International Paper 2012 Annual Report Download - page 66

each reporting unit. These calculations require many
estimates, including discount rates, future growth
rates, and cost and pricing trends for each reporting
unit. Subsequent changes in economic and operat-
ing conditions can affect these assumptions and
could result in additional interim testing and good-
will impairment charges in future periods. Upon
completion, the resulting estimated fair values are
then analyzed for reasonableness by comparing
them to earnings multiples for historic industry
business transactions, and by comparing the sum of
the reporting unit fair values and other corporate
assets and liabilities divided by diluted common
shares outstanding to the Company’s market price
per share on the analysis date.
No goodwill impairment charges were recorded in
2012 , 2011 or 2010 .
Pension and Postretirement Benefit
Obligations
The charges recorded for pension and other post-
retirement benefit obligations are determined annu-
ally in conjunction with International Paper’s
consulting actuary, and are dependent upon various
assumptions including the expected long-term rate
of return on plan assets, discount rates, projected
future compensation increases, health care cost
trend rates and mortality rates.
The calculations of pension and postretirement
benefit obligations and expenses require decisions
about a number of key assumptions that can sig-
nificantly affect liability and expense amounts,
including the expected long-term rate of return on
plan assets, the discount rate used to calculate plan
liabilities, the projected rate of future compensation
increases and health care cost trend rates.
Benefit obligations and fair values of plan assets as
of December 31, 2012, for International Paper’s pen-
sion and postretirement plans were as follows:
In millions
Benefit
Obligation
Fair Value of
Plan Assets
U.S. qualified pension $13,784 $10,111
U.S. nonqualified pension 417 —
U.S. postretirement 449 —
Non-U.S. pension 223 171
Non-U.S. postretirement 22 —
The table below shows assumptions used by
International Paper to calculate U.S. pension
expenses for the years shown:
2012 2011 2010
Discount rate 5.10% 5.60% 5.80%
Expected long-term rate of return on plan
assets 8.00%(a) 8.25% 8.25%
Rate of compensation increase 3.75% 3.75% 3.75%
(a) Represents the expected rate of return for IP’s qualified pen-
sion plan. The rate for the Temple-Inland Retirement Plan is
5.70%.
Additionally, health care cost trend rates used in the
calculation of U.S. postretirement obligations for the
years shown were:
2012 2011
Health care cost trend rate assumed for next year 7.50% 8.00%
Rate that the cost trend rate gradually declines to 5.00% 5.00%
Year that the rate reaches the rate it is assumed to
remain 2017 2017
International Paper determines these actuarial
assumptions, after consultation with our actuaries,
on December 31 of each year to calculate liability
information as of that date and pension and post-
retirement expense for the following year. The
expected long-term rate of return on plan assets is
based on projected rates of return for current and
planned asset classes in the plan’s investment
portfolio. The discount rate assumption was
determined based on a hypothetical settlement port-
folio selected from a universe of high quality corpo-
rate bonds.
Increasing (decreasing) the expected long-term rate
of return on U.S. plan assets by an additional 0.25%
would decrease (increase) 2013 pension expense by
approximately $24 million, while a (decrease)
increase of 0.25% in the discount rate would
(increase) decrease pension expense by approx-
imately $39 million. The effect on net postretirement
benefit cost from a 1% increase or decrease in the
annual health care cost trend rate would be approx-
imately $1 million.
Actual rates of return earned on U.S. pension plan
assets for each of the last 10 years were:
Year Return Year Return
2012 14.1% 2007 9.6%
2011 2.5% 2006 14.9%
2010 15.1% 2005 11.7%
2009 23.8% 2004 14.1%
2008 (23.6)% 2003 26.0%
The 2012 return above represents a weighted aver-
age of International Paper and Temple-Inland asset
returns. The annualized time-weighted rate of return
earned on U.S. pension plan assets was 5.0% and
9.9% for the past five and ten years, respectively. The
following graph shows the growth of a $1,000
investment in International Paper’s U.S. Pension Plan
Master Trust. The graph portrays the time-weighted
rate of return from 2002 – 2012.
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