IBM 2014 Annual Report Download - page 93

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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benefits attributed to employee services already rendered. The
fair value of plan assets represents the current market value of
assets held in an irrevocable trust fund, held for the sole benefit
of participants, which are invested by the trust fund. Overfunded
plans, with the fair value of plan assets exceeding the benefit obli-
gation, are aggregated and recorded as a prepaid pension asset
equal to this excess. Underfunded plans, with the benefit obliga-
tion exceeding the fair value of plan assets, are aggregated and
recorded as a retirement and nonpension postretirement benefit
obligation equal to this excess.
The current portion of the retirement and nonpension postre-
tirement benefit obligations represents the actuarial present value
of benefits payable in the next 12 months exceeding the fair value
of plan assets, measured on a plan-by-plan basis. This obligation is
recorded in compensation and benefits in the Consolidated State-
ment of Financial Position.
Net periodic pension and nonpension postretirement ben-
efit 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 OCI and
amortization of the net transition asset remaining in accumulated
other comprehensive income/(loss) (AOCI). Service cost repre -
sents 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 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 com-
ponent of OCI 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 compen-
sation, 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 Consoli-
dated 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 com-
pany also grants its employees Restricted Stock Units (RSUs),
including Retention Restricted Stock Units (RRSUs) and Perfor-
mance 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. Stock-based compensation cost is recorded
in Cost, SG&A, and RD&E in the Consolidated Statement of Earn-
ings 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. Dif-
ferences 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 Consoli -
dated Statement of Earnings (if the deferred tax asset exceeds the
tax deduction and no additional paid-in capital exists from previ-
ous 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 recog -
nized 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 allow-
ances 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.