the Company’s ability to successfully manage regulatory matters around the world, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. The Company’s accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates. Although certain changes cannot be reasonably assumed in the Company’s current estimates, management does not believe such changes would result in a material period-to-period impact on the results of operations or financial condition. 

## Employee Benefits 

Employee benefits include pensions – both defined contribu- tion and defined benefit – and other post-employment benefits (OPEB), with plans and benefits established locally. At the Corporate level, there is an employee stock ownership plan (ESOP) and a stock option plan. 

Under the provisions of SFAS No. 87, “Employer’s Account- ing for Pensions” and SFAS No. 106, “Employer’s Accounting for Postretirement Benefits Other Than Pensions,” measure- ment of the obligations under the defined benefit pension plans and OPEB plans are subject to a number of assump- tions. These include the rate of return on plan assets, health care cost trend rates and the rate at which the future obligations are discounted to the value of the liability at June 30th of each year presented in the Consolidated Balance Sheet (see Note 10). 

Certain defined contribution pension and OPEB benefits in the United States are funded by the ESOP plan (see Note 9). The ESOP plan is accounted for under the provisions of AICPA Statement of Position No. 76-3, “Accounting Practices for Certain Employee Stock Ownership Plans.” Series A shares are used to fund a portion of the defined contribution plan and Series B shares are used to fund a portion of retiree health care benefits – a component of OPEB. Changes in estimates and assumptions that are implicit in accounting for the ESOP would not have a material impact on the results of operations. 

Under SFAS No. 123, ”Accounting for Stock-Based Compen- sation,” the Company has elected to account for stock options under APB Opinion No. 25, ”Accounting for Stock Is- sued to Employees,” based on their intrinsic value at the date of grant. Because options generally are granted at market val- ue, there is no intrinsic value and resultant compensation ex- pense. Note 8 provides supplemental information, including 

pro forma earnings and earnings per share, as if the Company had accounted for options based on the method prescribed by SFAS No. 123. That methodology yields an estimate of fair value based on a measurement method that contains a num- ber of management estimates, including estimated option life and future volatility. Changes in these assumptions could significantly impact the estimated fair value of the options. 

## Hedging and Derivative Financial Instruments 

As a multinational company with diverse product offerings, the Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures, the Company evaluates its exposures on a global basis to take advantage of the netting opportunities that exist. For the remaining exposures, the Company enters into various derivative transactions in accordance with the Company’s hedging policies. The financial impacts of these hedging instruments are offset in part or in whole by corresponding changes in the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for speculative trading purposes. Note 7 includes a more detailed discussion of the Company’s accounting policies for financial instruments. 

Derivative positions are monitored using techniques including market valuation, sensitivity analysis and value at risk modeling. The tests for interest rate and currency rate exposures discussed below are based on a Monte Carlo simulation value at risk model using a one year horizon and a 95% confidence level. The model incorporates the impact of correlation and diversification from holding multiple currency and interest rate instruments and assumes that financial returns are normally distributed. Estimates of volatility and correlations of market factors are drawn from the Risk- Metrics ™  dataset as of June 28, 2002. In cases where data is unavailable in RiskMetrics ™ , a reasonable proxy is included. 

The Company’s market risk exposures relative to interest and currency rates, as discussed below, have not changed mate- rially versus the previous reporting period. In addition, the Company is not aware of any facts or circumstances that would significantly impact such exposures in the near term. 

## Interest Rate Exposure 

Interest rate swaps are used to hedge underlying debt obligations. Certain currency interest rate swaps are desig- nated as hedges of the Company’s foreign net investments. 

