Question

Analyzing and Interpreting Pension Disclosures
Assume E.I. Du Pont De Nemours and Co.'s 10-K report has the following disclosures related to its retirement plans ($ millions).

	Pension Benefits
($ millions)	2010	2009
Change in benefit obligation
Benefit obligation at beginning of year	$ 22,849	$ 22,935
Service cost	383	388
Interest cost	1,228	1,192
Plan participants' contributions	13	9
Acturarial loss (gain)	(728)	(244)
Benefits paid	(1,544)	(1,506)
Amendments	--	(1)
Net effects of acquisitions/divestitures	5	76
Benefit obligation at end of year	$ 22,206	$ 22,849
Change in plan assets
Fair value of plan assets at beginning of year	$ 22,249	$ 20,132
Actual gain on plan assets	1,927	3,306
Employer contributions	277	280
Plan participants' contributions	13	9
Benefits paid	(1,544)	(1,506)
Net effects of acquisitions/divestitures	--	28
Fair value of plan assets at end of year	$ 22,922	$ 22,249
Funded status
U.S. plans with plan assets	$ 2,365	$ 892
Non-U.S. plans with plan assets	(90)	(317)
All other plans	(1,559)	(1,515)
Total	$ 716	$ (940)

	Pension Benefits (in millions)
Components of net periodic benefit cost (credit)	2010	2009	2008
Net periodic benefit
Service cost	$ 383	$ 388	$ 349
Interest cost	1,228	1,192	1,160
Expected return on plan assets	(1,799)	(1,648)	(1,416)
Amortization of loss	117	227	303
Amortization of prior service cost	18	29	37
Curtailment/settlement (gain) loss	--	3	(1)
Net periodic benefit cost	$ (53)	$ 191	$ 432

Weighted-avg. assumptions used for net periodic benefit cost for years ended Dec. 31	2010	2009
Discount Rate	5.56%	5.43%
Expected return on plan assets	8.09%	8.18%
Rate of compensation increase	4.32%	4.31%

The following benefit payments, which reflect future service, as appropriate, are expected to be paid:

($ millions)	Pension Benefits
2008	$ 1,525
2009	1,507
2010	1,493
2011	1,500
2012	1,500
Years 2013-2017	7,690

HINT: Do not use negative signs with your answers.

(a) How much pension expense (revenue) does DuPont report in its 2010 income statement?

DuPont reports pension Answer

of $Answer

million.

(b) DuPont reports a $1,799 million expected return on pension plan assets as an offset to 2010 pension expense. Estimate what the expected return would have been had DuPont not changed the assumption on the expected return in 2010. (Round your dollar answers to the nearest whole number.)

$Answer

million

What is DuPont's actual gain or loss realized on its 2010 pension plan assets?

Answer

($ million) Answer

(c) What main factors affected DuPont's pension plan assets and pension liability during 2010?

Investment gains and employer contributions increased the plan assets. Service and interest costs increased the pension liability, and actuarial gains and benefit payments reduced the liability. Benefits were paid directly by the company and did not affect plan assets

Investment gains and employer contributions increased the plan assets, and benefits paid reduced plan assets. Service and interest costs increased the pension liability, and actuarial gains and benefit payments reduced the liability.

Investment gains and employer contributions increased the plan assets, and benefits paid reduced plan assets. Service and interest costs decreased the pension liability, and actuarial gains and benefit payments reduced the liability.

Investment gains and employer contributions increased the plan assets, and benefits paid reduced plan assets. Service costs increased the pension liability, and actuarial gains and benefit payments reduced the liability. Interest reflects the amount the company paid to its lenders and did not affect the pension obligation directly.

(d) Which of the following statements best describes what the phrase funded status means? What is the funded status of the 2010 DuPont pension plans?

"Funded status" reveals how much cash the plan has.

"Funded status" refers to the extent to which the plan assets are invested in mutual funds.

"Funded status" reflects the contributions that the company has made to the plan.

"Funded status" is the excess or deficiency of the pension obligation over plan assets.

DuPont's pension plan is Answer

by $Answer

million

(e) DuPont increased its discount rate from 5.43% to 5.56% in 2010. What effect(s) does the increase in the discount rate for determining pension obligations and cost have on the company's balance sheet and its income statement?

An increase in the discount rate reduces the PBO and has no effect on pension cost.

An increase in the discount rate reduces the PBO and increases pension cost.

An increase in the discount rate reduces the PBO and decreases pension cost.

An increase in the discount rate increases the PBO and increases pension cost.

(f) Which of the following statements best describes how DuPont's pension plan affected its 2010 cash flow?

There was no effect on the company's cash flow as all benefit payments are paid from plan assets.

The company's cash flow increased as the increase in pension assets more than offset the increase in the PBO.

The company's cash flow increased by the gains on the plan's investment portfolio and decreased by the benefits paid to plan participants.

The company contributed cash to its pension plan in 2010. This contribution directly affected the company's cash flow.

(g) Explain how the returns on pension assets affect the amount of cash that DuPont must contribute to fund the pension plan.

Asset returns have no effect on DuPont's cash flow because they are recognized in the pension plan and not on the company's financial statements.

Should pension investments decline as a result of a decline in the financial markets, DuPont might be required to increase its cash contribution to the pension plan.

Asset returns have no effect on DuPont's cash flow because increases in the PBO provide whatever financing the plan needs.

Asset returns have no effect on DuPont's cash flow because employee contributions make up any shortfall.

Answer 1