Baker Hughes 2014 Annual Report Download - page 68

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or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary
interpretations of local tax law. Resolution of these situations inevitably includes some degree of uncertainty;
accordingly, we provide taxes only for the amounts we believe will ultimately result from these proceedings. The
resulting change to our tax liability, if any, is dependent on numerous factors including, among others, the amount
and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to
negotiate a fair settlement through an administrative process; the impartiality of the local courts; the number of
countries in which we do business; and the potential for changes in the tax paid to one country to either produce, or
fail to produce, an offsetting tax change in other countries. Our experience has been that the estimates and
assumptions we have used to provide for future tax assessments have proven to be appropriate. However, past
experience is only a guide, and the potential exists that the tax resulting from the resolution of current and potential
future tax controversies may differ materially from the amount accrued.
In addition to the aforementioned assessments that have been received from various tax authorities, we also
provide for taxes for uncertain tax positions where formal assessments have not been received. The determination
of these liabilities requires the use of estimates and assumptions regarding future events. Once established, we
adjust these amounts only when more information is available or when a future event occurs necessitating a change
to the reserves such as changes in the facts or law, judicial decisions regarding the application of existing law or a
favorable audit outcome. We believe that the resolution of tax matters will not have a material effect on the
consolidated financial condition of the Company, although a resolution could have a material impact on our
consolidated statements of income for a particular period and on our effective tax rate for any period in which such
resolution occurs.
Pensions and Postretirement Benefit Obligations
Pensions and postretirement benefit obligations and the related expenses are calculated using actuarial models
and methods. This involves the use of two critical assumptions, the discount rate and the expected rate of return on
assets, both of which are important elements in determining pension expense and in measuring plan liabilities. We
evaluate these critical assumptions at least annually, and as necessary, we utilize third party actuarial firms to assist
us. Although considered less critical, other assumptions used in determining benefit obligations and related
expenses, such as demographic factors like retirement age, mortality and turnover, are also evaluated periodically
and are updated to reflect our actual and expected experience.
The discount rate enables us to determine expected future cash flows at a present value on the measurement
date. The development of the discount rate for our largest plans was based on a bond matching model whereby the
cash flows underlying the projected benefit obligation are matched against a yield curve constructed from a bond
portfolio of high-quality, fixed-income securities. Use of a lower discount rate would increase the present value of
benefit obligations and increase pension expense. We used a weighted average discount rate of 4.5% in 2014,
4.0% in 2013 and 4.6% in 2012 to determine pension expense. A 50 basis point reduction in the weighted average
discount rate would have increased pension expense and the projected benefit obligation of our principal pension
plans by approximately $3 million and $108 million, respectively, in 2014.
To determine the expected rate of return on plan assets, we consider the current and target asset allocations,
as well as historical and expected future returns on various categories of plan assets. A lower rate of return would
decrease plan assets which results in higher pension expense. We assumed a weighted average expected rate of
return on our plan assets of 6.7% in 2014, 6.9% in 2013 and 7.0% in 2012. A 50 basis point reduction in the
weighted average expected rate of return on assets of our principal pension plans would have increased pension
expense by approximately $7 million in 2014.
NEW ACCOUNTING STANDARDS UPDATES
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU")
No. 2014-09, Revenue from Contracts with Customers. The ASU will supersede most of the existing revenue
recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the
consideration to which the Company expects to be entitled in exchange for transferring goods or services to a
customer. The new standard also requires significantly expanded disclosures regarding the qualitative and
quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The pronouncement is effective for annual reporting periods beginning after December