INTERNATIONAL PAPER CO /NEW/

The preparation of financial statements in conformity with U.S. GAAP requires International Paper to establish

accounting policies and to make estimates that affect both the amounts and timing of the recording of assets,

liabilities, revenues and expenses. Some of these estimates require subjective judgments about matters that are

inherently uncertain.

Accounting policies whose application has had or is reasonably likely to have a material impact on the reported

results of operations and financial position of International Paper, and that can require a significant level of

estimation or uncertainty by management that affect their application, include the accounting for impairment of long-

lived assets and goodwill, pensions, income taxes and business combinations. Management has discussed the

selection of critical accounting policies and the effect of significant estimates with the Audit and Finance Committee

of the Company’s Board of Directors and with its independent registered public accounting firm.

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that

indicate that the carrying value of the assets may not be recoverable. A recoverability test is performed by

comparing the undiscounted cash flows to the carrying value of the assets. If the carrying amount is less than the

undiscounted cash flows, the fair value of the assets is compared to the carrying value to determine if they are

impaired. An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value.

In conjunction with the previous announcement and subsequent sale of the Global Cellulose Fibers business to AIP

for $1.5 billion, the Company evaluated the long-lived assets for impairment. As a result, the Company recorded a

net pre-tax charge of $1.07 billion ($805 million after taxes) for the year ended December 31, 2025 due to the

difference between the sales price less estimated selling costs and the carrying value. This non-cash charge is

included in Discontinued Operations, net of taxes in the accompanying consolidated statements of operations.

We perform an annual goodwill impairment as of October 1. Additionally, interim assessments of possible

impairments of goodwill are also made when events or changes in circumstances indicate that the carrying value of

the asset may not be recoverable through future operations. A goodwill impairment exists when the carrying amount

of goodwill exceeds its fair value.

ASU 2011-08, "Intangibles - Goodwill and Other," allows entities testing goodwill for impairment the option of

performing a qualitative assessment before performing the quantitative goodwill impairment test. If a qualitative

assessment is performed, an entity is not required to perform the quantitative goodwill impairment test unless the

entity determines that, based on that qualitative assessment, it is more likely than not that its fair value is less than

its carrying value.

The January 31, 2025 acquisition of DS Smith added approximately $4.3 billion of goodwill, of which $3.4 billion was

allocated to the PS EMEA reporting unit and $0.9 billion was related to the PS NA reporting unit.

The Company completed its annual goodwill impairment testing for the PS NA and PS EMEA reporting units as of

October 1, 2025. Based on this assessment, no impairment was identified for either reporting unit.

Later in the fourth quarter of 2025, the Company, as part of its annual strategic review, identified a triggering event

driven by its updated strategic plan impacted by macroeconomic and industry outlooks, as well as the Company’s

evaluation of a potential separation into two independent, publicly traded companies. In response, the Company

performed a quantitative goodwill impairment test for the PS NA and PS EMEA reporting units, comparing each

reporting unit’s carrying value to its estimated fair value.

Estimated fair values were determined using discounted future cash flows and market multiples, which use inputs

that are classified within Level 2 and Level 3 of the fair value hierarchy. The discounted cash flow approach requires

significant management judgments, including assumptions related to forecasts of future revenues, operating

margins, and discount rates. The market‑multiple approach under the guideline public company method similarly

requires significant assumptions regarding adjusted EBITDA multiples.

As of December 31, 2025, the quantitative impairment test concluded that the carrying amount of the PS EMEA

reporting unit exceeded its estimated fair value. As a result, the Company recorded a goodwill impairment charge of

approximately$2.47 billion, which is reflected in Impairment of goodwill in the accompanying consolidated

statement of operations. After the impairment charge the carrying value of the PS EMEA reporting unit approximates

fair value. The estimated fair value of the PS EMEA reporting unit is sensitive to the underlying assumptions and a

material change in any one, or combination of assumptions, could result in material future goodwill impairment. The

carrying amount of the PS NA reporting unit did not exceed its estimated fair value, andno impairment was

recorded for that reporting unit.

PENSION BENEFIT OBLIGATIONS

The calculation of the pension benefit obligation and corresponding expense amounts are determined annually, with

involvement of International Paper’s consulting actuary, and are dependent upon various assumptions including the

expected long-term rate of return on plan assets, discount rates, projected future compensation increases and

mortality rates.

The calculations of pension benefit obligations and expense require decisions about a number of key assumptions

that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan

assets and the discount rate used to calculate plan liabilities.

