Sony 2008 Annual Report Download - page 86

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the valuations, which may result in Sony recognizing impairment
charges for goodwill and other intangible assets in the future. In
order to evaluate the sensitivity of the fair value calculations on
the impairment analysis, Sony applied a hypothetical 10 percent
decrease to the fair value of each reporting unit. As of March 31,
2008, a hypothetical 10 percent decrease to the fair value of
each reporting unit would not have resulted in a material impact
on the statement of income.
■ PENSION BENEFITS COSTS
Employee pension benefit costs and obligations are dependent
on certain assumptions including discount rates, retirement
rates and mortality rates, which are based upon current statisti-
cal data, as well as expected long-term rates of return on plan
assets and other factors. Specifically, the discount rate and
expected long-term rate of return on assets are two critical
assumptions in the determination of periodic pension costs and
pension liabilities. Assumptions are evaluated at least annually,
or at the time when events occur or circumstances change and
these events or changes could have a significant effect on these
critical assumptions. In accordance with U.S. GAAP, actual
results that differ from the assumptions are accumulated and
amortized over future periods. Therefore, actual results generally
affect recognized costs and the recorded obligations for
pensions in future periods. While management believes that the
assumptions used are appropriate, differences in actual experi-
ence or changes in assumptions may affect Sony’s pension
obligations and future costs.
Sony’s principal pension plans are its Japanese pension plans.
Foreign pension plans are not significant individually, to total plan
assets and pension obligations.
To determine the benefit obligation of the Japanese pension
plans, Sony used a discount rate of 2.3 percent for its Japanese
pension plans as of March 31, 2008. The discount rate was
determined by using currently available information about rates
of return on high-quality fixed-income investments available and
expected to be available during the period to maturity of the
pension benefit obligation in consideration of amounts and
timing of cash outflows for expected benefit payments. Such
available information about rates of returns is collected from
Bloomberg and credit rating agencies. The 2.3 percent discount
rate remains unchanged from fiscal year ended March 31, 2007
and reflects current market interest rate conditions.
To determine the expected long-term rate of return on pension
plan assets, Sony considers the current and expected asset
allocations, as well as historical and expected long-term rates of
return on various categories of plan assets. For Japanese
pension plans, the expected long-term rate of return on pension
plan assets was 3.7 percent and 4.0 percent as of March 31,
2007 and 2008 respectively. The actual loss on pension plan
assets for the fiscal year ended March 31, 2008 was 8.5
percent. Actual results that differ from the expected return on
plan assets are accumulated and amortized as a component of
pension costs over the average future service period, thereby
reducing the year-to-year volatility in pension costs. As of March
31, 2007 and 2008, Sony had net actuarial losses of 200.6
billion yen and 242.1 billion yen, respectively, including losses
related to plan assets. For the fiscal year ended March 31, 2008,
the net actuarial loss increased due to the difference between
the actual rate of return on pension plan assets and the
expected long-term rate of return on pension plan assets. The
net actuarial loss reflects the overall unfavorable return on
investment over the past several years and will result in an
increase in pension costs as they are recognized.
Sony adopted FAS No. 158 in the financial statements for
the year ended March 31, 2007. As a result, Sony recorded
a pension liability adjustment for the prior service cost, net
actuarial loss and obligation existing at transition totaling 9.5
billion yen as of March 31, 2007. This adjustment was estab-
lished by a charge to stockholders’ equity, resulting in no
impact to the accompanying consolidated statements of
income. Refer to Note 14 of Notes to Consolidated Financial
Statements for more information regarding Sony’s pension and
severance plans.
The following table illustrates the effect of changes in the
discount rate and the expected return on pension plan assets,
while holding all other assumptions constant, for Japanese
pension plans as of March 31, 2008.
CHANGE IN ASSUMPTION Yen in billions
Pre-tax Pension Equity
PBO costs (net of tax)
25 basis point increase /
decrease in discount rate ....
–/+25.4 –/+2.0 +/–1.2
25 basis point increase /
decrease in expected
return on assets ...........
— –/+1.2 +/–0.7
■ STOCK-BASED COMPENSATION
Sony accounts for stock-based compensation using the fair
value based method. Fair value is measured on the date of grant
using the Black-Scholes option-pricing model. Sony estimates
the forfeiture rate based on its historical experience for the stock
acquisition rights plans, and recognizes this compensation
expense, net of an estimated forfeiture rate, only for the stock
acquisition rights expected to vest over the requisite service
period. The expense is primarily included in selling, general and
administrative expenses.