Case1

6 June 2017

University of Arizona Accounting 554 Case #1: Dow Chemical Company Goals: • • • Become familiar with a set of financial statements including auditor opinion and significant accounting policy footnote, Perform basic analysis and interpretation of the financial statements, including common size analysis, Recognize the role of estimates in the measurement of financial statement amounts. Refer to the Dow Chemical financial statements for 2008 in answering the following: 1. Who are Dow’s external auditors?

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Describe the two opinion letters that Dow received for 2008. In your own words, explain what these opinions mean. Why are the opinions dated several weeks after Dow’s year end? 2. Use a spreadsheet to construct common-size income statements for 2008 and 2007. (Note: common-size income statements are constructed by dividing each income statement item by net sales). a. Was the company profitable during 2008? During 2007? What does the term “profitable” mean? b. Compute the percentage change in net sales and in net income from 2007 to 2008. . What are Dow’s major categories of expenses? Do you detect any significant changes in the structure of costs in 2008 compared to 2007? d. Dow shows separate lines on the income statement for goodwill impairment losses, restructuring charges, purchased in-process research and development charges, acquisition-related expenses and asbestos-related credits. Why do you think the company chose not to just include all of the amounts within the line item for “Selling, general and administrative expenses. ” e.

How would the percentages you computed in part 2b change if the items in part 2d were excluded in measuring net income. (Caution: the items listed in part 2d are shown before tax, while net income is shown after tax. Be sure to adjust your answer accordingly, using the statutory tax rate of 35%. ) f. In a single sentence, explain why Dow’s profitability changed from 2007 to 2008. 3. Refer to the statement of cash flows. a. Compare Dow’s net income to cash provided by operations. Why is there such a big difference? b.

Explain why (i) depreciation and (ii) restructuring charges are shown as positive additions to cash provided by operations. c. Based on reading the statement of cash flows, explain in a short paragraph where Dow got cash in 2008 and what happened to that cash. 4. Several sections in Note A to the Dow financial statements refer to estimates (either using the word “estimate” or otherwise). Make a list of accounting estimates mentioned in Note A. Which of these estimates do you think is most critical in measuring Dow’s income?

The Dow Chemical Company and Subsidiaries PART II, Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Dow Chemical Company: We have audited the accompanying consolidated balance sheets of The Dow Chemical Company and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2008.

Our audits also included the financial statement schedule listed in the Index at Item 15 (a) 2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Dow Chemical Company and subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note U to the consolidated financial statements, the Company is involved in litigation related to an agreement to acquire Rohm and Haas Company. The Company has disclosed that it is reasonably possible that the ultimate resolution of the litigation could have a material adverse impact on the Company’s consolidated financial statements. As discussed in Note A to the consolidated financial statements, effective December 31, 2006, the Company changed its method of accounting for defined benefit pension and other postretirement plans to conform to Statement of Financial Accounting Standards No. 58. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting. s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Midland, Michigan February 17, 2009 64 The Dow Chemical Company and Subsidiaries Consolidated Statements of Income (In millions, except per share amounts) For the years ended December 31

Net Sales Cost of sales Research and development expenses Selling, general and administrative expenses Amortization of intangibles Goodwill impairment losses Restructuring charges Purchased in-process research and development charges Acquisition-related expenses Asbestos-related credit Equity in earnings of nonconsolidated affiliates Sundry income – net Interest income Interest expense and amortization of debt discount Income before Income Taxes and Minority Interests Provision for income taxes Minority interests’ share in income Net Income Available for Common Stockholders Share Data Earnings per common share – basic Earnings per common share – diluted Common stock dividends declared per share of common stock Weighted-average common shares outstanding – basic Weighted-average common shares outstanding – diluted See Notes to the Consolidated Financial Statements. 2008 $ 57,514 52,019 1,310 1,969 92 239 839 44 49 54 787 89 86 648 1,321 667 75 $ 579 $ $ $ 0. 62 0. 62 1. 68 930. 4 939. 0 2007 $ 53,513 46,400 1,305 1,864 72 578 57 1,122 324 130 584 4,229 1,244 98 $ 2,887 $ $ $ 3. 03 2. 99 1. 635 953. 1 965. 6 2006 $ 49,124 41,526 1,164 1,663 50 591 177 959 137 185 616 4,972 1,155 93 $ 3,724 $ $ $ 3. 87 3. 82 1. 50 962. 3 974. 4 65 The Dow Chemical Company and Subsidiaries Consolidated Balance Sheets (In millions, except share amounts) At December 31 2008 Assets 2007

