IBM 2005 Annual Report Download - page 92
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_91
InDecember2005,thecompanyapproved amendments
to the PPP and the SERP which provided that active partici-
pantswillnolongeraccruebenefitsunderthese plans effec-
tive December31,2007.Asaresultofthisaction,thecompany
recordedacurtailmentchargeofapproximately$267millionin
the Consolidated Statement of Earnings for the year ended
December 31, 2005. In addition, the company recorded a
reductionin thePBObalances ofapproximately$775million
and $13 million at December 31, 2005 for the PPP and the
SERP,respectively.
Inaddition,inDecember2005,thecompanyamendedthe
IBMJapanPensionPlan,whichthecompanyconsidersoneof
itsmaterialnon-U.S.pension plans.Thisamendmentmodified
certainplantermsincludingachangeinthemethodofcalculat-
ingbenefitsforcertainparticipantsatDecember31,2005.This
amendmentdidnot impact netperiodiccost/(income),however,
theamendmentresultedina$561 millionreductiontothePBO
asofDecember31,2005.
The overall change in the Net prepaid pension asset bal-
ance from 2004 to 2005 of approximately $500 million was
causedbyanincreasein the prepaidpensionassetrelatedto
thePPPasofDecember31,2005, principallydueto a $1.7bil-
lioncontributionmadebythecompanyinJanuary2005which
increasedthefairvalueofplanassets.Inaddition,aportionof
theoverallincreaseintheprepaidpensionassetinthePPPwas
drivenbythereductionofthePBOasaresultofthe planamend-
mentthatcaused the curtailmentcharge previously discussed.
The reduction in the material non-U.S. plan prepaid pension
assetwasdrivenprincipallybythereductioninthePBOrelated
totheamendmentsmadetotheIBMJapanPensionPlan. The
increaseinthecompany’sPrepaidpensionassetbalancefrom
2003 to 2004 was primarily due to a $700 million contribution
madebythecompanytothePPPduring2004.
ASSUMPTIONS USED TO DETERMINE PLAN
FINANCIAL INFORMATION
Underlying both the calculation of the PBO and net periodic
cost/(income)areactuarialvaluations.Thesevaluationsusepar-
ticipant-specific information such as salary, age and years of
service,as well as certain assumptions, themostsignificant of
which include: estimates of discount rates, expected return on
plan assets, rate of compensation increases, interest crediting
ratesandmortalityrates.Thecompanyevaluatestheseassump-
tions,ataminimum,annually,andmakeschangesasnecessary.
Followingisinformationonassumptionswhichhadasignif-
icant impact on net periodic cost/(income) and the year-end
benefitobligations for definedbenefit pension plans and non-
pensionpostretirementbenefitplanswereasfollows:
NONPENSIONPOSTRETIREMENT
SIGNIFICANTDEFINEDBENEFITPENSIONPLANS* BENEFITPLANS
U.S. PLANS NON-U.S. PLANS U.S. PLANS
2005 2004 2003 2005 2004** 2003** 2005 2004 2003
Weighted-average assumptions used
to determine netperiodic cost/(income)
fortheyearended December31:
Discountrate ««««5.75% «6.00% «6.75% «4.70% «5.20% «5.50% «5.75% «6.00% 6.75%
Expectedlong-termreturnonplanassets «8.00% «8.00% «8.00% «7.20% «7.50% «7.60% N/A N/A N/A
Rateofcompensationincrease «4.00% «4.00% «4.00% «3.00% 2.90% 3.20% N/A N/A N/A
Weighted-average assumptions
usedto determine benefit
obligationat December31:
Discountrate «5.50% «5.75% «6.00% «4.20% «4.70% «5.20% «««5.50% «5.75% «6.00%
Rateofcompensationincrease «4.00% «4.00% «4.00% «3.00% 3.10% 3.00% N/A N/A N/A
* SignificantdefinedbenefitplansconsistofthequalifiedportionoftheIBMPPPintheU.S.andthematerialnon-U.S.Plans.
** Prioryearamountshavebeenreclassifiedtoconformwithcurrentyearpresentation.
N/A—Notapplicable
DISCOUNTRATE
Thediscount rate assumptions used forpension and nonpen-
sion postretirement benefit plan accounting reflect the yields
available on high-quality, fixed income debt instruments. For
U.S. discount rates, a portfolio of corporate bonds is con-
structed with maturities that match the expected timing of the
benefitobligationpayments.Inthenon-U.S.,wheremarketsfor
high-quality long-term bonds are not generally as well devel-
oped, long-term government bonds are used as a base, to
which a credit spread is added to simulate corporate bond
yieldsatthesematurities inthejurisdictionofeachplan,asthe
benchmarkfordevelopingtherespectivediscountrates.
ForthePPP,thechangesinthediscountrateimpactedboth
netperiodiccostandbenefitobligation.Forpurposesofcalcu-
lating the 2005 net periodic cost, the discount rate changed
from6.0percentto5.75percentwhichresultedinanincreasein
net periodic cost of approximately $90 million. Similarly, the
2004changeindiscountratefrom6.75 percentto6.0 percent
increasednetperiodiccostbyapproximately$197million.