CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to understanding Praxair’s financial statements and accompanying notes prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Their application places significant importance on management’s judgement as a result of the need to make estimates of matters that are inherently uncertain. Praxair’s financial position, results of operations and cash flows could be materially affected if actual results differ from estimates made. These policies are determined by management and have been reviewed by Praxair’s Audit Committee.

DEPRECIABLE LIVES OF PROPERTY, PLANT AND EQUIPMENT
Praxair’s net property, plant and equipment at December 31, 2003 was $5,252 million, representing 63% of the company’s consolidated total assets. Depreciation expense for the year ended December 31, 2003 was $517 million, or 11% of total operating costs. Management judgement is required in the determination of the estimated depreciable lives that are used to calculate the annual depreciation expense and accumulated depreciation.

Property, plant and equipment are recorded at cost and depreciated over the assets’ estimated useful lives on a straight-line basis for financial reporting purposes. The estimated useful life represents the projected period of time that the asset will be productively employed by the company and is determined by management based on many factors, including historical experience with similar assets, technological life cycles, geographic locations and contractual supply relationships with on-site customers. Circumstances and events relating to these assets, such as on-site contract modifications, are monitored to ensure that changes in asset lives or impairments (see “Asset Impairments” below) are identified and prospective depreciation expense or impairment expense is adjusted accordingly. Praxair’s largest asset values relate to cryogenic air separation production plants with average depreciable lives of 15 years.

Based upon the assets as of December 31, 2003, if depreciable lives of machinery and equipment, on average, were increased or decreased by one year, annual depreciation expense would be decreased by approximately $25 million or increased by approximately $30 million, respectively.

PENSION BENEFITS
Pension benefits represent financial obligations that will be ultimately settled in the future with employees who meet eligibility requirements. Because of the uncertainties involved in estimating the timing and amount of future payments, significant estimates are required to calculate pension expense and liabilities related to the company’s plans. The company utilizes the services of several independent actuaries, whose models are used to facilitate these calculations.

Several key assumptions are used in actuarial models to calculate pension expense and liability amounts recorded in the financial statements. Management believes the three most significant variables in the models are the expected long-term rate of return on plan assets, the discount rate, and the expected rate of compensation increase. The actuarial models also use assumptions for various other factors including employee turnover, retirement age, and mortality. Praxair management believes the assumptions used in the actuarial calculations are reasonable and are within accepted practices in each of the respective geographic locations in which we operate.

The weighted average expected long-term rates of return on pension plan assets were 8.5% for U.S. plans and 8.0% for international plans at December 31, 2003. These rates are determined annually by management based on a weighted average of current and historical market trends, historical portfolio performance and the portfolio mix of investments. A 0.50% change in these expected long-term rates of return, with all other variables held constant, would change Praxair’s pension expense by approximately $5 million.

The weighted average discount rates for pension plan liabilities were 6.25% for U.S. plans and 6.0% for international plans at December 31, 2003. These rates are used to calculate the present value of plan liabilities and are determined annually by management based on market yields for high-quality fixed income investments on the measurement date. A 0.50% change in these discount rates, with all other variables held constant, would change Praxair’s pension expense by approximately $8 million and would impact the projected benefit obligation (PBO) by approximately $84 million.

The weighted average expected rates of compensation increase for Praxair’s pensions plans were 3.25% for U.S. plans and international plans at December 31, 2003. These estimated annual compensation increases are determined by management every year and are based on historical trends and market indices. A 0.50% change in the expected rate of compensation increase, with all other variables held constant, would change Praxair’s pension expense by approximately $4 million and would impact the projected benefit obligation (PBO) by approximately $23 million. A change in this assumption is usually consistent with a change in the discount rate assumption, and the earnings impacts generally offset one another.

ASSET IMPAIRMENT
At December 31, 2003, the company had goodwill of $1,075 million which represented excess purchase price for acquired businesses over the fair value of the net assets acquired. Management reviews goodwill for impairment annually or when events or circumstances indicate that its value may have declined. In order to evaluate impairment of goodwill, assumptions about the future condition and operations of the business unit to which the goodwill asset relates are made. These assumptions are applied to complex models in which we estimate the fair value of the business unit utilizing projected future cash flows, multiples of earnings and sales and other factors. Using these models, management determines whether an impairment charge is required to reduce goodwill to its estimated fair value.

This evaluation process is complex and involves subjective assumptions about future events and discount factors to be applied to projected cash flows. Estimated values can be affected by many factors beyond the company’s control such as business and economic trends, government regulation, and technological changes. Management believes that the assumptions made to evaluate goodwill impairment are appropriate and reasonable. However, changes in circumstances or conditions affecting these assumptions could result in impairment charges in future periods that may be material. At January 1, 2002, the company adopted SFAS 142 and employing the methodologies noted, determined that goodwill for six reporting units was impaired, which resulted in a pre-tax impairment charge of $146 million. At December 31, 2003, the remaining goodwill has been assigned to eight reporting units in amounts ranging from $7 million to $739 million.

The impairment evaluation process for property, plant and equipment uses projected undiscounted future cash flows. This test is performed when circumstances and events indicate that the carrying amount of an individual asset or grouping of assets may not be recoverable. Should undiscounted cash flows be less than the carrying amount of the assets, an impairment charge reducing the carrying amount to fair value is required. Fair value is determined based on the most appropriate valuation technique, including discounted cash flows.

INCOME TAXES
At December 31, 2003, Praxair had deferred tax assets of $569 million (net of valuation allowances of $99 million), and deferred tax liabilities of $802 million. Income tax expense was $174 million for the year ended December 31, 2003.

In the preparation of consolidated financial statements, Praxair estimates income taxes based on diverse and complex regulations that exist in various jurisdictions where we conduct business. Deferred income tax assets and liabilities represent tax benefits or obligations that arise from temporary differences due to differing treatment of certain items for accounting and income tax purposes. Praxair evaluates deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character (e.g. capital gain versus ordinary income treatment), amount and timing to result in their recovery. We establish a valuation allowance when management determines that it is more likely than not that a deferred tax asset will not be realized to reduce the assets to their realizable value. Considerable judgements are required in establishing deferred tax valuation allowances and in assessing probable exposures related to tax matters. Our tax returns are subject to audit and local taxing authorities could challenge our tax positions. The company’s practice is to review tax-filing positions by jurisdiction and to record provisions for probable tax assessments, including interest and penalties, if applicable. Praxair believes it records and/or discloses such potential tax liabilities as appropriate and has reasonably estimated its income tax liabilities and recoverable tax assets.