Pitney Bowes 2014 Annual Report Download - page 35

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Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions about
certain items that affect the reported amounts of assets, liabilities, revenues, expenses and accompanying disclosures, including the
disclosure of contingent assets and liabilities. The accounting policies below have been identified by management as those accounting
policies that are most critical to our financial statements due to the estimates and assumptions required. Management believes that the
estimates and assumptions used are reasonable and appropriate based on the information available at the time the financial statements
were prepared; however, actual results could differ from those estimates and assumptions. See Note 1 to the Consolidated Financial
Statements for a summary of our accounting policies.
Revenue recognition - Multiple element arrangements
We derive revenue from multiple sources including sales, rentals, financing and services. Certain transactions are consummated at the
same time and can therefore generate revenue from multiple sources. The most common form of these transactions involves a sale or
non-cancelable lease of equipment, a meter rental and an equipment maintenance agreement. As a result, we are required to determine
whether the deliverables in a multiple element arrangement should be treated as separate units of accounting for revenue recognition
purposes, and if so, how the price should be allocated among the delivered elements and when to recognize revenue for each element.
We recognize revenue for delivered elements only when the fair values of undelivered elements are known, customer acceptance has
occurred and payment is probable.
In these multiple element arrangements, revenue is allocated to each of the elements based on relative "selling prices" and the selling
price for each of the elements is determined based on vendor specific objective evidence (VSOE). We establish VSOE of selling prices
for our products and services based on the prices charged for each element when sold separately in standalone transactions. The allocation
of relative selling price to the various elements impacts the timing of revenue recognition, but does not change the total revenue recognized.
Revenue is allocated to the meter rental and equipment maintenance agreement elements using their respective selling prices charged in
standalone and renewal transactions. For a sale transaction, revenue is allocated to the equipment based on a range of selling prices in
standalone transactions. For a lease transaction, revenue is allocated to the equipment based on the present value of the remaining minimum
lease payments. The amount allocated to equipment is compared to the range of selling prices in standalone transactions during the period
to ensure the allocated equipment amount approximates average selling prices.
We also have multiple element arrangements containing only software and software related elements. Under these arrangements, revenue
is allocated based on VSOE, which is based on company specific stand-alone sales data or renewal rates. If we cannot obtain VSOE for
any undelivered software element, revenue is deferred until all deliverables have been delivered or until VSOE can be determined for
any remaining undelivered software elements. When the fair value of a delivered element cannot be established, but fair value evidence
exists for the undelivered software elements, we use the residual method to recognize revenue. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements
and recognized as revenue.
Pension benefits
The valuation of our pension assets and obligations and the calculation of net periodic pension expense are dependent on assumptions
and estimates relating to, among other things, the interest rate used to discount the future estimated liability (discount rate) and the
expected rate of return on plan assets. These assumptions are evaluated and updated annually and are described in further detail in Note
13 to the Consolidated Financial Statements.
The discount rate for our largest plan, the U.S. Qualified Pension Plan (the U.S. Plan) is determined by matching the expected cash flows
associated with our benefit obligations to a pool of corporate long-term, high-quality fixed income debt instruments available as of the
measurement date. The discount rate for our largest foreign plan, the U.K. Qualified Pension Plan (the U.K. Plan), is determined by using
a model that discounts each year's estimated benefit payments by an applicable spot rate derived from a yield curve created from a large
number of high quality corporate bonds. The discount rate used in the determination of net periodic pension expense for 2014 was 4.95%
for the U.S. Plan and 4.45% for the U.K. Plan. For 2015, the discount rate used in the determination of net periodic pension expense for
the U.S. Plan and the U.K. Plan will be 4.15% and 3.7%, respectively. A 0.25% change in the discount rate would impact annual pension
expense by less than $1 million for both the U.S. Plan and the U.K. Plan, and the projected benefit obligation of the U.S. Plan and U.K.
Plan by $49 million and $23 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