Dow Chemical 2014 Annual Report Download - page 83

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2013 Goodwill Impairment Test
During 2013, there were no events or changes in circumstances identified that warranted interim goodwill impairment
testing. During the fourth quarter of 2013, qualitative testing was performed for all but five of the Company's reporting
units that carry goodwill. The results of the qualitative testing did not indicate any reporting units where it was more
likely than not that the carrying value of the reporting unit was greater than its fair value. As a result, no additional
quantitative testing was required for those reporting units.
The Company chose to proceed directly to the first step of the quantitative testing for five reporting units due to
changes in business structures as well as to re-evaluate the reasonableness of the differences between fair value and
carrying value under current market conditions. Quantitative testing was conducted for the following reporting units,
using key assumptions for the discounted cash flow analysis: Dow Coating Materials, Dow Plastics Additives, Epoxy,
Performance Monomers and Polyurethanes.
In completing the fair value analysis for the 2013 impairment test, management evaluated the reasonableness of
differences noted between the fair value and carrying value of each reporting unit. All differences were determined to
be reasonable. For Performance Monomers, fair value did not exceed carrying value by a significant margin. The fair
value for Performance Monomers, which carried approximately $150 million of goodwill, exceeded the carrying value
by a margin of 11 percent.
Based on the fair value analysis completed by the Company in the fourth quarter of 2013, using the key assumptions
defined for the Company as well as the key assumptions defined specifically for each reporting unit, management
concluded that fair value exceeded carrying value for all reporting units.
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, 2014, 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 17 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 71 percent of the Company’s
pension plan assets and 70 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 2014 was 7.82 percent. This assumption increased to 7.85 percent for
determining 2015 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 decreased to 4.04 percent at December 31, 2014, from 4.92 percent at December 31, 2013.
At December 31, 2014, the U.S. qualified plans were underfunded on a projected benefit obligation basis by
$4.7 billion. The underfunded amount increased by approximately $1.7 billion compared with December 31, 2013.
The increase was primarily due to lower discount rates and updated mortality tables. The Company contributed
$554 million to the U.S. qualified plans in 2014.
The assumption for the long-term rate of increase in compensation levels for the principal U.S. qualified plans was
4.5 percent. Since 2002, the Company has used a generational mortality table to determine the duration of its pension