IBM 2010 Annual Report Download - page 126

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies124
Valuation Techniques
The following is a description of the valuation techniques used to
measure plan assets at fair value. There were no changes in valuation
techniques during 2010 and 2009.
Equity securities are valued at the closing price reported on
the stock exchange on which the individual securities are traded.
IBM common stock is valued at the closing price reported on the
New York Stock Exchange. Equity commingled/mutual funds are
typically valued using the net asset value (NAV) provided by the
administrator of the fund and reviewed by the company. The NAV
is based on the value of the underlying assets owned by the fund,
minus liabilities and divided by the number of shares or units out-
standing. These assets are classified as Level 1, Level 2 or Level
3 depending on availability of quoted market prices.
The fair value of fixed income securities is typically estimated
using pricing models, quoted prices of securities with similar char-
acteristics or discounted cash flows and are generally classified
as Level 2. If available, they are valued using the closing price
reported on the major market on which the individual securities
are traded.
Cash includes money market accounts that are valued at their
cost plus interest on a daily basis, which approximates fair value.
Short-term investments represent securities with original maturi-
ties of one year or less. These assets are classified as Level 1 or
Level 2.
Private equity and private real estate partnership valuations
require significant judgment due to the absence of quoted market
prices, the inherent lack of liquidity and the long-term nature of
such assets. These assets are initially valued at cost and are
reviewed periodically utilizing available and relevant market data
to determine if the carrying value of these assets should be
adjusted. These investments are classified as Level 3. The valua-
tion methodology is applied consistently from period to period.
Exchange traded derivatives are valued at the closing price
reported on the exchange on which the individual securities are
traded, while forward contracts are valued using a mid-close price.
Over-the-counter derivatives are typically valued using pricing
models. The models require a variety of inputs, including, for
example, yield curves, credit curves, measures of volatility and
foreign exchange rates. These assets are classified as Level 1 or
Level 2 depending on availability of quoted market prices.
Expected Contributions
Defined Benefit Pension Plans
It is the company’s general practice to fund amounts for pensions
sufficient to meet the minimum requirements set forth in applicable
employee benefits laws and local tax laws. From time to time, the
company contributes additional amounts as it deems appropriate.
The company contributed $865 million and $1,252 million in
cash to non-U.S. plans, including non-U.S. multi-employer plans,
during the years ended December 31, 2010 and 2009, respectively.
In 2011, the company is not legally required to make any con-
tributions to the U.S. defined benefit pension plans. However,
depending on market conditions, or other factors, the company
may elect to make discretionary contributions to the Qualified
PPP during the year.
The Pension Protection Act of 2006 (the Act), enacted into law
in 2006, is a comprehensive reform package that, among other
provisions, increases pension funding requirements for certain U.S.
defined benefit plans, provides guidelines for measuring pension
plan assets and pension obligations for funding purposes and
raises tax deduction limits for contributions to retirement-related
benefit plans. The additional funding requirements by the Act apply
to plan years beginning after December 31, 2007. The Act was
updated by the Worker, Retiree and Employer Recovery Act of
2008, which revised the funding requirements in the Act by clari-
fying that pension plans may smooth the value of pension plans
over 24 months. At December 31, 2010, no mandatory contribution
is required for 2011.
In 2011, the company estimates contributions to its non-U.S.
plans to be approximately $900 million, which will be mainly con-
tributed to defined benefit pension plans in Japan and Switzerland.
This amount represents the legally mandated minimum contribu-
tions. Financial market performance in 2011 could increase the
legally mandated minimum contribution in certain countries which
require monthly or daily remeasurement of the funded status.
The company could also elect to contribute more than the legally
mandated amount based on market conditions or other factors.
Nonpension Postretirement Benefit Plans
The company contributed $363 million and $293 million to the
nonpension postretirement benefit plans during the years ended
December 31, 2010 and 2009. These contribution amounts exclude
the Medicare-related subsidy discussed on page 125.