Current Assets Cash and cash equivalents Marketable securities and interest-bearing deposits Accounts and notes receivable: Trade (net of allowance for doubtful receivables – 2008: $124; 2007: $118) Other Inventories Deferred income tax assets – current Total current assets Investments Investment in nonconsolidated affiliates Other investments Noncurrent receivables Total investments Property Property Less accumulated depreciation Net property Other Assets Goodwill Other intangible assets (net of accumulated amortization – 2008: $825; 2007: $721) Deferred income tax assets – noncurrent Asbestos-related insurance receivables – noncurrent Deferred charges and other assets Total other assets Total Assets Liabilities and Stockholders’ Equity Current Liabilities Notes payable Long-term debt due within one year Accounts payable: Trade Other Income axes payable Deferred income tax liabilities – current Dividends payable Accrued and other current liabilities Total current liabilities Long-Term Debt Other Noncurrent Liabilities Deferred income tax liabilities – noncurrent Pension and other postretirement benefits – noncurrent Asbestos-related liabilities – noncurrent Other noncurrent obligations Total other noncurrent liabilities Minority Interest in Subsidiaries Preferred Securities of Subsidiaries Stockholders’ Equity Common stock (authorized 1,500,000,000 shares of $2. 50 par value each; issued 981,377,562 shares) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock at cost (2008: 57,031,291 shares; 2007: 41,011,018 shares) Net stockholders’ equity Total Liabilities and Stockholders’ Equity See Notes to the Consolidated Financial Statements. 66 $ ,800 3,782 3,074 6,036 368 16,060 3,204 2,245 276 5,725 48,391 34,097 14,294 $ 1,736 1 5,944 3,740 6,885 348 18,654 3,089 2,489 385 5,963 47,708 33,320 14,388 3,394 829 3,900 658 614 9,395 $ 45,474 3,572 781 2,126 696 2,621 9,796 $ 48,801 $ 2,360 1,454 3,306 2,227 637 88 411 2,625 13,108 8,042 746 5,466 824 3,208 10,244 69 500 $ 1,548 586 4,555 1,981 728 117 418 2,512 12,445 7,581 854 3,014 1,001 3,103 7,972 414 1,000 2,453 872 17,013 (4,389) (2,438) 13,511 $ 45,474 2,453 902 18,004 (170) (1,800) 19,389 $ 48,801 The Dow Chemical Company and Subsidiaries Consolidated Statements of Cash Flows (In millions) For the years ended December 31 2008 $ 579 $ 2007 2,887 $ 2006 3,724

