Siemens 2005 Annual Report Download - page 174

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Accounting for defined benefit plans
Consolidated Balance Sheets
Defined benefit plans determine the entitlements of their beneficiaries. The net present value of
the total fixed benefits for service already rendered is represented by the actuarially calculated
accumulated benefit obligation (ABO).
An employee’s final benefit entitlement at regular retirement age may be higher than the fixed
benefits at the measurement date due to future compensation or benefits increases. The net pres-
ent value of this ultimate future benefit entitlement for service already rendered is represented by
the projected benefit obligation (PBO), which is actuarially calculated with consideration for
future compensation increases.
The accrued benefit cost is equal to the PBO when the assumptions used to calculate the PBO
such as discount rate, compensation increase rate and pension progression rate are achieved. In
the case of funded plans, the market value of the external assets is offset against the benefit obli-
gations. The net liability or asset recorded on the balance sheet is equal to the under- or overfund-
ing of the PBO in this case, when the expected return on plan assets is subsequently realized.
Differences between actual experience and assumptions made for the discount rate, compen-
sation increase rate and pension progression rate, as well as the differences between actual and
expected returns on plan assets, result in the asset or liability related to pension plans being dif-
ferent than the under- or overfunding of the PBO. Such a difference also occurs when the assump-
tions used to value the PBO are adjusted at the measurement date. If the difference is so signifi-
cant that the current benefit obligation represented by the ABO (or the amount thereof not funded
by plan assets) exceeds the liability recorded on the balance sheet, such liability must be
increased. The unfunded portion of the ABO is referred to as the Minimum Liability and an
accrued pension liability that is at least equal to this Minimum Liability amount should be recog-
nized without affecting the Consolidated Statements of Income. The required increase in the lia-
bility is referred to as the additional minimum liability (AML), and its offsetting AML adjustment
results in the recognition of either an intangible asset or as a component of shareholders’ equity
(AOCI). The treatment as a separate component of shareholders’ equity is recorded, net of tax, as
a reduction of shareholders’ equity. The recognition of the AML results in the elimination of any
existing prepaid pension asset balance on a plan by plan basis.
Management’s discussion and analysis