IBM 2011 Annual Report Download - page 84

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies82
Net periodic pension and nonpension postretirement benefit
cost/(income) is recorded in the Consolidated Statement of Earnings
and includes service cost, interest cost, expected return on plan
assets, amortization of prior service costs/(credits) and (gains)/losses
previously recognized as a component of other comprehensive
income/(loss) and amortization of the net transition asset remaining
in accumulated other comprehensive income/(loss). Service cost
represents the actuarial present value of participant benefits earned
in the current year. Interest cost represents the time value of money
cost associated with the passage of time. Certain events, such as
changes in the employee base, plan amendments and changes in
actuarial assumptions, result in a change in the benefit obligation
and the corresponding change in other comprehensive income/
(loss). The result of these events is amortized as a component of
net periodic cost/(income) over the service lives or life expectancy
of the participants, depending on the plan, provided such amounts
exceed thresholds which are based upon the benefit obligation or
the value of plan assets. Net periodic cost/(income) is recorded in
cost, SG&A and RD&E in the Consolidated Statement of Earnings
based on the employees’ respective function.
(Gains)/losses and prior service costs/(credits) not recognized
as a component of net periodic cost/(income) in the Consolidated
Statement of Earnings as they arise are recognized as a component
of other comprehensive income in the Consolidated Statement of
Comprehensive Income. Those (gains)/losses and prior service costs/
(credits) are subsequently recognized as a component of net periodic
cost/(income) pursuant to the recognition and amortization provisions
of applicable accounting guidance. (Gains)/losses arise as a result
of differences between actual experience and assumptions or as a
result of changes in actuarial assumptions. Prior service costs/(credits)
represent the cost of benefit changes attributable to prior service
granted in plan amendments.
The measurement of benefit obligations and net periodic cost/
(income) is based on estimates and assumptions approved by the
company’s management. These valuations reflect the terms of the
plans and use participant-specific information such as compensation,
age and years of service, as well as certain assumptions, including
estimates of discount rates, expected return on plan assets, rate of
compensation increases, interest crediting rates and mortality rates.
Defined Contribution Plans
The company’s contribution for defined contribution plans is recorded
when the employee renders service to the company, essentially
coinciding with the cash contributions to the plans. The charge is
recorded in cost, SG&A and RD&E in the Consolidated Statement
of Earnings based on the employees’ respective function.
Stock-Based Compensation
Stock-based compensation represents the cost related to stock-
based awards granted to employees. The company measures stock-
based compensation cost at the grant date, based on the estimated
fair value of the award and recognizes the cost on a straight-line
basis (net of estimated forfeitures) over the employee requisite
service period. The company estimates the fair value of stock
options using a Black-Scholes valuation model. The company also
grants its employees Restricted Stock Units (RSUs), including
Retention Restricted Stock Units (RRSUs), and Performance Share
Units (PSUs). RSUs are stock awards granted to employees that
entitle the holder to shares of common stock as the award vests,
typically over a one- to five-year period. The fair value of the awards
is determined and fixed on the grant date based on the company’s
stock price, adjusted for the exclusion of dividend equivalents. All
stock-based compensation cost is recorded in cost, SG&A, and
RD&E in the Consolidated Statement of Earnings based on the
employees’ respective function.
The company records deferred tax assets for awards that result
in deductions on the company’s income tax returns, based on the
amount of compensation cost recognized and the statutory tax rate
in the jurisdiction in which it will receive a deduction. Differences
between the deferred tax assets recognized for financial reporting
purposes and the actual tax deduction reported on the income tax
return are recorded in additional paid-in capital (if the tax deduction
exceeds the deferred tax asset) or in the Consolidated Statement
of Earnings (if the deferred tax asset exceeds the tax deduction
and no additional paid-in capital exists from previous awards). See
note R, “Stock-Based Compensation,” on pages 118 to 121 for
additional information.
Income Taxes
Income tax expense is based on reported income before income
taxes. Deferred income taxes reflect the tax effect of temporary
differences between asset and liability amounts that are recognized
for financial reporting purposes and the amounts that are recognized
for income tax purposes. These deferred taxes are measured by
applying currently enacted tax laws. Valuation allowances are
recognized to reduce deferred tax assets to the amount that will
more likely than not be realized. In assessing the need for a valuation
allowance, management considers all available evidence for each
jurisdiction including past operating results, estimates of future
taxable income and the feasibility of ongoing tax planning strategies.
When the company changes its determination as to the amount of
deferred tax assets that can be realized, the valuation allowance is
adjusted with a corresponding impact to income tax expense in the
period in which such determination is made.
The company recognizes tax liabilities when, despite the company’s
belief that its tax return positions are supportable, the company
believes that certain positions may not be fully sustained upon review
by tax authorities. Benefits from tax positions are measured at the
largest amount of benefit that is greater than 50 percent likely of
being realized upon settlement. The current portion of tax liabilities
is included in taxes and the noncurrent portion of tax liabilities is