to a merchantable timber classification when the timber is considered harvestable. That occurs after: • 15 years in the South; and • 30 years in the West. Generally, we expense costs after the first planting as they are incurred. These costs are considered to be maintenance of the forest: • fertilization; • vegetation and insect control; • pruning and precommercial trimming; and • property taxes and interest. Accounting practices for these costs do not change when timber becomes merchantable and harvesting starts. Depletion. To determine depletion rates, we divide the net carrying value of timber by the related volume of timber estimated to be available over the growth cycle. To determine the growth cycle volume of timber, we consider: • regulatory and environmental constraints affecting operable acres; • our management strategies; • inventory data improvements; • growth rate revisions and recalibrations; and • known dispositions and inoperable acres. We include the cost of timber harvested in the carrying values of raw materials and product inventories. As these inventories are sold to third parties, we include them in the cost of products sold. Forest management in Canada. We hold forest management licenses in various Canadian provinces that are: • granted by the provincial governments; • for initial periods of 15 to 25 years; and • renewable every five years provided that we meet reforestation, operating and management guidelines. Calculation of the fees we pay on the timber we harvest: • varies from province to province; • is tied to product market pricing; and • depends upon the allocation of land management responsibilities in the license. Impairment of Long-Lived Assets We review long-lived assets, including Real Estate, and certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Impaired assets held for use are written down to fair value. Impaired assets held for sale are written down to fair value less cost to sell. We determine fair value based on: • appraisals; • market pricing of comparable assets; • discounted value of estimated cash flows from the asset; and • replacement values of comparable assets. Goodwill Goodwill is the purchase price minus the fair value of net assets acquired when we buy another entity. We assess goodwill for impairment: • using a fair-value-based approach; and • at least annually – at the beginning of the fourth quarter of our fiscal year. ITEMS RELATED TO FINANCING OUR BUSINESS Key items related to financing our business include cash and cash equivalents, derivatives, financial instruments and accounts payable. Financial Instruments We estimate the fair value of financial instruments where appropriate. The assumptions we use – including the discount rate and estimates of cash flows – can significantly affect our fair value amounts. Our fair values are estimates and may not necessarily match the amounts we would realize upon sale or settlement of our financial positions. Derivatives We use well-defined financial contracts to help manage risks associated with: • foreign exchange rates; • interest rates; and • commodity prices. We measure derivatives at fair value and present them as assets and liabilities on our Consolidated Balance Sheet. Certain of our purchase and sale contracts have elements that meet the accounting definition of derivatives. We do not account for these contracts as derivatives, however, because we expect the purchases and sales to occur and these contracts qualify for the “normal purchases or normal sales” exclusion. Cash flow hedges. We have certain commodity contracts – primarily related to the purchase of energy – that effectively lock in the purchase price of the commodities and that have been designated as cash flow hedges. We account for cash flow hedges as follows: • Changes in the fair value of the commodity contracts are recorded directly in equity as part of cumulative other comprehensive income. • The ineffective portion of the hedges is recognized in earnings in the periods that the ineffectiveness occurs. • When the forecasted transactions that are the subject of the hedges occur, the portion of the accumulated gains and losses applicable to the forecasted transactions that have occurred are reclassified from equity to earnings. Opportunity for credit-related gains and exposure to credit-related losses. Our use of derivative financial instruments resulted in gains (losses) of approximately: • $(24) million in 2007; • $12 million in 2006; and • $22 million in 2005. An exposure to credit-related losses could result in an event of nonperformance by counterparties to financial instruments. However, we expect no counterparty will fail to meet their obligations. Exposure in a derivative contract is the net difference between what each party is required to pay according to the terms of the contract. Notional amounts do not represent amounts exchanged by the parties. As a result, notional amounts are not a measure of exposure through the use of derivatives. The annual notional amounts of our derivative financial instruments were: • $100 million at December 30, 2007; and • $191 million at December 31, 2006. The aggregate notional amounts of our derivative financial instruments were: • $114 million at December 30, 2007; and • $201 million at December 31, 2006. Cash and Cash Equivalents Cash equivalents are short-term investments with original maturities of 90 days or less. We state short-term investments at cost, which approximates market. Accounts Payable Our banking system replenishes our major bank accounts daily as checks we have issued are presented for payment. As a result, we have negative book cash balances as a result of outstanding checks that have not yet been paid by the bank. We reflect these negative balances in accounts payable on our Consolidated Balance Sheet. Changes in these negative cash balances are reported as financing activities in our Consolidated Statements of Cash Flows. Negative book cash balances were: • $164 