IBM 2008 Annual Report Download - page 50

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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
Management Discussion ................................................................................................18
ROAD MAP ............................................................................................................ 18
FORWARD-LOOKING AND CAUTIONARY STATEMENTS ...................................... 18
MANAGEMENT DISCUSSION SNAPSHOT ............................................................ 19
DESCRIPTION OF BUSINESS................................................................................20
YEAR IN REVIEW ...................................................................................................25
PRIOR YEAR IN REVIEW ....................................................................................... 39
DISCONTINUED OPERATIONS ..............................................................................44
OTHER INFORMATION ..........................................................................................44
GLOBAL FINANCING .............................................................................................53
Report Of Management ............................................................................................... 58
Report Of Independent Registered Public Accounting Firm ................................. 59
Consolidated Statements ............................................................................................ 60
Notes ............................................................................................................................... 66
Total contractual obligations are reported in the table on page 
excluding the effects of time value and therefore, may not equal the
amounts reported in the Consolidated Statement of Financial Posi-
tion. Total contractual obligations increased $. billion from the
amount reported in the  Annual Report primarily due to the
addition of interest on long-term debt obligations ($. billion),
which was not previously reported, and an increase in long-term debt
obligations ($. billion), including current () maturities.
Purchase obligations include all commitments to purchase goods
or services of either a fixed or minimum quantity that meet any of the
following criteria: () they are noncancelable, () the company would
incur a penalty if the agreement was canceled, or () the company
must make specified minimum payments even if it does not take
delivery of the contracted products or services (take-or-pay). If the
obligation to purchase goods or services is noncancelable, the entire
value of the contract is included in the table above. If the obligation
is cancelable, but the company would incur a penalty if canceled, the
dollar amount of the penalty is included as a purchase obligation.
Contracted minimum amounts specified in take-or-pay contracts are
also included in the table as they represent the portion of each contract
that is a firm commitment.
In the ordinary course of business, the company enters into con-
tracts that specify that the company will purchase all or a portion of
its requirements of a specific product, commodity or service from a
supplier or vendor. These contracts are generally entered into in
order to secure pricing or other negotiated terms. They do not
specify fixed or minimum quantities to be purchased and, therefore,
the company does not consider them to be purchase obligations.
Off-Balance Sheet Arrangements
In the ordinary course of business, the company enters into off-
balance sheet arrangements as defined by the SEC Financial Reporting
Release  (FRR-), “Disclosure in Management’s Discussion and
Analysis about Off-Balance Sheet Arrangements and Aggregate Con-
tractual Obligations.”
The company has no off-balance sheet arrangements that have, or
are reasonably likely to have, a material current or future effect on
finan cial condition, changes in financial condition, revenues or expen-
ses, results of operations, liquidity, capital expenditures or capital
resources. See the table on page  for the company’s contractual
obligations and note O, “Contingencies and Commitments,” on
pages  to , for detailed information about the company’s guar-
antees, financial commitments and indemnification arrangements.
The company does not have retained interests in assets transferred
to unconsolidated entities or other material off-balance sheet inter-
ests or instruments.
  
The application of GAAP requires the company to make estimates
and assumptions about future events that directly affect its reported
financial condition and operating performance. The accounting esti-
mates and assumptions discussed in this section are those that the
company considers to be the most critical to its financial statements.
An accounting estimate is considered critical if both (a) the nature of
the estimate or assumption is material due to the levels of subjectivity
and judgment involved, and (b) the impact within a reasonable range of
outcomes of the estimate and assumption is material to the company’s
financial condition or operating performance. Senior management
has discussed the development, selection and disclosure of these esti-
mates with the Audit Committee of the company’s Board of Directors.
The company’s significant accounting policies are described in note A,
“Significant Accounting Policies,” on pages  to .
A quantitative sensitivity analysis is provided where that informa-
tion is reasonably available, can be reliably estimated and provides
material information to investors. The amounts used to assess sensi-
tivity (e.g.,  percent,  percent, etc.) are included to allow users of
the Annual Report to understand a general direction cause and effect
of changes in the estimates and do not represent management’s
predictions of variability. For all of these estimates, it should be noted
that future events rarely develop exactly as forecast, and estimates
require regular review and adjustment.
Pension Assumptions
For defined benefit pension plans, the measurement of the company’s
benefit obligation and net periodic pension cost/(income) requires
the use of certain assumptions, including, among others, estimates
of discount rates and expected return on plan assets. See note U,
“Retirement-Related Benefits,” on pages  to  for a description
of the company’s defined benefit pension plans.
Changes in the discount rate assumptions will impact the service
cost, (gain)/loss amortization and interest cost components of the net
periodic pension cost/(income) calculation (see page  for informa-
tion regarding the discount rate assumptions) and the projected
benefit obligation (PBO). As presented on page , the company
decreased the discount rate assumption for the IBM Personal Pension
Plan (PPP), a U.S.-based defined benefit plan, by  basis points to
. percent on December , . This change will increase pre-tax
cost and expense recognized in  by approximately $ million. If
the discount rate assumption for the PPP increased by  basis points
on December , , pre-tax cost and expense recognized in 
would have decreased by approximately $ million. Changes in the
discount rate assumptions will impact the PBO which, in turn, may
impact the company’s funding decisions if the PBO exceeds plan
assets. Each  basis point increase or decrease in the discount rate