Question
In: Accounting
Analyzing and Interpreting Pension and Health Care Footnote Assume Xerox reports the following pension and retiree...
Analyzing and Interpreting Pension and Health Care Footnote
Assume Xerox reports the following pension and retiree health care ("Other") footnote as part of its 10-K report.
| Pension Benefits | Retiree Health | |||
|---|---|---|---|---|
| (in millions) | 2010 | 2009 | 2010 | 2009 |
| Change in Benefit Obligation | ||||
| Benefit obligation, January 1 | $ 10,467 | $ 10,302 | $ 1,592 | $ 1,653 |
| Service cost | 237 | 244 | 17 | 19 |
| Interest cost | 578 | 732 | 87 | 92 |
| Plan participants' contributions | 12 | 13 | 20 | 19 |
| Plan amendments | 11 | (234) | -- | 31 |
| Acturarial gain | (508) | (85) | (114) | (105) |
| Currency exchange rate changes | 331 | 564 | 21 | -- |
| Curtailments | (1) | (2) | -- | -- |
| Benefits paid/settlements | (629) | (1,067) | (102) | (117) |
| Benefit obligation, December 31 | $ 10,498 | $ 10,467 | $ 1,521 | $ 1,592 |
| Change in Plan Assets | ||||
| Fair value of plan assets, January 1 | $ 9,217 | $ 8,444 | $ -- | $ -- |
| Actual return on plan assets | 695 | 959 | -- | -- |
| Employer contribution | 256 | 355 | 82 | 98 |
| Plan participants' contributions | 12 | 13 | 20 | 19 |
| Currency exchange rate changes | 280 | 513 | -- | -- |
| Benefits paid/settlements | (629) | (1,067) | (102) | (117) |
| Fair value of plan assets, December 31 | $ 9,831 | $ 9,217 | $ -- | $ -- |
| Net funded status (including under-funded and non-funded plans) at December 31 | $ (667) | $ (1,250) | $ (1,521) | $ (1,592) |
| Pension Benefits | Retiree Health | |||||
|---|---|---|---|---|---|---|
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 |
| Components of Net Periodic Benefit Cost | ||||||
| Defined benefit plans | ||||||
| Service cost | $ 237 | $ 244 | $ 234 | $ 17 | $ 19 | $ 20 |
| Interest cost | 578 | 732 | 581 | 87 | 92 | 90 |
| Expected return on plan assets | (668) | (802) | (622) | -- | -- | -- |
| Recognized net acturarial loss | 75 | 104 | 98 | 10 | 19 | 31 |
| Amortization of prior service credit | (20) | (18) | (3) | (12) | (13) | (24) |
| Recognized net transition obligation (asset) | -- | 2 | 1 | -- | -- | -- |
| Recognized curtailment/settlement loss | 33 | 93 | 54 | -- | -- | -- |
| Net periodic benefit cost | 235 | 355 | 343 | 102 | 117 | 117 |
| Defined contribution plans | 80 | 70 | 71 | -- | -- | -- |
| Total | $ 315 | $ 425 | $ 414 | $ 102 | $ 117 | $ 117 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | ||||||
| Net acturarial loss (gain) | (499) | (114) | ||||
| Prior service cost (credit) | 5 | -- | ||||
| Amortization of net acturarial (loss) gain | (108) | (10) | ||||
| Amortizaion of prior service (cost) credit | 20 | 12 | ||||
| Total recognized in other comprehensive income | (582) | (112) | ||||
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income | $ (267) | $ (10) | ||||
(a) Describe what is meant by service cost and interest cost (the
service and interest costs appear both in the reconciliation of the
PBO and in the computation of pension expense).
Service cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is the expense we incur on funds borrowed by the pension plan.
Service cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is an expense that accrues on the pension obligation during the year.
Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is the expense we incur on funds borrowed by the pension plan.
Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is an expense that accrues on the pension obligation during the year.
1.00 points out of 1.00
The correct answer is: Service cost represents the additional
pension benefits earned by employees during the current year but
paid to employees in the future. Interest cost is an expense that
accrues on the pension obligation during the year.
(b) What is the actual return on the pension and the health care
("Other") plan investments in 2010?
$Answer
million
Was Xerox's profitability impacted by this amount?
Xerox's profit is reduced by the expected return on pension assets. Because the health care ("Other") plan is not funded, there are no assets generating a return, hence there is no expected return offset for this plan.