Operating Activities Net Income Available for Common Stockholders Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Purchased in-process research and development charges Provision (Credit) for deferred income tax Earnings of nonconsolidated affiliates less than (in excess of) dividends received Minority interests’ share in income Pension contributions Net loss (gain) on sales of investments Net gain on sales of property, businesses and consolidated companies Other net loss (gain) Goodwill impairment losses Restructuring charges Asbestos-related credit Excess tax benefits from share-based payment arrangements Changes in assets and liabilities: Accounts and notes receivable Inventories Accounts payable Other assets and liabilities Cash provided by operating activities Investing Activities Capital expenditures Proceeds from sales of property, businesses and consolidated companies Acquisitions of businesses Purchases of previously leased assets Investments in consolidated companies Investments in nonconsolidated affiliates Distributions from nonconsolidated affiliates Proceeds from sales of ownership interests in nonconsolidated affiliates Purchases of investments Proceeds from sales and maturities of investments Cash used in investing activities Financing Activities Changes in short-term otes payable Payments on long-term debt Proceeds from issuance of long-term debt Purchases of treasury stock Proceeds from sales of common stock Payment of deferred financing costs Excess tax benefits from share-based payment arrangements Distributions to minority interests Dividends paid to stockholders Cash used in financing activities Effect of Exchange Rate Changes on Cash Summary Increase (Decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See Notes to the Consolidated Financial Statements. 2,236 44 (260) 49 75 (185) 1 (127) 15 239 837 (54) (8) 2,853 812 (1,062) (1,333) 4,711 (2,276) 318 (63) (336) (331) 6 (855) 800 (2,737) 825 (760) 1,453 (898) 72 (70) 8 (45) (1,563) (978) 68 1,064 1,736 2,800 2,190 57 494 (348) 98 (183) (143) (108) (75) 577 (31) (1,002) (712) 799 (16) 4,484 (2,075) 211 (143) (30) (867) (78) 63 30 (1,952) 1,983 (2,858) 1,220 (1,354) 21 (1,462) 379 31 (51) (1,512) (2,728) 81 (1,021) 2,757 $ 1,736 2,074 104 (343) 93 (575) (19) (130) (12) 586 (177) (11) 242 (758) (129) (515) 4,154 (1,775) 296 (208) (111) (103) 6 10 (1,405) 1,383 (1,907) 23 (1,359) (739) 223 11 (57) (1,404) (3,302) 6 (1,049) 3,806 $ 2,757 $ 67

The Dow Chemical Company and Subsidiaries Consolidated Statements of Stockholders’ Equity (In millions) For the years ended December 31 2008 $ 2,453 902 (30) 872 18,004 579 (1,556) (14) 17,013 71 (182) (111) 723 (502) 221 (989) 16 (3,278) (4,251) 25 (452) 179 (248) (4,389) (1,800) (898) 260 (2,438) $ 13,511 $ 2007 2,453 830 72 902 16,987 2,887 (1,548) (32) (290) 18,004 42 29 71 (12) 735 723 (2,192) (74) 1,277 (989) (73) 20 78 25 (170) (970) (1,455) 625 (1,800) $ 19,389 $ 2006 2,453 661 169 830 (1) 1 14,719 3,724 (1,438) (18) 16,987 11 31 42 (663) 651 (12) (1,312) 1,147 (165) 165 (2,192) (2,192) 15 (127) 39 (73) (2,235) (559) (746) 335 (970) $ 17,065

Common Stock Balance at beginning and end of year Additional Paid-in Capital Balance at beginning of year Stock-based compensation Balance at end of year Unearned ESOP Shares Balance at beginning of year Shares allocated to ESOP participants Balance at end of year Retained Earnings Balance at beginning of year Net income Dividends declared on common stock (Per share: $1. 68 in 2008, $1. 635 in 2007 and $1. 50 in 2006) Other Impact of the adoption of FIN No. 48 Balance at end of year Accumulated Other Comprehensive Loss Unrealized Gains on Investments at beginning of year Unrealized gains (losses) Balance at end of year Cumulative Translation Adjustments at beginning of year Translation adjustments Balance at end of year Minimum Pension Liability at beginning of year Adjustments Balance at end of year, prior to Dec. 31, 2006 adoption of SFAS No. 158 Reversal of Minimum Pension Liability under SFAS No. 158 Recognition of prior service cost and net loss under SFAS No. 58 Pension and Other Postretirement Benefit Plans at beginning of year Net prior service (cost) credit Net gain (loss) Pension and Other Postretirement Benefit Plans at end of year Accumulated Derivative Gain (Loss) at beginning of year Net hedging results Reclassification to earnings Balance at end of year Total accumulated other comprehensive loss Treasury Stock Balance at beginning of year Purchases Issuance to employees and employee plans Balance at end of year Net Stockholders’ Equity See Notes to the Consolidated Financial Statements. 68 The Dow Chemical Company and Subsidiaries Consolidated Statements of Comprehensive Income (In millions) For the years ended December 31

