Pitney Bowes 2015 Annual Report Download - page 45

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plan assets used in the determination of net periodic pension expense for 2015 was 7.0% for both the U.S. Plan and the U.K. Plan. For
2016, the expected rate of return on plan assets used in the determination of net periodic pension expense for the U.S. Plan will be 7.0%
and the U.K. Plan will be 6.5%. A 0.25% change in the expected rate of return on plan assets would impact annual pension expense for
the U.S. Plan by $4 million and the U.K. Plan by $1 million. See Note 14 to the Consolidated Financial Statements for information about
the allocation of pension assets.
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 recognized in the calculation of the market-related
value of assets over a five-year period. Effective December 31, 2014, plan benefits for participants in a majority of our U.S. and foreign
pension plans were frozen.
Residual value of leased assets
We provide financing for our equipment sales primarily through sales-type leases. Equipment residual values are determined at inception
of the lease using estimates of 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 a sales-type lease. Estimates of equipment fair value at end of lease term 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 client behavior, regulatory changes, remanufacturing strategies, used equipment markets, if any,
competition and technological changes.
We evaluate residual values on an annual basis or sooner if circumstances warrant. 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 leased assets were 10% lower than management's current estimates, pre-tax income would
be lower by $11 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 low because of the geographic and industry diversification of our clients and small account balances for most of our
clients. We continuously monitor collections and payments from our clients and evaluate the adequacy of the applicable allowance based
on historical loss experience, past due status, adverse situations that may affect a client's ability to pay and prevailing economic conditions
and 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 2.0% at December 31, 2015 and 2.4% at December 31,
2014. Holding all other assumptions constant, a 0.25% change in the allowance rate at December 31, 2015 would have changed the 2015
provision by $1 million.
Total allowance for credit losses as a percentage of finance receivables was 1.3% at December 31, 2015 and 1.5% at December 31, 2014.
Holding all other assumptions constant, a 0.25% change in the allowance rate at December 31, 2015 would have changed the 2015
provision by $4 million.
Income taxes and valuation allowance
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our annual tax rate is based on 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 the 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 that 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 of
tax laws. The amount of reserves is adjusted when information becomes available or when an event occurs indicating a change in the
reserve is appropriate. Future changes in tax reserve requirements could have a material impact on our financial condition or results of
operations.
Significant judgment is also required in determining the amount of valuation allowance to be recorded against deferred tax assets. In
assessing whether a valuation allowance is necessary, and the amount of such allowance, we consider all available evidence for each
jurisdiction including historical operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies.