John Deere 2014 Annual Report Download - page 27

from dealers. Over the last five fiscal years, this percent has
varied by an average of approximately plus or minus .5 percent,
compared to the average sales incentive costs to retail sales
percent during that period. Holding other assumptions constant,
if this estimated cost experience percent were to increase or
decrease .5 percent, the sales incentive accrual at October 31,
2014 would increase or decrease by approximately $40 million.
Product Warranties
At the time a sale to a dealer is recognized, the company
records the estimated future warranty costs. The company
generally determines its total warranty liability by applying
historical claims rate experience to the estimated amount of
equipment that has been sold and is still under warranty based
on dealer inventories and retail sales. The historical claims rate
is primarily determined by a review of five-year claims costs
and consideration of current quality developments. Variances in
claims experience and the type of warranty programs affect
these estimates, which are reviewed quarterly.
The product warranty accruals, excluding extended
warranty unamortized premiums, at October 31, 2014, 2013
and 2012 were $809 million, $822 million and $733 million,
respectively. The changes were due primarily to lower sales
volumes in 2014 and higher sales volumes in 2013.
Estimates used to determine the product warranty accruals
are significantly affected by the historical percent of warranty
claims costs to sales. Over the last five fiscal years, this percent
has varied by an average of approximately plus or minus .08
percent, compared to the average warranty costs to sales percent
during that period. Holding other assumptions constant, if this
estimated cost experience percent were to increase or decrease
.08 percent, the warranty accrual at October 31, 2014 would
increase or decrease by approximately $35 million.
Postretirement Benefit Obligations
Pension obligations and other postretirement employee
benefit (OPEB) obligations are based on various assumptions
used by the company’s actuaries in calculating these amounts.
These assumptions include discount rates, health care cost trend
rates, expected return on plan assets, compensation increases,
retirement rates, mortality rates and other factors. Actual results
that differ from the assumptions and changes in assumptions
affect future expenses and obligations.
The pension liabilities, net of pension assets, recognized
on the balance sheet at October 31, 2014 and 2012 were $743
million and $1,817 million, respectively. The pension assets,
net of pension liabilities, at October 31, 2013 were $40 million.
The increase in pension net liabilities in 2014 was due primarily
to decreases in discount rates and updated mortality assumptions
based on the Society of Actuaries’ (SOA) RP-2000 base table
and mortality projection scale BB. The increase in pension net
assets in 2013 was due primarily to the return on plan assets and
increases in discount rates, partially offset by interest on the
liabilities. The OPEB liabilities, net of OPEB assets, at October
31, 2014, 2013 and 2012 were $5,347 million, $4,769 million
and $5,736 million, respectively. The increase in 2014 was due
primarily to the change in the mortality assumptions mentioned
above and decreases in discount rates, partially offset by a change
in the retiree medical credit plan (see Note 7). The decrease
in 2013 was due primarily to increases in discount rates and
favorable claims experience, partially offset by interest on the
liabilities. In October 2014, the SOA finalized new mortality
tables (RP-2014) and mortality improvement scale (MP-2014).
The company does not expect the effects of the new mortality
tables on its mortality assumptions and resulting effects on the
consolidated financial statements to be significant when adopted.
The effect of hypothetical changes to selected assumptions
on the company’s major U.S. retirement benefit plans would be
as follows in millions of dollars:
October 31, 2014 2015
______________ _________
Increase Increase
Percentage (Decrease) (Decrease)
Assumptions Change PBO/APBO* Expense
Pension
Discount rate** ................... +/-.5 $ (634)/676 $ (38)/37
Expected return
on assets ....................... +/-.5 (48)/48
OPEB
Discount rate** ................... +/-.5 (373)/415 (19)/21
Expected return
on assets ....................... +/-.5 (4)/4
Health care cost
trend rate** .................... +/-1.0 835/(639) 107/(83)
* Projected benefit obligation (PBO) for pension plans and accumulated postretirement
benefit obligation (APBO) for OPEB plans.
** Pretax impact on service cost, interest cost and amortization of gains or losses.
Goodwill
Goodwill is not amortized and is tested for impairment annually
and when events or circumstances change such that it is more
likely than not that the fair value of a reporting unit is reduced
below its carrying amount. The end of the fiscal third quarter is
the annual measurement date. To test for goodwill impairment,
the carrying value of each reporting unit is compared with its
fair value. If the carrying value of the goodwill is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the implied fair value of the goodwill.
An estimate of the fair value of the reporting unit is
determined through a combination of comparable market values
for similar businesses and discounted cash flows. These estimates
can change significantly based on such factors as the reporting
unit’s financial performance, economic conditions, interest
rates, growth rates, pricing, changes in business strategies and
competition.
Based on this testing, the company identified a reporting
unit in 2012 for which the goodwill was impaired. None were
impaired in 2014 and 2013. In the fourth quarter of 2012,
the company recorded a non-cash charge in cost of sales of
$33 million pretax, or $31 million after-tax. The charge was
associated with a reporting unit included in the agriculture and
turf operating segment. The key factor contributing to the
impairment was a decline in the reporting unit’s forecasted
financial performance (see Note 5).
A 10 percent decrease in the estimated fair value of
the company’s reporting units would have had no impact on
the carrying value of goodwill at the annual measurement date
in 2014.
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