Benefit obligations and fair values of plan assets as of December 31, 2025, for International Paper’s pension plan

were as follows:

The table below shows the discount rate used by International Paper to calculate U.S. pension obligations for the

years shown:

International Paper determines the actuarial assumptions to calculate liability information as of December 31 each

year or more frequently if required and pension expense for the following year. International Paper consults with our

third-party actuary in determining these actuarial assumptions. The expected long-term rate of return on plan assets

is based on projected rates of return for current asset classes in the plan’s investment portfolio. The discount rate

assumption was determined based on a hypothetical settlement portfolio selected from a universe of high-quality

corporate bonds.

The expected long-term rate of return on U.S. pension plan assets used to determine net periodic cost for the year

ended December 31, 2025 was 7.00%.

Decreasing the expected long-term rate of return on U.S. plan assets by an additional 0.25% would increase 2026

pension expense by approximately$21 million, while a decrease of 0.25% in the discount rate would increase

pension expense by approximately$13 million.

Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were:

ASC 715, “Compensation – Retirement Benefits,” provides for delayed recognition of actuarial gains and losses,

including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the

assumed discount rate, differences between the actual and expected return on plan assets, and other assumption

changes. These net gains and losses are recognized in pension expense prospectively over a period that

approximates the average remaining service period of active employees expected to receive benefits under the

plans to the extent that they are not offset by gains and losses in subsequent years.

The increase in 2025 pension expense primarily reflects lower asset returns, higher interest cost due to a higher

discount rate, and the impact of curtailment and settlement losses.

Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation

increases remain the same as of December 31, 2025, projected future net periodic pension plan expense (income)

would be as follows:

The Company estimates that it will record net pension income of approximately$14 million for its U.S. defined

benefit plans in 2026, compared to expense of$42 million in 2025.

The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2025 totaled

approximately$8.5 billion, consisting of approximately 64% hedging assets and 36% return seeking assets. The

Company’s funding policy for its qualified pension plan is to contribute amounts sufficient to meet legal funding

requirements, plus any additional amounts that the Company may determine to be appropriate considering the

funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. The

Company continually reassesses the amount and timing of any discretionary contributions and could elect to make

voluntary contributions in the future. There were no required contributions to the U.S. qualified plan in 2025. The

nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled$49 million for the

year ended December 31, 2025.

INCOME TAXES

International Paper records its global tax provision based on the respective tax rules and regulations for the

jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax

purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are

recorded based upon the Company’s evaluation of the “more likely than not” outcome considering technical merits

of the position based on specific tax regulations and facts of each matter. Changes to recorded liabilities are only

made when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax

authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or recent court cases

that are relevant to the matter. Accrued interest related to these uncertain tax positions is recorded in our

consolidated statement of operations in Interest expense, net. The Company's uncertain tax positions were $384

million and $204 million at December 31, 2025 and 2024, respectively.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will

not be realized. Significant judgment is required in assessing the need for and magnitude of appropriate valuation

allowances against deferred tax assets. This assessment is completed by tax jurisdiction and relies on both positive

and negative evidence available, with significant weight placed on recent financial results. Cumulative reported pre-

tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in

the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight

placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we

use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable

income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the

use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is

inherently complex and subjective. The realization of these assets is dependent on generating future taxable

income, as well as successful implementation of various tax planning strategies. The Company's valuation

allowance was$1.5 billion and$1.2 billion at December 31, 2025 and 2024, respectively.

While International Paper believes that these judgments and estimates are appropriate and reasonable under the

circumstances, actual resolution of these matters may differ from recorded estimated amounts.

BUSINESS COMBINATIONS

We account for acquisitions under ASC 805, Business Combinations, which requires allocating the purchase price

to the fair values of assets acquired and liabilities assumed as of the acquisition date. This process involves

significant estimates and assumptions, particularly for property, plant and equipment and identifiable intangible

assets such as customer relationships and lists, trade names, and technology. Key inputs include forecasted cash

flows, discount rates, market data, and other valuation factors. These estimates are inherently judgmental and

subject to change as additional information becomes available during the measurement period (up to 12 months

after closing).

On January 31, 2025, we completed the combination with DS Smith for $9.9 billion. The purchase price allocation

resulted in goodwill for the excess of purchase price over the fair value of net assets acquired. The fair value

assigned to the assets and liabilities acquired above were measured using Level 2 and Level 3 inputs. The

estimated fair value of inventory was determined using the Comparative Sales and Replacement Cost methods.

Fair value estimates related to the trade name and patents identified intangible assets were determined using the

Relief from Royalty method. The fair value estimates related to customer relationships and lists identified intangible

assets were determined using the Multi-Period Excess Earnings method. The plants, properties and equipment,

specifically the machinery and equipment and buildings and improvements, were valued using either the indirect or

direct methods of the Cost Approach, while the land was valued using the Sales Comparison Approach. We have

finalized the fair values of property, plant and equipment, intangible assets, and certain tax-related items, with

assistance from third-party valuation specialists. See Note 1 and Note 7 of Item 8. Financial Statements and

Supplementary Data for additional details.