Xerox 2012 Annual Report Download - page 32

Management’s Discussion
30
Allowance for Doubtful Accounts and Credit Losses
We continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based upon our
historical experience adjusted for current conditions. We recorded bad
debt provisions of $120 million, $157 million and $188 million in SAG
expenses in our Consolidated Statements of Income for the years
ended December 31, 2012, 2011 and 2010, respectively.
Bad debt provisions decreased by $37 million in 2012. Reserves, as a
percentage of trade and finance receivables, were 3.3% at
December 31, 2012, which was consistent with the percentage at
December 31, 2011 and 2010. The decrease in bad debt provisions was
primarily related to improvements in Europe, reflecting a stabilization
of credit issues noted in the prior year. We continue to assess our
receivable portfolio in light of the current economic environment
and its impact on our estimation of the adequacy of the allowance
for doubtful accounts. In addition, although our bad debt provisions
improved in Europe, this region continues to be a focus of our credit
review and analysis.
As discussed above, we estimated our provision for doubtful accounts
based on historical experience and customer-specific collection issues.
This methodology was consistently applied for all periods presented.
During the five year period ended December 31, 2012, our reserve for
doubtful accounts ranged from 3.3% to 4.1% of gross receivables.
Holding all assumptions constant, a 1-percentage point increase or
decrease in the reserve from the December 31, 2012 rate of 3.3%
would change the 2012 provision by approximately $85 million.
Refer to Note 4 – Accounts Receivables, Net and Note 5 – Finance
Receivables, Net in the Consolidated Financial Statements for
additional information regarding our allowance for doubtful accounts.
Pension Plan Assumptions
We sponsor defined benefit pension plans in various forms in several
countries covering employees who meet eligibility requirements.
Several statistical and other factors that attempt to anticipate future
events are used in calculating the expense, liability and asset values
related to our defined benefit pension plans. These factors include
assumptions we make about the expected return on plan assets,
discount rates, the rate of future compensation increases and mortality.
Differences between these assumptions and actual experiences
are reported as net actuarial gains and losses and are subject to
amortization to net periodic benefit cost over future periods.
Cumulative net actuarial losses for our defined benefit pension plans of
$3.4 billion as of December 31, 2012 increased by approximately
$800 million from December 31, 2011. This increase reflects the
increase in our benefit obligations as a result of a lower discount rate,
which was only partially offset by positive returns on plan assets in
2012 as compared to expected returns. The total actuarial loss will be
amortized over future periods, subject to offsetting gains or losses that
will impact the future amortization amounts.
We used a consolidated weighted average expected rate of return on
plan assets of 6.9% for 2012, 7.2% for 2011 and 7.3% for 2010, on
a worldwide basis. During 2012, the actual return on plan assets was
$792 million as compared to an expected return of $613 million. When
estimating the 2013 expected rate of return, in addition to assessing
recent performance, we considered the historical returns earned on
plan assets, the rates of return expected in the future, particularly in
light of current economic conditions, and our investment strategy
and asset mix with respect to the plans’ funds. The weighted average
expected rate of return on plan assets we will use in 2013 is 6.7%.
The reduction in the expected rate of return in 2013 as compared to
2012 primarily reflects an expected slight decrease in long-term capital
market returns.
Another significant assumption affecting our defined benefit pension
obligations and the net periodic benefit cost is the rate that we use
to discount our future anticipated benefit obligations. In the U.S. and
the U.K., which comprise approximately 75% 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. The consolidated weighted average discount rate we
used to measure our pension obligations as of December 31, 2012 and
to calculate our 2013 expense was 3.9%, which is lower than the 4.7%
that was used to calculate our obligations as of December 31, 2011
and our 2012 expense. The weighted average discount rate we used to
measure our retiree health obligation as of December 31, 2012 and to
calculate our 2013 expense was 3.6%, which is lower than the 4.5%
that was used to calculate our obligation at December 31, 2011 and
our 2012 expense.
Holding all other assumptions constant, a 0.25% increase or decrease
in the discount rate would change the 2013 projected net periodic
pension cost by $31 million. Likewise, a 0.25% increase or decrease in
the expected return on plan assets would change the 2013 projected
net periodic pension cost by $19 million.
One of the most significant and volatile elements of our net periodic
defined benefit pension plan expense is settlement losses. Our primary
domestic plans allow participants the option of settling their vested
benefits through either the receipt of a lump-sum payment or the
purchase of a non-participating annuity contract with an insurance
company. Annuity purchases represent benefits to be provided via
contracts under which an insurance company is obligated to pay the
benefits. Accordingly, under either option, the participant’s vested
benefit is considered fully settled upon payment of the lump-sum or
the purchase of the annuity. Approximately two-thirds of participants
elect to receive a lump-sum payment.
We have elected to apply settlement accounting and, therefore, we
recognize the losses associated with these settlements immediately
upon the settlement of the vested benefits. Settlement accounting
requires us to recognize a pro rata portion of the aggregate