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).
1. 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.
2. 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.
3. 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.
4. 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 2015?
Was Xerox's profitability impacted by this amount?
i. 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.
ii. 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.
iii. 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.
iv. The actual return for both plans is the income or loss that is reported in Xerox's income statement.
(c) Provide an example under which an "actuarial loss," such as the $332 million loss in 2015 that Xerox reports, might arise.
i. A reduction in the amount of benefit payments.
ii. A decrease in the expected return assumption.
iii. A decrease in the actual return on plan assets.
iv. A decrease in the discount rate.
(d) What is the source of funds to make payments to retirees?
i. pension and health care obligations
ii. pension and health care liabilities
iii. pension and health care assets
iv. operating cash flows
(e) How much cash did Xerox contribute to its pension and health care plans in 2015?
(f) How much cash did retirees receive in 2015 from the pension plan and the health care plan?