Document Z4nqKDeyOnBVOp2kd73zgqNvp

elOvk Page 72 of 84 Table of Contents COOPER INDUSTRIES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Cooper's fourth-quarter 2001 analysis of the contingent liability exposure assumed that the liabilities would be settled within the Federal-Mogul bankruptcy proceedings This analysis assumed that representatives of Federal-Mogul, its bankruptcy committees and the future claimants (the "Representatives") would reach similar conclusions regarding the potential future liabilities and insurance recoveries as Cooper did based on the Bates White, LLC analysis Throughout 2003, Cooper worked towards resolution of the indemnification issues and future handling of the Abex-related claims within the Federal-Mogul bankruptcy proceedings This included negotiations with the Representatives regarding participation in Federal-Mogul's proposed 524(g) asbestos trust Based on the status of the negotiations in 2004, Cooper concluded that it was probable that Federal-Mogul will reject the 1998 Agreement Cooper also concluded that the Representatives would require any negotiated settlement through the Federal-Mogul bankruptcy to be at the high end of the Bates White, LLC liability analysis and with substantially lower insurance recovery assumptions and higher administrative costs While Cooper believes that the insurance has significant additional value, extensive litigation with the insurance carriers may be required to receive recoveries and there is risk that court decisions could reduce the value of the recoveries Additionally, the assumptions on liability payments could prove inaccurate over time If Cooper is unable to reach a settlement with the Representatives and the 1998 Agreement is rejected, Cooper would be required to reflect an accrual for the total estimated liability and a receivable for the probable insurance recoveries Generally accepted accounting principles provide relatively conservative requirements for the recording of insurance recoveries and a substantial portion of the potential insurance recoveries would not be reflected as receivables until future events occur During late February and early March 2004, Cooper reassessed the accrual required based on the then current status of the negotiations with the Representatives and the liability and insurance receivable that would be required to be recorded if this matter is not settled within the Federal-Mogul bankruptcy Cooper concluded that resolution within the Federal-Mogul proposed 524(g) asbestos trust would likely be within the range of the liabilities, net of insurance recoveries, that Cooper would accrue if this matter were not settled within the Federal-Mogul bankruptcy Accordingly, Cooper recorded a $126 0 million after-tax discontinued operations charge, net of a $70 9 income tax benefit, in the fourth quarter of 2003 Cooper has continued discussions with the Representatives, but to date has been unable to reach a satisfactory conclusion At this time, the exact manner in which this issue will be resolved is not known The accrual for potential liabilities related to the Automotive Products sale and the Federal-Mogul bankruptcy was $225 1 million and $252 5 million at December 31, 2004 and 2003, respectively NOTE 17: FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS Derivative Instruments and Hedging Activities Financial Accounting Standards No 133, Accountingfor Derivative Instruments and Hedging Activities ("SFAS No 133"), as amended, requires that all derivatives be recognized as assets and liabilities and measured at fair value For derivative instruments that are not designated as hedges, the gain or loss on the derivative is recognized in earnings currently A derivative instrument may be designated as a hedge of the exposure to changes m the fair value of an asset or liability or variability in expected future cash flows if the hedging relationship is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk during the period of designation If a derivative is designated as a fair value hedge, the gain or loss on the derivative and the offsetting loss or gain on the hedged asset, liability or firm commitment is recognized in earnings For derivative instruments designated as a cash flow hedge, the effective portion of the gam or loss on the derivative instrument is reported as a component of accumulated nonowner changes m equity and reclassified into earnings in the same period that the hedged transaction affects earnings The ineffective portion of the gain or loss is immediately recognized in earnings F-29 http //www.sec gov/Archives/edgar/data/1141982/000095012905001490/h22660el0vk htm 2/6/2006