IBM 2012 Annual Report Download - page 83

82 Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
82
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 previ-
ously recognized as a component of OCI and amortization of the
net transition asset remaining in accumulated other comprehensive
income/(loss) (AOCI). 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 pas-
sage 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
OCI. 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 functions.
(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 OCI in the Consolidated Statement of Comprehensive Income.
Those (gains)/losses and prior service costs/(credits) are subse-
quently recognized as a component of net periodic cost/(income)
pursuant to the recognition and amortization provisions of appli-
cable 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 compensa-
tion, 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. The
charge is recorded in Cost, SG&A and RD&E in the Consolidated
Statement of Earnings based on the employees’ respective
functions.
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 functions.
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).
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 recog-
nized 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 tax-
able 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 com-
pany’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
included in other liabilities in the Consolidated Statement of Financial
Position. To the extent that new information becomes available which
causes the company to change its judgment regarding the adequacy
of existing tax liabilities, such changes to tax liabilities will impact
income tax expense in the period in which such determination is
made. Interest and penalties, if any, related to accrued liabilities for
potential tax assessments are included in income tax expense.