Refer to P&G\'s financial statements and the related information in the annual r

Question

Refer to P&G's financial statements and the related information in the annual report to answer the following questions. http://www.pg.com/annualreport2011/_files/pdf/PG_2011_AnnualReport.pdf

a) Examining each item in P&G's balance sheet, identify those items that require present value, discounting, or interest computation in establishing the amount reported.

b) (1) What interest rates are disclosed by P&G as being used to compute interest and present values?

(2) Why are there so many different interest rates applied to P&G's financial statement elements (assets, liabilities, revenues, and expenses)?

Explanation / Answer

Refer to P&G's financial statements and the related information in the annual report to answer the following questions. http://www.pg.com/annualreport2011/_files/pdf/PG_2011_AnnualReport.pdf a) Examining each item in P&G's balance sheet, identify those items that require present value, discounting, or interest computation in establishing the amount reported. b) (1) What interest rates are disclosed by P&G as being used to compute interest and present values? (2) Why are there so many different interest rates applied to P&G's financial statement elements (assets, liabilities, revenues, and expenses)? 1. Item Interest rate Long term debt 3.40% Expected return on long term plan assets 9.50% Defined benefit pension plans 5.30% OPEB plan 5.70% 2. The different interest rates are given as under: 1) Expected return is the risk free return i.e long term bond yields 2) Long term debt is discounted on the basis of current market interest rate fluctuations 3) The defined benefit pension plans uses the weighted average rate of the countries in which the company operates. The assets and liabilities are to be measured at fair value. Thus the valuation should reflect the actual realisation or obligation that the company expects to pay or receive as on the balance sheet date. It needs to consider all relevant factors into consideration like the market conditions, interest rate fluctuations, hedging, attrition etc. Thus, the diversity.

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