NOTE 16. RETIREMENT BENEFIT OBLIGATIONS

The Company’s employees participate in various defined benefit pension and postretirement plans sponsored by the Company and its subsidiaries. Plans in the U.S., U.K., Australia, and Canada are accounted for as defined benefit pension plans. Accordingly, the funded and unfunded position of each plan is recorded in the Balance Sheets. Actuarial gains and losses that have not yet been recognized through income are recorded in Accumulated other comprehensive (loss) income, net of taxes, until they are amortized as a component of net periodic benefit cost. The determination of benefit obligations and the recognition of expenses related to the plans are dependent on various assumptions. The major assumptions primarily relate to discount rates, expected long-term rates of return on plan assets and mortality rates. Management develops each assumption using relevant company experience in conjunction with market-related data for each individual country in which such plans exist. The funded status of the plans can change from year to year, but the assets of the funded plans have been sufficient to pay all benefits that came due in each of fiscal 2016, 2015, and 2014.

Summary of Funded Status

The Company uses a June 30 measurement date for all pension and postretirement benefit plans. The combined domestic and foreign pension and postretirement plans resulted in a net pension and postretirement benefits liability of $356 million and $281 million at June 30, 2016 and 2015, respectively. The Company recognized these amounts in the Balance Sheets at June 30, 2016 and June 30, 2015 as follows:


	Pension Benefits
	Domestic						Foreign						Postretirement benefits						Total
	As of June 30,
	2016			2015			2016			2015			2016			2015			2016			2015
	(in millions)
Other non-current assets	$	—		$	—		$	4		$	36		$	—		$	—		$	4		$	36
Other current liabilities		—			—			(1	)		(1	)		(9	)		(11	)		(10	)		(12	)
Retirement benefit obligations		(109	)		(80	)		(124	)		(103	)		(117	)		(122	)		(350	)		(305	)

Net amount recognized	$	(109	)	$	(80	)	$	(121	)	$	(68	)	$	(126	)	$	(133	)	$	(356	)	$	(281	)

The following table sets forth the change in the projected benefit obligation, change in the fair value of the Company’s plan assets and funded status:


	Pension Benefits
	Domestic						Foreign						Postretirement Benefits						Total
	As of June 30,
	2016			2015			2016			2015			2016			2015			2016			2015
	(in millions)
Projected benefit obligation, beginning of the year	$	382		$	350		$	1,272		$	1,252		$	133		$	150		$	1,787		$	1,752
Service cost		—			1			10			11			—			—			10			12
Interest cost		17			17			44			49			5			6			66			72
Benefits paid		(18	)		(16	)		(55	)		(58	)		(8	)		(9	)		(81	)		(83	)
Settlements^(a)		(11	)		(9	)		(33	)		—			—			—			(44	)		(9	)
Actuarial loss/(gain)^(b)		28			10			153			85			(2	)		(13	)		179			82
Foreign exchange rate changes		—			—			(188	)		(122	)		(2	)		(1	)		(190	)		(123	)
Plan curtailments		(2	)		—			(2	)		—			—			—			(4	)		—
Amendments, transfers and other^(c)		—			29			—			55			—			—			—			84

Projected benefit obligation, end of the year		396			382			1,201			1,272			126			133			1,723			1,787

Change in the fair value of plan assets for the Company’s benefit plans:
Fair value of plan assets, beginning of the year		302			301			1,204			1,234			—			—			1,506			1,535
Actual return on plan assets		14			5			107			91			—			—			121			96
Employer contributions		—			—			26			9			—			—			26			9
Benefits paid		(18	)		(16	)		(55	)		(58	)		—			—			(73	)		(74	)
Settlements^(a)		(11	)		(9	)		(33	)		—			—			—			(44	)		(9	)
Foreign exchange rate changes		—			—			(169	)		(120	)		—			—			(169	)		(120	)
Amendments, transfers and other^(c)		—			21			—			48			—			—			—			69

Fair value of plan assets, end of the year		287			302			1,080			1,204			—			—			1,367			1,506

Funded status	$	(109	)	$	(80	)	$	(121	)	$	(68	)	$	(126	)	$	(133	)	$	(356	)	$	(281	)

^(a)	Amounts related to payments made to former employees of the Company in full settlement of their deferred pension benefits.

