IBM 2009 Annual Report Download - page 54

Critical Accounting Estimates
The application of GAAP requires the company to make esti-
mates and assumptions about future events that directly affect
its reported financial condition and operating performance. The
accounting estimates 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
estimates 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
70 to 79.
A quantitative sensitivity analysis is provided where that infor-
mation is reasonably available, can be reliably estimated and
provides material information to investors. The amounts used to
assess sensitivity (e.g., 1 percent, 10 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 forecasted, and estimates require regular
review and adjustment.
Pension Assumptions
The measurement of the company’s benefit obligation to its
employees 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.
Changes in the discount rate assumptions will impact the
(gain)/loss amortization and interest cost components of the net
periodic pension cost/(income) calculation (see page 115 for
information regarding the discount rate assumptions) and the
projected benefit obligation (PBO). As presented on page 115,
the company decreased the discount rate assumption for the
IBM Personal Pension Plan (PPP), a U.S.-based defined benefit
plan, by 15 basis points to 5.60 percent on December 31, 2009.
This change will increase pre-tax cost and expense recognized
in 2010 by an estimated $40 million. If the discount rate assump-
tion for the PPP increased by 15 basis points on December 31,
2009, pre-tax cost and expense recognized in 2010 would have
decreased by an estimated $41 million. Changes in the dis-
count rate assumptions will impact the PBO which, in turn, may
impact the company’s funding decisions if the PBO exceeds plan
assets. Each 25 basis point increase or decrease in the discount
rate will cause a corresponding decrease or increase, respec-
tively, in the PPP’s PBO of an estimated $1.2 billion based upon
December 31, 2009 data. The PPP’s PBO (after the decrease
in discount rate presented on page 115) and plan assets as of
December 31, 2009 is presented on page 113.
The expected long-term return on plan assets is used in cal-
culating the net periodic pension cost/(income). See page 115
for information regarding the expected long-term return on plan
assets assumption. The differences between the actual return on
plan assets and expected long-term return on plan assets are
recognized over five years in the expected return on plan assets
line in net periodic pension cost/(income) and also as a com-
ponent of actuarial gains/losses, which are recognized over the
service lives or life expectancy of the plan participants, depending
on the plan, provided such amounts exceed thresholds which are
based upon the obligation or the value of plan assets.
To the extent the outlook for long-term returns changes such
that management changes its expected long-term return on plan
assets assumption, each 50 basis point increase or decrease in
the expected long-term return on PPP plan assets assumption
will have an estimated increase or decrease, respectively, of
$252 million on the following year’s pre-tax net periodic pension
cost/(income) (based upon the PPP’s plan assets at December
31, 2009 and assuming no contributions are made in 2010).
The company may voluntarily make contributions or be
required, by law, to make contributions to its pension plans.
Actual results that differ from the estimates may result in more
or less future company funding into the pension plans than is
planned by management.
Impacts of these types of changes on the company’s defined
benefit pension plans in other countries worldwide will vary
depending upon the status of each respective plan.
Revenue Recognition
Application of the various accounting principles in GAAP related
to the measurement and recognition of revenue requires the
company to make judgments and estimates. Specifically, com-
plex arrangements with nonstandard terms and conditions may
require significant contract interpretation to determine the appro-
priate accounting, including whether the deliverables specified in
a multiple element arrangement should be treated as separate
units of accounting. Other significant judgments include deter-
mining whether IBM or a reseller is acting as the principal in a
transaction and whether separate contracts are considered part
of one arrangement.
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