Xerox 2007 Annual Report Download - page 91

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
Research, Development and Engineering (“R,D&E”):
Research, development and engineering costs are
expensed as incurred. R,D&E was $912, $922 and $943,
for the three years ended December 31, 2007,
respectively. Research and development (“R&D”) costs
were $764 in 2007, $761 in 2006 and $755 in 2005.
Sustaining engineering costs are incurred with respect to
on-going product improvements or environmental
compliance after initial product launch. Our sustaining
engineering costs were $148, $161, and $188, for the
three years ended December 31, 2007, respectively.
Restructuring Charges: Costs associated with exit or
disposal activities, including lease termination costs and
certain employee severance costs associated with
restructuring, plant closing or other activity, are recognized
when they are incurred. In those geographies where we
have either a formal severance plan or a history of
consistently providing severance benefits representing a
substantive plan, we recognize severance costs when they
are both probable and reasonably estimable.
Pension and Post-Retirement Benefit Obligations:
We sponsor pension plans in various forms in several
countries covering substantially all employees who meet
eligibility requirements. Post-retirement benefit plans
cover primarily U.S. employees for retirement medical
costs. As permitted by existing accounting rules, we
employ a delayed recognition feature in measuring the
costs of pension and post-retirement benefit plans. This
requires changes in the benefit obligations and changes in
the value of assets set aside to meet those obligations to
be recognized not as they occur, but systematically and
gradually over subsequent periods. All changes are
ultimately recognized as components of net periodic
benefit cost, except to the extent they may be offset by
subsequent changes. At any point, changes that have
been identified and quantified but not recognized as
components of net periodic benefit cost, are recognized in
accumulated other comprehensive loss, net of tax.
Several statistical and other factors that attempt to
anticipate future events are used in calculating the
expense, liability and asset values related to our pension
and post-retirement benefit plans. These factors include
assumptions we make about the discount rate, expected
return on plan assets, rate of increase in healthcare costs,
the rate of future compensation increases, and mortality,
among others. Actual returns on plan assets are not
immediately recognized in our income statement, due to
the delayed recognition requirement. In calculating the
expected return on the plan asset component of our net
periodic pension cost, we apply our estimate of the long-
term rate of return to the plan assets that support our
pension obligations, after deducting assets that are
specifically allocated to Transitional Retirement Accounts
(which are accounted for based on specific plan terms).
For purposes of determining the expected return on
plan assets, we utilize a calculated value approach in
determining the value of the pension plan assets, as
opposed to a fair market value approach. The primary
difference between the two methods relates to systematic
recognition of changes in fair value over time (generally
two years) versus immediate recognition of changes in fair
value. Our expected rate of return on plan assets is then
applied to the calculated asset value to determine the
amount of the expected return on plan assets to be used
in the determination of the net periodic pension cost. The
calculated value approach reduces the volatility in net
periodic pension cost that results from using the fair
market value approach.
Each year, the difference between the actual return
on plan assets and the expected return on plan assets is
added to, or subtracted from, any cumulative actuarial
gain or loss that arose in prior years. Subsequent to the
adoption of FAS 158, this amount is a component of the
net actuarial gain or loss recognized in accumulated other
comprehensive loss and is subject to subsequent
amortization to net periodic pension cost in future periods
over the remaining service lives of the employees
participating in the pension plan.
The discount rate is used to present value our future
anticipated benefit obligations. In estimating our discount
rate, we consider rates of return on high quality fixed-
income investments included in various published bond
indexes, adjusted to eliminate the effects of call provisions
and differences in the timing and amounts of cash
outflows related to the bonds, as well as, the expected
timing of pension and other benefit payments. In the U.S.
and the U.K., which comprise approximately 80% of our
projected benefit obligation, we consider the Moody’s Aa
Corporate Bond Index and the International Index
Company’s iBoxx Sterling Corporate AA Cash Bond Index,
respectively in the determination of the appropriate
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