^(b)

Fiscal 2016 actuarial losses for the Company’s pension plans are primarily related to the reduction in discount rates used in measuring plan obligations as of June 30, 2016. Fiscal 2016 actuarial gains related to postretirement benefits primarily relate to favorable changes in plan demographics. Fiscal 2015 actuarial losses for domestic pension plans are primarily related to the strengthening of the mortality tables utilized in measuring plan obligations as of June 30, 2015. Fiscal 2015 actuarial losses for foreign pension plans are primarily related to changes in the discount rate utilized in measuring the plan obligations as of June 30, 2015. Fiscal 2015 actuarial gains related to postretirement benefits primarily relate to changes in plan demographics.

^(c)	For fiscal 2015, the increase in the Company’s pension benefit obligation and plan assets relates to the acquisition of Harlequin and the assumption of Harlequin’s defined benefit pension plans which resulted in an increase in the Company’s net pension liability of approximately $15 million.

Amounts recognized in Accumulated other comprehensive (loss) income consist of:


	Pension Benefits								Postretirement Benefits						Total
	Domestic				Foreign				Postretirement Benefits						Total
	As of June 30,
	2016		2015		2016		2015		2016			2015			2016			2015
	(in millions)
Actuarial losses (gains)	$	158	$	131	$	452	$	439	$	2		$	4		$	612		$	574
Prior service (benefit) cost		—		—		—		—		(34	)		(41	)		(34	)		(41	)

Net amounts recognized	$	158	$	131	$	452	$	439	$	(32	)	$	(37	)	$	578		$	533

Amounts in Accumulated other comprehensive (loss) income expected to be recognized as a component of net periodic pension cost in fiscal 2017:


	Pension Benefits				Postretirement Benefits			Total
	Domestic		Foreign		Postretirement Benefits			Total
	As of June 30, 2016
	(in millions)
Actuarial losses (gains)	$	5	$	17	$	—		$	22
Prior service (benefit) cost		—		—		(4	)		(4	)

Net amounts recognized	$	5	$	17	$	(4	)	$	18

Accumulated pension benefit obligations as of June 30, 2016 and 2015 were $1,588 million and $1,639 million, respectively. Below is information about funded and unfunded pension plans.


	Domestic Pension Benefits
	Funded Plans				Unfunded Plans				Total
	As of June 30,
	2016		2015		2016		2015		2016		2015
	(in millions)
Projected benefit obligation	$	383	$	370	$	13	$	12	$	396	$	382
Accumulated benefit obligation		383		368		13		12		396		380
Fair value of plan assets		287		302		—		—		287		302

	Foreign Pension Benefits
	Funded Plans				Unfunded Plans				Total
	As of June 30,
	2016		2015		2016		2015		2016		2015
	(in millions)
Projected benefit obligation	$	1,131	$	1,198	$	70	$	74	$	1,201	$	1,272
Accumulated benefit obligation		1,122		1,185		70		74		1,192		1,259
Fair value of plan assets		1,080		1,204		—		—		1,080		1,204

The accumulated benefit obligation exceeds the fair value of plan assets for all domestic pension plans. Below is information about foreign pension plans in which the accumulated benefit obligation exceeds the fair value of the plan assets.


	Funded Plans				Unfunded Plans				Total
	As of June 30,
	2016		2015		2016		2015		2016		2015
	(in millions)
Projected benefit obligation	$	821	$	550	$	70	$	74	$	891	$	624
Accumulated benefit obligation		821		549		70		74		891		623
Fair value of plan assets		773		525		—		—		773		525

Summary of Net Periodic Benefit Costs

The Company recorded $8 million, ($4) million and $7 million in net periodic benefit costs (income) in the Statements of Operations for the fiscal years ended June 30, 2016, 2015 and 2014, respectively. Beginning in fiscal 2017, the Company will change the method used to estimate the service and interest cost components of net periodic benefit costs (income) for its pension and other postretirement benefit plans. For fiscal 2016 and previous periods presented, the Company estimated the service and interest cost components utilizing a single weighted-average discount rate for each country derived from a yield curve used to measure the benefit obligation. The new method utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The Company changed to the new method to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change is accounted for as a change in accounting estimate which is applied prospectively. This change in estimate is not expected to have a material impact on the Company’s pension and postretirement net periodic benefit expense in future periods.