million at December 30, 2007; and • $254 million at December 31, 2006. ITEMS RELATED TO OPERATIONS Key items related to operations include revenue recognition, inventories, shipping and handling costs, income taxes, share-based compensation, pension plans and other postretirement plans and environmental remediation. Revenue Recognition Our forest products-based operations recognize revenue differently from how our Real Estate operations do. Our Forest Products operations generally recognize revenue upon shipment to customers. For certain export sales, title does not transfer until the product reaches the foreign port. For these sales, revenue is recognized when title transfers at the foreign port. Our Real Estate operations recognize revenue when: • closings have occurred; • required down payments have been received; • title and possession have been transferred to the buyer; and • all other criteria for sale and profit recognition have been satisfied. Inventories We state inventories at the lower of cost or market. Cost includes labor, materials and production overhead. We use LIFO – the last-in, first-out method – for certain of our domestic raw materials, in process and finished goods inventories. Our LIFO inventories for continuing operations were: • $420 million at December 30, 2007; and • $478 million at December 31, 2006. We use FIFO – the first-in, first-out method – or moving average cost methods for the balance of our domestic raw materials and product inventories, as well as for all materials and supplies inventories and all foreign inventories. If we used FIFO for all inventories, our stated product inventories would have been higher by: • $246 million at December 30, 2007; and • $233 million at December 31, 2006. Shipping and Handling Costs We classify shipping and handling costs in the costs of products sold in our Consolidated Statement of Earnings. Income Taxes We account for income taxes under the liability method. We adopted Interpretation 48 on January 1, 2007. Under Interpretation 48, unrecognized tax benefits represent potential future funding obligations to taxing authorities if uncertain tax positions the company has taken on previously filed tax returns are not sustained. In accordance with the company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense and current taxes payable. This policy did not change as a result of Interpretation 48. We recognize deferred tax assets and liabilities for: • future tax consequences due to differences between the carrying amounts for financial purposes and the tax bases of certain items; and • operating loss and tax credit carryforwards. To measure deferred tax assets and liabilities, we: • determine when the differences between the carrying amounts and tax bases of affected items are expected to be recovered or resolved; and • use enacted tax rates expected to apply to taxable income in those years. Share-Based Compensation We account for share-based compensation according to FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R). This statement requires us to measure the fair value of share-based awards on the dates they are granted or modified. These measurements establish the cost of the share-based awards for accounting purposes. We then recognize the cost of share-based awards in our Consolidated Statement of Earnings over the employee’s required service period. Note 18: Share-Based Compensation provides more information about our share-based compensation. Pension and Other Postretirement Benefit Plans We recognize the overfunded or underfunded status of our defined benefit pension and other postretirement plans on our balance sheet and recognize changes in that funded status, in the year in which the changes occur, through comprehensive income. The amount of the pension and other postretirement benefit obligations and the net periodic benefit cost to be recognized during the period are determined by actuarial valuations. The net periodic benefit cost for the period includes the following: • cost of benefits provided in exchange for employees’ services rendered during the year; • interest cost of the obligations; • expected long-term return on fund assets; • amortization of the actual changes in the fair value of fund assets are over three years; • gains or losses on plan settlements and curtailments; • amortization of prior service costs and plan amendments over the average remaining service period of the active employee group covered by the plans; and • amortization of cumulative unrecognized net actuarial gains and losses, generally in excess of 10 percent of the greater of the accrued benefit obligation or market-related value of plan assets at the beginning of the year, over the average remaining service period of the active employee group covered by the plans. Pension Plans We have pension plans covering most of our employees. Determination of benefits differs for salaried and hourly employees: • For salaried employees, benefits are based on each employee’s highest monthly earnings for five consecutive years during the final 10 years before retirement. • For hourly employees, benefits generally are stated amounts for each year of service and for unionized employees, benefits are set through collective bargaining agreements. We contribute to our U.S. and Canadian pension plans according to established funding standard. The standards applicable for the plans are: • U.S. pension plans – according to the Employee Retirement Income Security Act of 1974; and • Canadian pension plans – according to the applicable Provincial Pension Benefits Act and the Income Tax Act. Postretirement Benefits Other Than Pensions We provide certain postretirement health care and life insurance benefits for some retired employees. All our salaried employees and some hourly employees may become eligible for these benefits when they retire. Environmental Remediation We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when the recovery is deemed probable. |