388 13 9 5 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 Interest cost 1,228 1,192 Plan participants contributions Acturarial loss (gain) (728) (244) Benefits paid (1,544) (1,506) Amendments (1) Net effects of acquisitions/divestitures 76 Benefit obligation at $ $ end of year 22,206 22,849 Change in plan assets Fair value of plan assets $ at beginning of year 21,649 19,532 Actual gain on plan assets 1,909 3,306 Employer contributions Plan participants contributions 13 Benefits paid (1,544) (1,506) Net effects of acquisitions/divestitures Fair value of plan assets at end of year 22,304 21,649 Funded status U.S. plans with plan assets $ 1,747 $ 892 Non-U.S. plans with plan assets (90) (317) All other plans (1,559) (1,515) Total $98 $(940) 277 280 9 28 $ TA 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 (1,804) (1,648) (1,416) Amortization of loss Amortization of prior service cost Curtailment/settlement (gain) loss (1) Net periodic benefit cost $(58) $ 191 $ 432 117 227 303 18 29 37 3 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 8.3396 8.4496 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 2010 1,493 2011 1,507 1,500 2012 1,500 7,690 Years 2013-2017 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 of $ 0 million. (b) DuPont reports a $1,804 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.) $ 0 million What is DuPont's actual gain or loss realized on its 2010 pension plan assets? 0 ($ million) (c) What main factors affected DuPont's pension plan assets and pension liability during 2010? Olnvestment 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. Olnvestment 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. Olnvestment 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. Olnvestment 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 (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? O"Funded status" is the excess or deficiency of the pension obligation over plan assets. O"Funded status" reflects the contributions that the company has made to the plan. O"Funded status" reveals how much cash the plan has. O"Funded status" refers to the extent to which the plan assets are invested in mutual funds. DuPont's pension plan is by $ 0 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? OAn increase in the discount rate increases the PBO and increases pension cost. OAn increase in the discount rate reduces the PBO and decreases pension cost. OAn increase in the discount rate reduces the PBO and has no effect on pension cost. OAn increase in the discount rate reduces the PBO and increases pension cost. (f) Which of the following statements best describes how DuPont's pension plan affected its 2010 cash flow? OThe company contributed cash to its pension plan in 2010. This contribution directly affected the company's cash flow. Othere was no effect on the company's cash flow as all benefit payments are paid from plan assets. OThe company's cash flow increased by the gains on the plan's investment portfolio and decreased by the benefits paid to plan participants. OThe company's cash flow increased as the increase in pension assets more than offset the increase in the PBO. (g) Explain how the returns on pension assets affect the amount of cash that DuPont must contribute to fund the pension plan. OAsset returns have no effect on DuPont's cash flow because increases in the PBO provide whatever financing the plan needs. OAsset 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. Oshould 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. OAsset returns have no effect on DuPont's cash flow because employee contributions make up any shortfall. 388 13 9 5 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 Interest cost 1,228 1,192 Plan participants contributions Acturarial loss (gain) (728) (244) Benefits paid (1,544) (1,506) Amendments (1) Net effects of acquisitions/divestitures 76 Benefit obligation at $ $ end of year 22,206 22,849 Change in plan assets Fair value of plan assets $ at beginning of year 21,649 19,532 Actual gain on plan assets 1,909 3,306 Employer contributions Plan participants contributions 13 Benefits paid (1,544) (1,506) Net effects of acquisitions/divestitures Fair value of plan assets at end of year 22,304 21,649 Funded status U.S. plans with plan assets $ 1,747 $ 892 Non-U.S. plans with plan assets (90) (317) All other plans (1,559) (1,515) Total $98 $(940) 277 280 9 28 $ TA 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 (1,804) (1,648) (1,416) Amortization of loss Amortization of prior service cost Curtailment/settlement (gain) loss (1) Net periodic benefit cost $(58) $ 191 $ 432 117 227 303 18 29 37 3 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 8.3396 8.4496 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 2010 1,493 2011 1,507 1,500 2012 1,500 7,690 Years 2013-2017 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 of $ 0 million. (b) DuPont reports a $1,804 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.) $ 0 million What is DuPont's actual gain or loss realized on its 2010 pension plan assets? 0 ($ million) (c) What main factors affected DuPont's pension plan assets and pension liability during 2010? Olnvestment 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. Olnvestment 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. Olnvestment 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. Olnvestment 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 (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? O"Funded status" is the excess or deficiency of the pension obligation over plan assets. O"Funded status" reflects the contributions that the company has made to the plan. O"Funded status" reveals how much cash the plan has. O"Funded status" refers to the extent to which the plan assets are invested in mutual funds. DuPont's pension plan is by $ 0 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? OAn increase in the discount rate increases the PBO and increases pension cost. OAn increase in the discount rate reduces the PBO and decreases pension cost. OAn increase in the discount rate reduces the PBO and has no effect on pension cost. OAn increase in the discount rate reduces the PBO and increases pension cost. (f) Which of the following statements best describes how DuPont's pension plan affected its 2010 cash flow? OThe company contributed cash to its pension plan in 2010. This contribution directly affected the company's cash flow. Othere was no effect on the company's cash flow as all benefit payments are paid from plan assets. OThe company's cash flow increased by the gains on the plan's investment portfolio and decreased by the benefits paid to plan participants. OThe company's cash flow increased as the increase in pension assets more than offset the increase in the PBO. (g) Explain how the returns on pension assets affect the amount of cash that DuPont must contribute to fund the pension plan. OAsset returns have no effect on DuPont's cash flow because increases in the PBO provide whatever financing the plan needs. OAsset 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. Oshould 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. OAsset returns have no effect on DuPont's cash flow because employee contributions make up any shortfall