International Paper 2012 Annual Report Download - page 67

400
2002 2004 2006 2008 2010 2012
900
1400
1900
2900
2400
Dollars
ASC 715, “Compensation – Retirement Benefits,”
provides for delayed recognition of actuarial gains
and losses, including amounts arising from changes
in the estimated projected plan benefit obligation
due to changes in the assumed discount rate, differ-
ences between the actual and expected return on
plan assets, and other assumption changes. These
net gains and losses are recognized in pension
expense prospectively over a period that approx-
imates the average remaining service period of
active employees expected to receive benefits under
the plans (approximately nine years) to the extent
that they are not offset by gains and losses in sub-
sequent years. The estimated net loss and prior serv-
ice cost that will be amortized from accumulated
other comprehensive income into net periodic pen-
sion cost for the U.S. pension plans over the next
fiscal year are $490 million and $34 million ,
respectively.
Net periodic pension and postretirement plan
expenses, calculated for all of International Paper’s
plans, were as follows:
In millions 2012 2011 2010 2009 2008
Pension expense
U.S. plans (non-cash) $342 $195 $231 $213 $123
Non-U.S. plans 31— 3 4
Postretirement expense
U.S. plans (4 ) 7 6 27 28
Non-U.S. plans 12133
Net expense $342 $205 $238 $246 $158
The increase in 2012 U.S. pension expense princi-
pally reflects a decrease in the discount rate, a lower
expected return on assets assumption and the
acquisition of Temple-Inland. The decrease in 2012
U.S. postretirement expense is principally due to a
curtailment gain related to the remeasurement of the
Temple-Inland plan.
Assuming that discount rates, expected long-term
returns on plan assets and rates of future compensa-
tion increases remain the same as in 2012 , projected
future net periodic pension and postretirement plan
expenses would be as follows:
In millions 2014 (1) 2013 (1)
Pension expense
U.S. plans (non-cash) $461 $ 561
Non-U.S. plans 5 5
Postretirement expense
U.S. plans 13 5
Non-U.S. plans 22
Net expense $481 $573
(1) Based on assumptions at December 31, 2012.
The Company estimates that it will record net pen-
sion expense of approximately $561 million for its
U.S. defined benefit plans in 2013 , with the increase
from expense of $342 million in 2012 reflecting a
decrease in the assumed discount rate to 4.10% in
2013 from 5.10% in 2012, a lower return on asset
assumption for Temple-Inland plan assets to 5.30%
in 2013 from 5.70% in 2012 and higher amortization
of unrecognized losses.
The market value of plan assets for International
Paper’s U.S. qualified pension plan at December 31,
2012 totaled approximately $10.1 billion , consisting
of approximately 41% equity securities, 38% debt
securities, 10% real estate and 11% other assets. Plan
assets include an immaterial amount of International
Paper common stock.
The Company’s funding policy for its qualified pen-
sion plans is to contribute amounts sufficient to meet
legal funding requirements, plus any additional
amounts that the Company may determine to be
appropriate considering the funded status of the
plan, tax deductibility, the cash flows generated by
the Company, and other factors. The Company con-
tinually reassesses the amount and timing of any
discretionary contributions and could elect to make
voluntary contributions in the future. The required
contribution for the U.S. qualified pension plans in
2013 is approximately $31 million. The nonqualified
defined benefit plans are funded to the extent of
benefit payments, which totaled $95 million for the
year ended December 31, 2012.
Accounting for Stock Options
International Paper follows ASC 718,
“Compensation – Stock Compensation,” in account-
ing for stock options. Under this guidance, expense
for stock options is recorded over the related service
period based on the grant-date fair market value.
During each reporting period, diluted earnings
per share is calculated by assuming that “in-the-
money” options are exercised and the exercise
proceeds are used to repurchase shares in the
marketplace. When options are actually exercised,
option proceeds are credited to equity and issued
shares are included in the computation of earn-
ings per common share, with no effect on
reported earnings. Equity is also increased by
40