Net Income Available for Common Stockholders Other Comprehensive Income (Loss), Net of Tax (tax amounts shown below for 2008, 2007, 2006) Unrealized gains (losses) on investments: Unrealized holding gains (losses) during the period (net of tax of $(70), $42, $30) Less: Reclassification adjustments for net amounts included in net income (net of tax of $(13), $(22), $(16)) Cumulative translation adjustments (net of tax of $(22), $5, $(39)) Minimum pension liability adjustments (net of tax of $ -, $ -, $657) Defined benefit pension plans: Prior service cost arising during period (net of tax of $ -, $(53)) Net gain (loss) arising during period (net of tax of $(1,561), $630) Less: Amortization of prior service cost included in net periodic pension costs (net of tax of $8, $5) Less: Amortization of net loss included in net periodic pension costs (net of tax of $13, $67) Net gains (losses) on cash flow hedging derivative instruments (net of tax of $(49), $14, $(39)) Total other comprehensive income (loss) Comprehensive Income (Loss) See Notes to the Consolidated Financial Statements. $ 2008 579 $ 2007 2,887 $ 2006 3,724 (158) (24) (502) (4) (3,307) 20 29 (273) (4,219) $ (3,640) 70 (41) 735 (88) 1,150 14 127 98 2,065 4,952 61 (30) 651 1,147 (88) 1,741 5,465 $ $ 69 The Dow Chemical Company and Subsidiaries Notes to the Consolidated Financial Statements

Table of Contents Note A B C D E F G H I J K L M N O P Q R S T U Summary of Significant Accounting Policies and Recent Accounting Pronouncements Restructuring Acquisitions Inventories Property Nonconsolidated Affiliates and Related Company Transactions Goodwill and Other Intangible Assets Financial Instruments Fair Value Measurements Supplementary Information Commitments and Contingent Liabilities Notes Payable, Long-Term Debt and Available Credit Facilities Pension Plans and Other Postretirement Benefits Leased Property and Variable Interest Entities Stock-Based Compensation Limited Partnership Preferred Securities of Subsidiaries Stockholders’ Equity Income Taxes Operating Segments and Geographic Areas Subsequent Events Page 70 75 82 83 83 84 86 88 94 95 96 103 105 109 109 113 113 114 114 117 124

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U. S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies, joint ventures and partnerships) are accounted for on the equity basis. Use of Estimates in Financial Statement Preparation The preparation of financial statements in accordance with U. S.

GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates. Foreign Currency Translation The local currency has been primarily used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in “Accumulated other comprehensive income (loss)” (“AOCI”). Where the U. S. ollar is used as the functional currency, foreign currency gains and losses are reflected in income. 70 The Dow Chemical Company and Subsidiaries Notes to the Consolidated Financial Statements Environmental Matters Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Other noncurrent obligations” at undiscounted amounts.

Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets as “Accounts and notes receivable – Other. ” Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.

Cash and Cash Equivalents Cash and cash equivalents include time deposits and readily marketable securities with original maturities of three months or less. Financial Instruments The Company calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows. The Company utilizes derivative instruments to manage exposures to currency exchange rates, commodity prices and interest rate risk. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date.

Changes in the fair value of these instruments are reported in income or AOCI, depending on the use of the derivative and whether it qualifies for hedge accounting treatment under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. Gains and losses on derivative instruments that qualify as cash flow hedges are recorded in AOCI, to the extent the hedges are effective, until the underlying transactions are recognized in income. To the extent effective, gains and losses on derivative and nonderivative instruments used as hedges of the Company’s net investment in foreign operations are recorded in AOCI as part of the cumulative translation adjustment.

The ineffective portions of cash flow hedges and hedges of net investment in foreign operations, if any, are recognized in income immediately. Gains and losses on derivative instruments designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the results included in income. Inventories Inventories are stated at the lower of cost or market. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, irst-out (“FIFO”); and average cost, and is used consistently from year to year. Property Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straightline method. For most assets capitalized through 1996, the declining balance method was used. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.

