Dow Chemical 2013 Annual Report Download - page 82

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Based on the fair value analysis completed by the Company in the fourth quarter of 2012, using the key assumptions
defined for the Company as well as the key assumptions defined specifically for each reporting unit, management
concluded that fair value exceeded carrying value for all reporting units that carry goodwill except for the Dow
Formulated Systems reporting unit. Management completed the second step of the quantitative test for Dow
Formulated Systems to compare the implied fair value of the reporting unit's goodwill to the carrying value. As a
result, the Company recorded a goodwill impairment loss of $220 million in the fourth quarter of 2012 which
represented the total amount of goodwill carried by the Dow Formulated Systems reporting unit.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits
are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on
plan assets, discount rates at which the liabilities could have been settled at December 31, 2013, rate of increase in
future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually
and are disclosed in Note 17 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results
that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense
recognized and obligations recorded in future periods. The U.S. pension plans represent 71 percent of the Company’s
pension plan assets and 69 percent of the pension obligations.
The following information relates to the U.S. plans only; a similar approach is used for the Company’s non-U.S. plans.
The Company determines the expected long-term rate of return on assets by performing a detailed analysis of
historical and expected returns based on the strategic asset allocation approved by the Company's Investment
Committee and the underlying return fundamentals of each asset class. The Company’s historical experience with the
pension fund asset performance is also considered. The expected return of each asset class is derived from a forecasted
future return confirmed by historical experience. The expected long-term rate of return is an assumption and not what
is expected to be earned in any one particular year. The weighted-average long-term rate of return assumption used for
determining net periodic pension expense for 2013 was 7.85 percent. This assumption decreased to 7.82 percent for
determining 2014 net periodic pension expense. Future actual pension expense will depend on future investment
performance, changes in future discount rates and various other factors related to the population of participants in the
Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are
based on the yield on high-quality fixed income instruments at the measurement date. Future expected actuarially
determined cash flows of Dow’s major U.S. plans are matched against the Towers Watson RATE:Link yield curve
(based on 60th to 90th percentile bond yields) to arrive at a single discount rate by plan. The weighted average
discount rate increased to 4.92 percent at December 31, 2013, from 4.02 percent at December 31, 2012.
At December 31, 2013, the U.S. qualified plans were underfunded on a projected benefit obligation basis by $3 billion.
The underfunded amount decreased by approximately $2.5 billion compared with December 31, 2012. The decrease
was primarily due to higher discount rates. The Company contributed $561 million to the U.S. qualified plans in 2013.
The assumption for the long-term rate of increase in compensation levels for the principal U.S. qualified plans was 4.5
percent. Since 2002, the Company has used a generational mortality table to determine the duration of its pension and
other postretirement obligations.
The following discussion relates to the Company’s significant pension plans.
The Company bases the determination of pension expense on a market-related valuation of plan assets that reduces
year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period
from the year in which they occur. Investment gains or losses for this purpose represent the difference between the
expected return calculated using the market-related value of plan assets and the actual return based on the market value
of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the
future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the
plan, both gains and losses have been recognized and amortized. At December 31, 2013, net gains of $555 million