Question

Analyzing and Interpreting Pension and Health Care Footnote
Xerox Corporation reports the following pension and retiree health care (“Other”) footnote as part of its 10-K report.

December 31, 2015 ($ millions)		Pension Benefits	Retiree Health
Change in Benefit Obligation
Benefit obligation, January 1		$11,855	$937
Service cost		36	7
Interest cost		295	34
Plan participants’ contributions		4	14
Actuarial loss		(332)	(4)
Currency exchange rate changes		(538)	(25)
Plan amendments and curtailments		(17)	(31)
Benefits paid/settlements		(638)	(77)
Benefit obligation, December 31		$10,665	$855
Change in Plan Assets
Fair value of plan assets, January 1		$9,214	$—
Actual return on plan assets		(89)	—
Employer contribution		309	63
Plan participants’ contributions		4	14
Currency exchange rate changes		(440)	—
Benefits paid/settlements		(638)	(77)
Other		(4)	—
Fair value of plan assets, December 31		$8,356	$—
Net funded status at December 31		$(2,309)	$(855)

December 31, 2015 ($millions)		Pension Benefits	Retiree Health
Components of Net Periodic Benefit Cost
Service cost		$36	$7
Interest cost		295	34
Expected return on plan assets		(376)	—
Recognized net actuarial loss		96	1
Amortization of prior service credit		2	(18)
Recognized settlement loss		89	-
Recognized curtailment gain		-	(22)
Defined benefit plans		142	2
Defined contribution plans		100	-
Total net periodic cost		$242	$2
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Net actuarial loss		$125	$(4)
Prior service credit		(16)	(32)
Amortization of net actuarial loss		(185)	(1)
Amortization of net prior service credit		(2)	18
Curtailment gain		—	22
Total recognized in other comprehensive income		$(78)	$3

(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 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 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 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.

Mark 1.00 out of 1.00

(b) What is the actual return on the pension and the health care ("Other") plan investments in 2015?

$Answer

million  

Was Xerox's profitability impacted by this amount?

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.

The expected return (not the actual return) on the pension plan assets impacts Xerox's income for 2015. 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.

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.

Mark 1.00 out of 1.00

(c) Provide an example under which an "actuarial loss," such as the $332 million loss in 2015 that Xerox reports, might arise.

A reduction in the amount of benefit payments.

A decrease in the expected return assumption.

A decrease in the actual return on plan assets.

A decrease in the discount rate.

Mark 1.00 out of 1.00

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

pension and health care obligations

pension and health care liabilities

pension and health care assets

operating cash flows

Mark 1.00 out of 1.00

(e) How much cash did Xerox contribute to its pension and health care plans in 2015?

Pension = $Answer

million

Health Care = $Answer

million

(f) How much cash did retirees receive in 2015 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 2015?
$Answer

million

(g) Show the computation of the 2015 funded status for the pension and health care plans.

Do not use negative signs with your answers.

Pension : $10,665 million - $Answer

million = $Answer

million Answerunderfundedoverfunded

Health Care : $0 million - $Answer

million = $Answer

million Answerunderfundedoverfunded

(h) The company reports $125 million “Net actuarial loss” in the table relating to other comprehensive income, a credit of $16 million relating to “Prior service credit,” a loss of $185 million relating to “Amortization of net actuarial loss,” and a credit of $2 million relating to “Amortization of prior service credit” 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.

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four questions should be answered. kindly take note of it.

Part A

Option C

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.

Part B

actual return on the pension and the health care ("Other") plan investments in 2015 = $(89) million (Pension) + 0 (other) = $(89) million

option B

The expected return (not the actual return) on the pension plan assets impacts Xerox's income for 2015. 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.

Part C

Option D

A decrease in the discount rate.

(the discount rate which is used to calculate the pension and health care obligations affects the actuarial losses. There is increase in actuarial losses with the decrease in the discount rate)

Part D

Option C

pension and health care assets

(when cash payments to retirees are made, there is a corresponding decrease in the amount of the pension and health care obligations. There is sufficient assets in the pension plan to make payments for the year 2015.