• Note 20: Employee Benefit Plans
• Note 21: Other Non-Current Liabilities
• Note 22: Financial and Capital Management

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (20 to 22)

We, us, our, BCE and the company mean either BCE Inc. or, collectively, BCE Inc., its subsidiaries, joint ventures and associates; Bell means our Bell Wireline, Bell Wireless and Bell Media segments on an aggregate basis; and Bell Aliant means either Bell Aliant Inc. or, collectively, Bell Aliant Inc. and its subsidiaries.

NOTE 20 | EMPLOYEE BENEFIT PLANS 

EMPLOYEE BENEFIT PLANS COST

We provide pension and other post-employment benefits for most of our employees. These include DB pension, DC pension, post-employment and long-term disability benefits. The cost of these plans, including financing, is tabled below.

COMPONENTS OF DB PLANS COST

The statements of comprehensive income includes the following amounts, before income taxes.

COMPONENTS OF DB ACCRUED BENEFIT ASSET (LIABILITY)

The following table shows the change in accrued benefit obligation and fair value of plan assets.

FUNDED STATUS OF DB PENSION PLANS

The following table shows the funded status of our accrued benefit obligation.

SIGNIFICANT ASSUMPTIONS

We used the following key assumptions to measure the accrued benefit obligation and the net benefit plans cost for the DB pension plans and plans that provide other employee future benefits. These assumptions are long-term, which is consistent with the nature of employee benefit plans.

We assumed the following trend rates in healthcare costs:

• an annual increase of 4.5% in the cost per person of covered healthcare benefits for 2011 and the foreseeable future

• an annual increase of 5.0% for retirees under age 65 and 4.5% for retirees over age 65 in the cost of medication for 2011 and the foreseeable future.

Assumed trend rates in healthcare costs have a significant effect on the amounts reported for the healthcare plans. The following table, for example, shows the effect of a 1% change in the assumed trend rates in healthcare costs.

DISCOUNT RATE

We determine the appropriate discount rate at the end of each year. The following table shows the impact of a 0.5% increase and a 0.5% decrease in the discount rate on the net employee benefit plans cost for 2012 and the employee benefit obligation at December 31, 2012.

EXPECTED LONG-TERM RATE OF RETURN

We determine the appropriate expected long-term rate of return at the end of each year. The following table shows the impact of a 0.5% increase and a 0.5% decrease in the expected rate of return on pension plan assets on the net employee benefit plans cost for 2012 and the employee benefit obligation at December 31, 2012.

PENSION PLAN ASSETS

The investment strategy for the major pension plans is to maintain a diversified portfolio of assets, invested in a prudent manner to maintain the security of funds while maximizing returns within our guidelines. The expected rate of return assumption is based on our target asset allocation policy and the expected future rates of return on these assets.

The following table shows the allocation of our pension plan assets at December 31, 2011 and 2010, target allocations for 2011 and the expected long-term rate of return by asset class.

Equity securities included approximately $9 million of BCE common shares and Bell Aliant common shares, or 0.05% of total plan assets, at December 31, 2011 and approximately $19 million of BCE common shares and Bell Aliant units, or 0.1% of total plan assets, at December 31, 2010.
Debt securities included approximately $19 million of Bell Canada debentures or 0.12% of total plan assets, at December 31, 2011 and approximately $6 million of Bell Canada debentures, or 0.04% of total plan assets, at December 31, 2010.

CASH FLOWS

We are responsible for adequately funding our DB pension plans. We make contributions to them based on various actuarial cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections and future service benefits.

We contribute to the DC pension plans as employees provide service.

The following table shows the amounts we contributed to the DB and DC pension plans and the payments made to beneficiaries under other employee future benefit plans.

We expect to contribute approximately $265 million to our DB pension plans in 2012, subject to actuarial valuations being completed. We expect to pay approximately $110 million to beneficiaries under other employee benefit plans and to contribute approximately $70 million to the DC pension plans in 2012.

NOTE 21 | OTHER NON-CURRENT LIABILITIES 

NOTE 22 | FINANCIAL AND CAPITAL MANAGEMENT 

FINANCIAL MANAGEMENT

Management’s objectives are to protect BCE and its subsidiaries on a consolidated basis against material economic exposures and variability of results against various financial risks that include credit risk, liquidity risk, interest rate risk, foreign currency risk and equity price risk.

DERIVATIVES

We use derivative instruments to manage our exposure to foreign currency risk, interest rate risk and changes in the price of BCE common shares under our share-based payment plans. We do not use derivative instruments for speculative purposes, as such we are not exposed to any significant liquidity risks relating to them.
The following derivative instruments were outstanding at December 31, 2011, December 31, 2010 and January 1, 2010:

• cross-currency swaps and foreign currency forward contracts that hedge foreign currency risk on a portion of our long-term debt

• foreign currency forward contracts that manage the foreign currency risk of certain purchase commitments

• interest rate swaps that hedge interest rate risk on a portion of our long-term debt

• forward contracts on BCE common shares that mitigate the cash flow exposure related to share-based payment plans.

For fair value hedges, the gains recognized on the hedging instruments were $36 million and $5 million in 2011 and 2010, respectively, and the losses recognized on the positions hedged were $42 million and $9 million in 2011 and 2010, respectively.

