Sears 2014 Annual Report Download - page 29

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The components of the adjustments to EBITDA related to domestic pension expense were as follows:
millions 2014 2013 2012
Components of net periodic expense:
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 221 $ 219 $ 291
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (247)(224)(291)
Amortization of experience losses . . . . . . . . . . . . . . . . . . . . . . . . . 115 167 165
Net periodic expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89 $ 162 $ 165
In accordance with GAAP, we recognize on the balance sheet actuarial gains and losses for defined
benefit pension plans annually in the fourth quarter of each fiscal year and whenever a plan is determined
to qualify for a remeasurement during a fiscal year. For income statement purposes, these actuarial gains
and losses are recognized throughout the year through an amortization process. The Company recognizes in
its results of operations, as a corridor adjustment, any unrecognized actuarial net gains or losses that exceed
10% of the larger of projected benefit obligations or plan assets. Accumulated gains/losses that are inside
the 10% corridor are not recognized, while accumulated actuarial gains/losses that are outside the 10%
corridor are amortized over the "average future service" of the population and are included in the
amortization of experience losses line item above.
Actuarial gains and losses occur when actual experience differs from the estimates used to allocate
the change in value of pension plans to expense throughout the year or when assumptions change, as they
may each year. Significant factors that can contribute to the recognition of actuarial gains and losses
include changes in discount rates used to remeasure pension obligations on an annual basis or upon a
qualifying remeasurement, differences between actual and expected returns on plan assets and other
changes in actuarial assumptions. Management believes these actuarial gains and losses are primarily
financing activities that are more reflective of changes in current conditions in global financial markets
(and in particular interest rates) that are not directly related to the underlying business and that do not have
an immediate, corresponding impact on the benefits provided to eligible retirees. For further information on
the actuarial assumptions and plan assets referenced above, see Management's Discussion and Analysis of
Financial Condition and Results of Operations - Application of Critical Accounting Policies and Estimates -
Defined Benefit Pension Plans, and Note 7 of Notes to Consolidated Financial Statements.
• Pension settlements – In 2012, the Company amended its domestic pension plan and offered a one-time
voluntary lump sum payment option in an effort to reduce its long-term pension obligations and ongoing
annual pension expense. The pension settlements were funded from existing pension plan assets. In connection
with this transaction, the Company incurred a charge to operations as a result of the requirement to expense
the unrealized actuarial losses. The charge had no effect on equity because the unrealized actuarial losses are
already recognized in accumulated other comprehensive income/(loss). Accordingly, the effect on retained
earnings was offset by a corresponding reduction in accumulated other comprehensive loss.
• Lands' End separation – The results of the Lands' End business that were included in our results of operations
prior to the separation.
• SHO separation – The results of the Sears Hometown and Outlet businesses that were included in our results
of operations prior to the separation.