IBM 2005 Annual Report Download - page 88
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_87
Inaddition,certainofthecompany’snon-U.S.subsidiaries
havedefinedbenefitnonpensionpostretirementplansthatpro-
videmedicalanddentalbenefitsforeligible non-U.S. retirees
andeligibledependents,aswellaslifeinsuranceforcertaineli-
gible non-U.S. retirees. However, most of the retirees outside
theUnitedStates arecoveredbygovernment sponsoredand
administeredprograms.
AccountingPolicy
DEFINED BENEFIT PENSION AND NONPENSION
POSTRETIREMENT BENEFIT PLANS
Thecompanyaccountsforitsdefinedbenefitpensionplansand
itsnonpensionpostretirementbenefitplansinaccordancewith
theprovisionsoftheapplicableGAAP,whichrequiresthecom-
panytorecordits obligation totheparticipants,aswell as the
corresponding net periodic cost. The company determines its
obligationtotheparticipantsanditsnetperiodiccostprincipally
usingactuarialvaluationsprovidedbythird-partyactuaries.
Theamount that thecompany recordsinits Consolidated
StatementofFinancialPositionisreflectiveofthetotalprojected
benefitobligation(PBO), the fair valueof planassetsand any
deferred gains or losses at the measurement date. The com-
panyusesaDecember31 measurementdateforthemajorityof
its pension plans and nonpension postretirement plans. The
PBO is the actuarial present value of benefits expected to be
paidupon retirementbaseduponestimated futurecompensa-
tionlevels.Thefairvalueofplanassetsrepresentsthecurrent
marketvalueofcumulativecompanycontributionsmadetoan
irrevocabletrust fund, heldforthesolebenefitof participants,
whichareinvestedbythetrust.Deferredgainsorlossesariseas
a result of events that impact the plan and affect current and
future net periodic cost/(income), as permitted by accounting
standards. Examples of such “events” include plan amend-
mentsandchangesinactuarialassumptionssuchasdiscount
rate,rateofcompensationincreasesandmortality.
Theprincipleunderlying recognitionofincome/expenseis
thatemployeesrenderserviceovertheirservicelivesonarela-
tivelysmoothbasisandtherefore,theincomestatementeffects
of pensions or nonpension postretirement benefit plans are
earnedin,andshouldfollow,thesamepattern.Theamountof
netperiodiccost/(income)thatisrecordedintheConsolidated
StatementofEarningsconsistsofseveralcomponentsincluding
servicecost,interestcost,expectedreturnonplanassets,and
amortizationofpreviouslyunrecognizedgainsorlosses.Service
costrepresentsthevalueof thebenefits earnedin the current
yearbytheparticipants.Interestcostrepresentsthetimevalue
ofmoneycostassociatedwiththepassageoftime.Inaddition,
the net periodic cost/(income) is impacted by the anticipated
income/loss from the return oninvestedassets,as well as the
income/expense resulting from the recognition of previously
deferred items. Certain items such as changes in employee
base, planchangesandchangesinactuarialassumptionshave
resulted in deferral of the income/expense impact of such
events. Accounting standards require the use of an attribution
approach which generally spreads income/expense of the
deferreditemsovertheservicelivesoftheemployeesintheplan,
provided such amounts exceed thresholds which are based
upon the obligation or the value of plan assets. The average
servicelivesoftheemployeesin thePPP currentlyapproximates
11 years and varyforemployeesin non-U.S.plans.
Underlying both the calculation of the PBO and net peri-
odic cost/(income) are actuarial valuations, as discussed
above.Thesevaluationsreflectthetermsoftheplansanduse
participant-specificinformationsuchassalary,ageandyears
ofservice,aswellascertain assumptionswhichincludeesti-
matesofdiscountrates,expectedreturnonplanassets,rateof
compensation increases and mortality rates. For additional
informationregardingassumptions,seethesectioninthisfoot-
note entitled “Assumptions Used to Determine Plan Financial
Information,” onpage91.
As noted above, the PBO is the actuarial present value of
benefitsexpectedtobepaiduponretirementbaseduponfuture
compensationlevels.Theaccumulatedbenefitobligation(ABO)
isthepresentvalueoftheactuariallydeterminedcompanyobli-
gation for pension payments, assuming no further salary
increasesforemployees.Forinstancesinwhichthefairvalueof
planassetsarelessthantheABO,asofthe measurementdate
(definedasanunfundedABOposition),aminimumliabilityequal
tothisdifferenceisrecognizedintheConsolidatedStatementof
Financial Position. The offset to the minimum liability results in
establishing an intangible asset not exceeding unrecognized
priorservice cost. Anyremainingoffsettingamount results in a
net of tax charge to the Accumulated gains and (losses) not
affectingretainedearningssectionofStockholders’ Equityinthe
ConsolidatedStatementofFinancialPosition.
DEFINED CONTRIBUTION PLANS
Thecompanyrecordsexpensefordefinedcontributionplansfor
the company’s matching contribution when the employee ren-
dersservicetothecompany,essentiallycoincidingwiththecash
contributionstotheplans.