IBM 2013 Annual Report Download - page 135

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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
134
between actual and expected returns are recognized as a compo-
nent of net loss or gain in AOCI, which is amortized as a component
of net periodic (income)/cost over the service lives or life expectancy
of the plan participants, depending on the plan, provided such amounts
exceed certain thresholds provided by accounting standards. The
market-related value of plan assets recognizes changes in the fair
value of plan assets systematically over a five-year period in the
expected return on plan assets line in net periodic (income)/cost.
For the U.S. defined benefit pension plan, the Qualified PPP, the
expected long-term rate of return on plan assets of 8.00 percent
remained constant for the years ended December 31, 2013, 2012
and 2011 and, consequently, had no incremental impact on net
periodic (income)/cost.
For the nonpension postretirement benefit plans, the company
maintains a highly liquid trust fund balance to ensure timely pay-
ments are made. As a result, for the years ended December 31, 2013,
2012 and 2011, the expected long-term return on plan assets and
the actual return on those assets were not material.
Rate of Compensation Increases and Mortality Rate
The rate of compensation increases is determined by the com pany,
based upon its long-term plans for such increases. The rate of
compensation increase is not applicable to the U.S. defined benefit
pension plans as benefit accruals ceased December 31, 2007 for all
participants. Mortality rate assumptions are based on life expec-
tancy and death rates for different types of participants. Mortality
rates are periodically updated based on actual experience.
Interest Crediting Rate
Benefits for certain participants in the PPP are calculated using a
cash balance formula. An assumption underlying this formula is an
interest crediting rate, which impacts both net periodic (income)/
cost and the PBO. This assumption provides a basis for projecting
the expected interest rate that participants will earn on the benefits
that they are expected to receive in the following year and is based
on the average from August to October of the one-year U.S. Treasury
Constant Maturity yield plus one percent.
For the PPP, the change in the interest crediting rate to 1.2 per-
cent for the year ended December 31, 2013, from 1.1 percent for the
year ended December 31, 2012, resulted in a decrease in 2013 net
periodic income of $6 million. The change in the interest crediting
rate to 1.1 percent for the year ended December 31, 2012, from 1.3
percent for the year ended December 31, 2011, resulted in an
increase in 2012 net periodic income of $10 million. The change in
the interest crediting rate to 1.3 percent for the year ended Decem-
ber 31, 2011, from 1.4 percent for the year ended December 31, 2010,
resulted in an increase in 2011 net periodic income of $4 million.
Healthcare Cost Trend Rate
For nonpension postretirement benefit plan accounting, the com-
pany reviews external data and its own historical trends for
healthcare costs to determine the healthcare cost trend rates. How-
ever, the healthcare cost trend rate has an insignificant effect on
plan costs and obligations as a result of the terms of the plan which
limit the company’s obligation to the participants. The company
assumes that the healthcare cost trend rate for 2014 will be 6.5
percent. In addition, the company assumes that the same trend rate
will decrease to 5 percent over the next three years. A one percent-
age point increase or decrease in the assumed healthcare cost
trend rate would not have had a material effect on 2013, 2012 and
2011 net periodic cost or the benefit obligations as of December 31,
2013 and 2012.
Healthcare Legislation
The expected effects of the U.S. healthcare reform legislation
enacted in March 2010 were incorporated into the remeasurements
of the U.S. nonpension postretirement benefit plan at December 31,
2013 and 2012. The impact was insignificant as a result of the terms
of the plan which limit the company’s obligation to the participants.