Impairment and Disposal of Long-Lived Assets The Company evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of. Long-lived assets to be disposed of by sale are classified as held for sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. 71 The Dow Chemical Company and Subsidiaries Notes to the Consolidated Financial Statements

NOTE A – Summary of Significant Accounting Policies and Recent Accounting Pronouncements – Continued Asset Retirement Obligations The Company records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset, generally for periods of 10 years or less. Investments Investments in debt and marketable equity securities, including warrants, are classified as trading, available-for-sale, or heldto-maturity.

Investments classified as trading are reported at fair value with unrealized gains and losses included in income. Those classified as available-for-sale are reported at fair value with unrealized gains and losses recorded in AOCI. Those classified as held-to-maturity are recorded at amortized cost. The cost of investments sold is determined by specific identification. The Company routinely reviews available-for-sale securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down to fair value.

The excess of the cost of investments in subsidiaries over the values assigned to assets and liabilities is shown as goodwill and is subject to the impairment provisions of SFAS No. 142, “Goodwill and Other Intangible Assets. ” Absent any impairment indicators, recorded goodwill is tested annually for impairment by comparing the fair value of each reporting unit, determined using a discounted cash flow method, with its carrying value. Revenue Sales are recognized when the revenue is realized or realizable, and has been earned. Approximately 98 percent of the Company’s sales are related to sales of product. The remaining 2 percent are related to the Company’s service offerings, insurance operations, and licensing of patents and technology.

Revenue for product sales is recognized as risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. Substantially all of the Company’s products are sold FOB (free on board) shipping point or, with respect to countries other than the United States, an equivalent basis. As such, title to the product passes when the product is delivered to the freight carrier. Dow’s standard terms of delivery are included in its contracts of sale, order confirmation documents and invoices. Freight costs and any directly related associated costs of transporting finished product to customers are recorded as “Cost of sales. The Company’s primary service offerings are in the form of contract manufacturing services and services associated with Dow AgroSciences’ termite solution, SENTRICON™ Termite Colony Elimination System. Revenue associated with these service offerings is recognized when services are rendered, according to contractual agreements. Revenue related to the Company’s insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts. Revenue related to the initial licensing of patents and technology is recognized when earned; revenue related to running royalties is recognized according to licensee production levels.

Legal Costs The Company expenses legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred. Severance Costs The Company routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic areas. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under Dow’s ongoing benefit arrangements. These severance costs are accrued (under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. and 43”) once management commits to a plan of termination including the number of employees to be terminated, their job classifications or functions, their locations and the expected completion date. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued. 72

The Dow Chemical Company and Subsidiaries Notes to the Consolidated Financial Statements The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.

Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested. Earnings per Common Share The calculation of earnings per common share is based on the weighted-average number of the Company’s common shares outstanding for the applicable period. The calculation of diluted earnings per common share reflects the effect of all potential dilutive common shares that were outstanding during the respective periods, unless the effect of doing so is antidilutive. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 8, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes. ” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 was effective for fiscal years beginning after December 15, 2006. On January 1, 2007, the Company adopted the provisions of FIN No. 48. The cumulative effect of adoption was a $290 million reduction of retained earnings.

See Note S for further information on income taxes. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R). ” The Statement, which was effective December 31, 2006 for the Company, requires employers to recognize the funded status of defined benefit postretirement plans as an asset or liability on the balance sheet and to recognize changes in that funded status through comprehensive income. See Note M for further information on pension plans and other postretirement benefits. In September 2006, the FASB issued SFAS No. 57, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the portion of SFAS No. 57 that was not delayed, and since the Company’s existing fair value measurements are consistent with the guidance of the Statement, the partial adoption of the Statement did not have a material impact on the Company’s consolidated financial statements. Since the Company’s existing fair value measurements for pension assets are also consistent with the guidance of the Statement, the adoption of the Statement for pension and postretirement plans at the December 31, 2008 measurement date did not have a material impact on the Company’s consolidated financial statements. In accordance with FSP FAS No. 157-2, the provisions of SFAS No. 157 were not applied to the long-lived asset impairments described in Note B or to the goodwill impairments described in Note G.

