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	(635)	(1,067)	(180)	(117)
Benefit obligation, December 31	$ 10,492	$ 10,467	$ 1,443	$ 1,592
Change in Plan Assets
Fair value of plan assets, January 1	$ 9,217	$ 8,444	$ --	$ --
Actual return on plan assets	621	959	--	--
Employer contribution	334	355	160	98
Plan participants' contributions	12	13	20	19
Currency exchange rate changes	280	513	--	--
Benefits paid/settlements	(635)	(1,067)	(180)	(117)
Fair value of plan assets, December 31	$ 9,829	$ 9,217	$ --	$ --
Net funded status (including under-funded and non-funded plans) at December 31	$ (663)	$ (1,250)	$ (1,443)	$ (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 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 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 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.

(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?

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 both plans is the income or loss that is reported in Xerox's income statement.

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 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.

(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 discount rate.

An increase in the actual return on plan assets.

A reduction in the amount of benefit payments.

An increase in the expected return assumption.

(d) What is the source of funds to make payments to retirees?

pension and health care assets

operating cash flows

pension and health care liabilities

pension and health care obligations

(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 : $9,829 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 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 a 10-year period.

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 and are never amortized to income.