Analyzing and Interpreting Pension Disclosures | E.I. Du Pont Report

Analyzing and Interpreting Pension Disclosures Assume E.I. Du Pont De Nemours and Co.'s 10-K report has the following disclosures

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 $ 21,649 $ 19,532
Actual gain on plan assets 1,909 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 $ 22,304 $ 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)

 

  Pension Benefits
(in millions)
Components of net periodic benefit cost (credit) and amounts recognized in other comprehensive income 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 117 227 303
Amortization of prior service cost 18 29 37
Curtailment/settlement (gain) loss 3 (1)
Net periodic benefit cost $ (58) $ 191 $ 432
       
Changes in plan assets and benefit obligations recognized in other comprehensive income      
Net gain (893)
Amortization of loss (117)
Amortization of prior service cost (18)
Total recognized in other comprehensive income $ (1,028) $ — $ —
Total recognized in net periodic benefit cost and other comprehensive income $ (1,086) $ 191 $ 432

 

Weighted-avg. assumptions used for net periodic benefit cost for years ended Dec. 31  

 

2010

 

 

2009

Dicsount Rate 5.56% 5.43%
Expected return on plan assets 8.33% 8.33%
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 = revenue of $Answer = 1086 million.

(b) DuPont reports a $1,804 million expected return on pension plan assets as an offset to 2010 pension expense. Approximately, how is this amount computed (estimate from the numbers reported

(Round your dollar answers to the nearest whole number.)

$Answer = 21649 million x Answer = 8.33% = $Answer 1803 million

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

Answer = 1086 ($ million) Answer = gain

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

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.

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

(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” is the excess or deficiency of the pension obligation over plan assets.

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

“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.

DuPont’s pension plan is Answer=overfunded  by $Answer 98 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 increases 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 reduces the PBO and has no effect on pension cost.

An 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?

The company contributed cash to its pension plan in 2010. This contribution directly affected the company’s 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 by the gains on the plan’s investment portfolio and decreased by the benefits paid to plan participants.

The 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.

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 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 employee contributions make up any shortfall.

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