The Company does not expect the adoption of the Statement for nonfinancial assets and nonfinancial liabilities on January 1, 2009 to have a material impact on the Company’s consolidated financial statements. See Note I for expanded disclosures about fair value measurements. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133. ” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008, which is January 1, 2009 for the Company; early adoption is encouraged. The Company’s enhanced disclosures are included in Note H. In September 2008, the FASB issued FSP FAS No. 133-1 and FIN No. 5-4, “Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. ” The FSP amends and enhances the disclosure requirements for sellers of credit derivatives (including hybrid instruments that have embedded credit derivatives) and financial guarantees. The FSP was effective for reporting periods ending after November 15, 2008. The Company currently does not hold any of these instruments, thus the FSP did not have an impact on the disclosures in the Company’s consolidated financial statements at December 31, 2008. 73 The Dow Chemical Company and Subsidiaries Notes to the Consolidated Financial Statements

NOTE A – Summary of Significant Accounting Policies and Recent Accounting Pronouncements – Continued In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. ” The FSP clarifies the application of SFAS No. 157, “Fair Value Measurements,” when the market for a financial asset is not active. The FSP was effective upon issuance, including reporting for prior periods for which financial statements had not been issued. The adoption of the FSP did not have a material impact on the Company’s consolidated financial statements. See Note I for further information on fair value measurements.

In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. ” The FSP, which is effective in the first reporting period ending after December 15, 2008, requires additional disclosures concerning transfers of financial assets. The FSP also requires additional disclosures concerning an enterprise’s involvement with variable interest entities and qualifying special purpose entities under certain conditions, none of which apply to the Company. The Company’s required disclosures concerning transfers of financial assets are included in Note J.

In January 2009, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20. ” The FSP provides clarification on other-than-temporary impairment assessments for securitized assets within the scope of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. ” The FSP is effective in the first reporting period ending after December 15, 2008. The implementation of the EITF did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Issued But Not Yet Adopted In December 2007, the FASB revised SFAS No. 141, “Business Combinations” (“SFAS No. 141R”), to establish revised principles and requirements for how entities will recognize and measure assets and liabilities acquired in a business combination. The Statement is effective for business combinations completed on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will apply the guidance of the Statement to business combinations completed on or after January 1, 2009. In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. The Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective for annual reporting periods beginning on or after December 15, 2008. The Company does not expect the adoption of the Statement on January 1, 2009 to have a material impact on the Company’s consolidated financial statements. The Company will incorporate presentation and disclosure requirements outlined by SFAS No. 160 in the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2009. In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets. The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets. ” The FSP must be applied prospectively to intangible assets acquired in fiscal years beginning after December 15, 2008. The Company will apply the guidance of the FSP to intangible assets acquired on or after January 1, 2009. In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). The FSP applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. The FSP, which is effective January 1, 2009 for the Company, is to be applied retrospectively to all past periods presented. The Company has not issued convertible debt securities; therefore, the FSP is not anticipated to have an impact on the Company’s consolidated financial statements. In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. ” The FSP addresses whether instruments granted in share-based payment ransactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The FSP affects entities that accrue dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. This FSP is effective for fiscal years beginning after December 15, 2008, which is January 1, 2009 for the Company. The Company does not have share-based payment awards that contain rights to nonforfeitable dividends, thus this FSP is not anticipated to have an impact on the Company’s consolidated financial statements.

In September 2008, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement. ” The Issue, which is effective in the first reporting period beginning on or after December 15, 2008, instructs issuers of a liability with a third-party credit enhancement that is inseparable from the liability to treat the liability and the credit enhancement as two units of accounting, and provide related disclosures. The Company does not carry any liabilities with inseparable third-party credit enhancements, thus the Issue is not anticipated to have an impact on the Company’s consolidated financial statements. 74

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