Xerox 2008 Annual Report Download - page 59

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
assets, when events or changes in circumstances occur that
indicate that the carrying value of the asset may not be
recoverable. The assessment of possible impairment is based on
our ability to recover the carrying value of the asset from the
expected future pre-tax cash flows (undiscounted and without
interest charges) of the related operations. If these cash flows are
less than the carrying value of such asset, an impairment loss is
recognized for the difference between estimated fair value and
carrying value. Our primary measure of fair value is based on
discounted cash flows.
Treasury Stock
We account for repurchased common stock under the cost method
and include such treasury stock as a component of our Common
shareholders’ equity. Retirement of Treasury stock is recorded as a
reduction of Common stock and Additional paid-in-capital at the
time such retirement is approved by our Board of Directors.
Research, Development and Engineering (“R,D&E”)
Research, development and engineering costs are expensed as
incurred. R,D&E was $884, $912 and $922, for the three years
ended December 31, 2008, respectively. Research and
development (“R&D”) costs were $750 in 2008, $764 in 2007 and
$761 in 2006. Sustaining engineering costs are incurred with
respect to on-going product improvements or environmental
compliance after initial product launch. Our sustaining engineering
costs were $134, $148, and $161, for the three years ended
December 31, 2008, 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 U.S. and
Canadian employees for retirement medical costs. 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.
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 discount rate assumptions. Refer
to Note 14 – Employee Benefit Plans for further information.
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