The actual return for both plans is the income or loss that is reported in Xerox's income statement.
The expected return (not the actual return) on the pension plan assets impacts Xerox's income for 2010. Pension expense is reduced by this amount. Because the health care ("Other") plan is not funded, there are no assets generating a return, hence there is no expected return offset for this plan.
The actual return for the pension plans is the income or loss that is reported in Xerox's income statement. Because the "Other" (health care) plan is funded on a pay-as-you-go basis, it does not affect Xerox's profit until the benefits are paid.
1.00 points out of 1.00
The correct answer is: The expected return (not the actual return)
on the pension plan assets impacts Xerox's income for 2010. Pension
expense is reduced by this amount. Because the health care
("Other") plan is not funded, there are no assets generating a
return, hence there is no expected return offset for this plan.
(c) Provide an example under which an "actuarial gain," such as the
$508 million gain in 2010 that Xerox reports, might arise.
An increase in the actual return on plan assets.
An increase in the discount rate.
An increase in the expected return assumption.
A reduction in the amount of benefit payments.
1.00 points out of 1.00
The correct answer is: An increase in the discount rate.
(d) What is the source of funds to make payments to retirees?
pension and health care liabilities
pension and health care assets
pension and health care obligations
operating cash flows
1.00 points out of 1.00
The correct answer is: pension and health care assets
(e) How much cash did Xerox contribute to its pension and health
care plans in 2010?
Pension = $Answer
million
Health care = $Answer
million
(f) How much cash did retirees receive in 2010 from the pension
plan and the health care plan?
Pension = $Answer
million
Health care = $Answer
million
How much cash did Xerox pay these retirees in 2010?
Answer
million
(g) Show the computation of the 2010 funded status for the pension
and health care plans.
Do not use negative signs with your answers.
Pension : $9,831 million - $Answer
million = $Answer
million Answerunderfundedoverfunded
Health care : $0 million - $Answer
million = $Answer
million Answerunderfundedoverfunded
(h) The company reports $108 million "amortization of net actuarial
(loss) gain" in the table relating to Other Comprehensive Income
and $75 million "Recognized net actuarial loss" and $33 million
"Recognized curtailment/settlement loss" in the net periodic
benefit cost table. (Note that $75 million + $33 million = $108
million.) The company also reports a $20 million "Amortization of
prior service (cost) credit" and a corresponding amount in the net
periodic benefit cost table. Describe the process by which these
amounts are transferred from Other Comprehensive Income to pension
expense in the income statement.
These amounts remain in AOCI unless they exceed the greater of 10% of pension assets or PBO at the beginning of the year. If the accumulated amounts exceed the maximum, the excess is amortized to income over a 10-year period.
These amounts remain in AOCI and are never amortized to income.
These amounts remain in AOCI unless they exceed the greater of pension assets or PBO at the beginning of the year. If the accumulated amounts exceed the maximum, the excess is amortized to income over the remaining service lives of the employees.
These amounts remain in AOCI unless they exceed the greater of 10% of pension assets or PBO at the beginning of the year. If the accumulated amounts exceed the maximum, the excess is amortized to income over the remaining service lives of the employees.
1.00 points out of 1.00
The correct answer is: These amounts remain in AOCI unless they
exceed the greater of 10% of pension assets or PBO at the beginning
of the year. If the accumulated amounts exceed the maximum, the
excess is amortized to income over the remaining service lives of
the employees.
Solutions
Expert Solution
Based on the information provided in the tables, the values are derived as follows:
b) What is the actual return on the pension and the health care ("Other") plan investments in 2010? = 695 (Pension) + 0 (Other) = $695 million
_____
e) How much cash did Xerox contribute to its pension and health care plans in 2010?
Pension = $256 million
Healthcare = $82 million
_____
f) How much cash did retirees receive in 2010 from the pension plan and the health care plan?
Pension = $629 million
Healthcare = $102 million
How much cash did Xerox pay these retirees in 2010? $0 million
_____
g) Show the computation of the 2010 funded status for the pension and health care plans.
Pension = Fair Value of Plan Assets, December 31 - Benefit Obligation, December 31 = $9,831 million - $10,498 million = -$667 or $667 million (as negative signs are not to be included) [Answer is Underfunded]
Healthcare = $0 million - Benefit Obligation, December 31 = $0 million - $1,521 million = -$1,521 or $1,521 million (as negative signs are not to be included) [Answer is Underfunded]
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