Pitney Bowes 2013 Annual Report Download - page 37

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annual pension expense by less than $1 million for both the U.S. Plan and the U.K. Plan, and lower the projected benefit obligation of
the U.S. Plan and U.K. Plan by $45 million and $21 million, respectively.
Pension assets are exposed to various risks such as interest rate, market and credit risks. We invest our pension plan assets in a variety
of investment securities in accordance with our strategic asset allocation policy. The expected return on plan assets is based on historical
and expected future returns for current and targeted asset allocations for each asset class in the investment portfolio, adjusted for historical
and expected experience of active portfolio management results, as compared to the benchmark returns. When assessing the expected
future returns for the portfolio, management places more emphasis on the expected future returns than historical returns. The expected
rate of return used in the determination of net periodic pension expense for 2013 was 7.25% for the U.S. Plan and 7.38% for the U.K.
Plan. For 2014, the expected rate of return used in the determination of net periodic pension expense for the U.S. Plan and the U.K. Plan
will be 7.0% and 7.5%, respectively. A 0.25% increase in the expected rate of return on plan return on assets would decrease annual
pension expense for the U.S. Plan by $4 million and the U.K. Plan by $1 million. See Note 18 to the Consolidated Financial Statements
for asset allocations at December 31, 2013 and 2012 and target allocations for 2014.
Actual pension plan results that differ from our assumptions and estimates are accumulated and amortized over the life expectancy of
inactive plan participants and affect future pension expense. Net pension expense is also based on a market-related valuation of plan
assets where differences between the actual and expected return on plan assets are amortized to pension expense over a five-year period.
Effective December 31, 2014, benefit accruals for participants in a majority of our U.S. and foreign pension plans will be frozen.
Residual value of leased assets
We provide lease financing for our products primarily through sales-type leases. Equipment residual values are determined at inception
of the lease using estimates of equipment fair value at the end of the lease term. Residual value estimates impact the determination of
whether a lease is classified as an operating lease or sales-type lease. Estimates of future equipment fair value are based primarily on our
historical experience. We also consider forecasted supply and demand for our various products, product retirement and future product
launch plans, end of lease customer behavior, regulatory changes, remanufacturing strategies, used equipment markets, if any, competition
and technological changes.
We evaluate residual values on an annual basis or as changes to the above considerations occur and declines in estimated residual values
considered "other-than-temporary" are recognized immediately. Estimated increases in future residual values are not recognized until the
equipment is remarketed. If the actual residual value of lease assets were 10% lower than management's current estimates, pre-tax income
would be lower by $14 million.
Allowances for doubtful accounts and credit losses
We estimate our credit risk for accounts receivables and finance receivables and provide allowances for estimated losses. We believe that
our credit risk is limited because of our large number of customers, small account balances for most of our customers and customer
geographic and industry diversification. We continuously monitor collections and payments from our customers and evaluate the adequacy
of the applicable allowance based on historical loss experience, past due status, adverse situations that may affect a customer's ability to
pay and prevailing economic conditions. We make adjustments to the reserves as deemed necessary. This evaluation is inherently subjective
and actual results may differ significantly from estimated reserves.
The allowance for doubtful accounts as a percentage of trade receivables was 2.7% at December 31, 2013 and 2012. Holding all other
assumptions constant, a 0.25% increase or decrease in the allowance rate at December 31, 2013 would have changed the 2013 provision
by $1 million.
Total allowance for credit losses as a percentage of finance receivables was 1.8% at December 31, 2013 and 2012. Holding all other
assumptions constant, a 0.25% increase or decrease in the allowance rate at December 31, 2012 would have changed the 2013 provision
by $5 million.
Accounting for income taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our annual tax rate is based on our income, statutory tax
rates, tax reserve changes and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant
judgment is required in determining our annual tax rate and in evaluating our tax positions.
We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the
related financial statement implications. Tax reserves have been established which we believe to be appropriate given the possibility of
tax adjustments. Determining the appropriate level of tax reserves requires us to exercise judgment regarding the uncertain application