Dow Chemical 2011 Annual Report Download - page 158

64
underlying assets of the reporting unit to assess whether or not any additional asset impairment existed. Based on the
undiscounted cash flow analysis completed in accordance with ASC Topic 360, “Property, Plant, and Equipment,” no
further impairment existed.
The Company also monitors and evaluates its market capitalization relative to book value. When the market
capitalization of the Company falls below book value, management undertakes a process to evaluate whether a change in
circumstances has occurred that would indicate it is more likely than not that the fair value of any of its reporting units has
declined below carrying value. This evaluation process includes the use of third-party market-based valuations and internal
discounted cash flow analysis. As part of the annual goodwill impairment test, the Company also compares market
capitalization with the most recent total estimated fair value of its reporting units to ensure that significant differences are
understood. At December 31, 2011, 2010 and 2009, Dow’s market capitalization exceeded book value.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are
determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan
assets, discount rates at which the liabilities could have been settled at December 31, 2011, rate of increase in future
compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are
disclosed in Note Q to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ
from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and
obligations recorded in future periods. The U.S. pension plans represent approximately 71 percent of the Company’s
pension plan assets and 73 percent of the pension obligations.
The following information relates to the U.S. plans only; a similar approach is used for the Company’s non-U.S. plans.
The Company determines the expected long-term rate of return on assets by performing a detailed analysis of
historical and expected returns based on the strategic asset allocation approved by the Company's Investment Committee
and the underlying return fundamentals of each asset class. The Company’s historical experience with the pension fund
asset performance is also considered. The expected return of each asset class is derived from a forecasted future return
confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be
earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net
periodic pension expense for 2011 was 8.18 percent. This assumption was decreased to 7.82 percent for determining 2012
net periodic pension expense. Future actual pension expense will depend on future investment performance, changes in
future discount rates and various other factors related to the population of participants in the Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are
based on the yield on high-quality fixed income instruments at the measurement date. Future expected actuarially
determined cash flows of Dow’s major U.S. plans are matched against the Towers Watson RATE:Link yield curve (based
on 60th to 90th percentile bond yields) to arrive at a single discount rate by plan. The weighted average discount rate was
4.98 percent at December 31, 2011 and 5.51 percent at December 31, 2010.
At December 31, 2011, the U.S. qualified plans were underfunded on a projected benefit obligation basis by
$4.3 billion. The underfunded amount increased by approximately $1.0 billion compared with December 31, 2010. The
increase was primarily due to lower discount rates. The Company contributed $531 million to the U.S. qualified plans in
2011.
The assumption for the long-term rate of increase in compensation levels for the principal U.S. qualified plans was
4.50 percent. Since 2002, the Company has used a generational mortality table to determine the duration of its pension and
other postretirement obligations.
The following discussion relates to all of the Company’s pension plans.
The Company bases the determination of pension expense on a market-related valuation of plan assets that reduces
year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the
year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return
calculated using the market-related value of plan assets and the actual return based on the market value of plan assets.
Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan
assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and
losses have been recognized and amortized. At December 31, 2011, net losses of $596 million remain to be recognized in
the calculation of the market-related value of plan assets. These net losses will result in increases in future pension expense