Baker Hughes 2015 Annual Report Download - page 50

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consolidated statements of income (loss) 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 3.6% in 2015,
4.5% in 2014 and 4.0% in 2013 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 $7 million and $85 million, respectively, in 2015.
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 6.8% in 2015, 6.7% in 2014 and 6.9% in 2013. 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 2015.
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 to be applied retrospectively and is effective for annual reporting
periods beginning after December 15, 2017, with early adoption permitted as of January 1, 2017. We have not
completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and
related disclosures.
In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs. The ASU
requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. The pronouncement is
effective for annual reporting periods beginning after December 15, 2015. We currently report debt issuance costs
consistent with the guidance of this ASU; therefore there will be no impact on our consolidated financial statements
and related disclosures upon adoption.
In April 2015, the FASB issued ASU No. 2015-5, Customer's Accounting for Fees Paid in a Cloud Computing
Arrangement. The ASU provides guidance to customers about whether a cloud computing arrangement includes a
software license and the related accounting treatment. The pronouncement is effective for annual reporting periods
beginning after December 15, 2015. Adoption of this pronouncement is not expected to have a material impact on
our consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires
inventory measured using the FIFO or average cost methods to be subsequently measured at the lower of cost or