CREDIT RISK

We are exposed to credit risk from operating activities and certain financing activities, the maximum exposure of which is represented by the carrying amounts reported on the statements of financial position.
We are exposed to credit risk if counterparties to our trade receivables and derivative instruments are unable to meet their obligations. The concentration of credit risk from our customers is minimized because we have a large and diverse customer base. We regularly monitor our credit risk and credit exposure. There was minimal credit risk relating to derivative instruments at December 31, 2011, December 31, 2010 and January 1, 2010. We deal with institutions that have strong credit ratings and as such we expect that they will be able to meet their obligations.
The following table provides the change in allowance for doubtful accounts for trade receivables.

For many of our customers, trade receivables are written off directly to bad debt expense if the account has not been collected after a predetermined period of time.

The following table provides further details on trade receivables not provisioned.

LIQUIDITY RISK

We generate enough cash from our operating activities to fund our operations and fulfill our obligations as they become due. We have sufficient committed bank facilities in place should our cash requirements exceed cash generated from our operations.
Financial liabilities that are due within one year have been classified as current in the statements of financial position.

The following table is a maturity analysis for recognized financial liabilities with maturities that are greater than one year at December 31, 2011 for each of the next five years and thereafter.

MARKET RISK

Currency Exposures

We use cross-currency swaps and foreign currency forward contracts to hedge debt that is denominated in foreign currencies. We also use foreign currency forward contracts to manage foreign currency risk related to anticipated transactions, including certain purchase commitments.
At December 31, 2011, the amounts to be received under foreign currency forward contracts were US$1,323 million (2010 – US$1,280 million) and the amounts to be paid were $1,329 million (2010 – $1,333 million).
The effect on net earnings of a 10% increase or decrease in the Canadian/US dollar exchange rate was not significant at December 31, 2011, with all other variables held constant. The effect on other comprehensive income of a 10% change in the Canadian/US dollar exchange rate on the value of our foreign currency forward contracts was $80 million at December 31, 2011, with all other variables held constant.

The following table provides further details on our outstanding cross-currency swaps and foreign currency forward contracts as at December 31, 2011, December 31, 2010 and January 1, 2010.

Interest Rate Exposures

We use interest rate swaps to manage the mix of fixed and floating interest rates of our debt. The effect on net earnings and other comprehensive income of a 100 basis point increase or decrease in interest rates was $11 million at December 31, 2011, with all other variables held constant. The following table shows interest rate swaps outstanding at December 31, 2011, December 31, 2010 and January 1, 2010.

Equity Price Exposures

We use equity forward contracts to economically hedge the cash flow exposure of BCE’s common shares related to share-based payment plans. See Note 24, Share-Based Payments for details on our share-based payment arrangements.
The effect on net earnings of a 10% change in the market price of BCE’s common shares was $26 million at December 31, 2011, with all other variables held constant.

FAIR VALUE

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Certain fair value estimates are affected by assumptions we make about the amount and timing of estimated future cash flows and discount rates, all of which reflect varying degrees of risk. Income taxes and other expenses that would be incurred on disposition of financial instruments are not reflected in the fair values. As a result, the fair values are not the net amounts that would be realized if these instruments were settled.

The carrying value of our cash and cash equivalents, trade and other receivables, trade payables and accruals, compensation payable, interest payable and short-term obligations approximates fair value because they are short-term.
The following table provides the fair value details of financial instruments measured at amortized cost in the statements of financial position.

The following table provides the fair value details of financial instruments measured at fair value in the statements of financial position at December 31, 2011, December 31, 2010 and January 1, 2010.

CAPITAL MANAGEMENT

We have various capital policies, procedures and processes which are utilized to achieve our objectives for capital management. These include optimizing our cost of capital and maximizing shareholder return while balancing the interests of our stakeholders.
Our definition of capital includes equity attributable to owners of the parent, debt, and cash and cash equivalents.
In order to meet our objectives of maintaining a net debt to Adjusted EBITDA ratio of between 1.5 and 2.0 times and an Adjusted EBITDA to net interest expense ratio greater than 7.5 times, we monitor our capital structure and make adjustments, including to our dividend policy, as required.
In 2011, the board of directors of BCE approved increases in the annual dividend on BCE’s common shares as follows:

• 5.1%, from $1.97  per common share to $2.07  per common share in May 2011

• 4.8%, from $2.07  per common share to $2.17  per common share in December 2011.

On February 9, 2012, the board of directors declared a quarterly dividend of $0.5425 per common share, payable on April 15, 2012 to shareholders of record at March 15, 2012.
In 2010, the board of directors of BCE approved increases in the annual dividend on BCE’s common shares as follows:

• 5.2%, from $1.74 per common share to $1.83 per common share in August 2010

• 7.7%, from $1.83 per common share to $1.97 per common share in December 2010.

The details of BCE’s 2011 and 2010 normal course issuer bids (NCIB) are set out in Note 23, Share Capital.
The following table summarizes some of our key ratios used to monitor and manage Bell Canada’s capital structure. These ratios are calculated for BCE, excluding Bell Aliant.