IBM 2012 Annual Report Download - page 133

132 Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
132
Valuation Techniques
The following is a description of the valuation techniques used to
measure plan assets at fair value. There were no changes in valua-
tion techniques during 2012 and 2011.
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 outstanding. 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 maturities
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 valuation 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 exam-
ple, 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 $557 million and $728 million in cash
to non-U.S. defined benefit pension plans and $60 million and
$70 million in cash to non-U.S. multi-employer plans during the
years ended December 31, 2012 and 2011, respectively. The cash
contributions to multi-employer plans represent the annual cost
included in net periodic (income)/cost recognized in the Consoli-
dated Statement of Earnings. The company has no liability for
participants in multi-employer plans other than its own employees.
As a result, the company’s participation in multi-employer plans has
no material impact on the company’s financial statements.
In 2013, 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 clarifying that pension
plans may smooth the value of pension plans over 24 months.
At December 31, 2012, no mandatory contribution was required
for 2013.
In 2013, the company estimates contributions to its non-U.S.
defined benefit and multi-employer plans to be approximately
$700 million, which will be mainly contributed to defined benefit
pension plans in Japan, the UK and Switzerland. This amount
represents the legally mandated minimum contributions. Financial
market performance in 2013 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 $693 million and $362 million to the non-
pension postretirement benefit plans during the years ended
December 31, 2012 and 2011, respectively. These contribution
amounts exclude the Medicare-related subsidy discussed on page
133. The 2012 amount includes a $400 million voluntary cash con-
tribution to the U.S. non-pension postretirement benefit plan. This
advanced funding will be utilized to fund post-2012 benefit payments
for Medicare-eligible prescription drugs.