The amortization of amounts related to unrecognized prior service costs (credits) and deferred losses were reclassified out of Other comprehensive income as a component of net periodic benefit costs.

The components of net periodic benefits costs were as follows:


	Pension Benefits
	Domestic									Foreign									Postretirement Benefits									Total
	For the fiscal years ended June 30,
	2016			2015			2014			2016			2015			2014			2016			2015			2014			2016			2015			2014
	(in millions)
Service cost benefits earned during the period	$	—		$	1		$	4		$	10		$	11		$	12		$	—		$	—		$	1		$	10		$	12		$	17
Interest costs on projected benefit obligations		17			17			16			44			49			51			5			6			7			66			72			74
Expected return on plan assets		(19	)		(22	)		(17	)		(62	)		(71	)		(76	)		—			—			—			(81	)		(93	)		(93	)
Amortization of deferred losses		4			3			4			14			13			12			—			—			(1	)		18			16			15
Amortization of prior service costs		—			—			—			—			—			—			(7	)		(13	)		(13	)		(7	)		(13	)		(13	)
Settlements, curtailments and other		—			2			4			2			—			3			—			—			—			2			2			7

Net periodic benefits costs- Total	$	2		$	1		$	11		$	8		$	2		$	2		$	(2	)	$	(7	)	$	(6	)	$	8		$	(4	)	$	7


	Pension Benefits
	Domestic									Foreign									Postretirement Benefits
	For the fiscal years ended June 30,
	2016			2015			2014			2016			2015			2014			2016			2015			2014
Additional information:
Weighted-average assumptions used to determine benefit obligations
Discount rate		3.7	%		4.5	%		4.5	%		2.9	%		3.7	%		4.2	%		3.4	%		4.2	%		4.0	%
Rate of increase in future compensation		N/A			3.0	%		N/A			2.7	%		2.9	%		3.6	%		N/A			N/A			N/A

Weighted-average assumptions used to determine net periodic benefit cost
Discount rate		4.5	%		4.5	%		5.0	%		3.7	%		4.2	%		4.5	%		4.2	%		4.0	%		4.7	%
Expected return on plan assets		6.5	%		7.0	%		7.0	%		5.5	%		6.2	%		6.8	%		N/A			N/A			N/A
Rate of increase in future compensation		3.0	%		3.0	%		5.3	%		2.9	%		3.6	%		3.7	%		N/A			N/A			N/A

N/A – not applicable

The following assumed health care cost trend rates as of June 30 were also used in accounting for postretirement benefits:


	Postretirement benefits
	Fiscal 2016			Fiscal 2015
Health care cost trend rate		6.7	%		6.6	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.5	%		4.6	%
Year that the rate reaches the ultimate trend rate		2028			2027

Assumed health care cost trend rates could have a significant effect on the amounts reported for the postretirement health care plan. The effect of a one percentage point increase and one percentage point decrease in the assumed health care cost trend rate would have the following effects on the results for fiscal 2016:


	Service and Interest Costs		Benefit Obligation
	(in millions)
One percentage point increase	$	1	$	12
One percentage point decrease	$	—	$	(11	)

The following table sets forth the estimated benefit payments for the next five fiscal years, and in aggregate for the five fiscal years thereafter. The expected benefits are estimated based on the same assumptions used to measure the Company’s benefit obligation at the end of the fiscal year and include benefits attributable to estimated future employee service:


	Expected Benefit Payments
	Pension Benefits				Postretirement Benefits		Total
	Domestic		Foreign		Postretirement Benefits		Total
	(in millions)
Fiscal year:
2017	$	24		47		9	$	80
2018		21		48		9		78
2019		20		50		9		79
2020		20		53		9		82
2021		21		54		9		84
2022-2026		107		292		41		440

Plan Assets

The Company applies the provisions of ASC 715, which requires disclosures including: (i) investment policies and strategies; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure plan assets; (iv) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and (v) significant concentrations of risk within plan assets.

The table below presents the Company’s plan assets by level within the fair value hierarchy, as described in Note 2 – Summary of Significant Accounting Policies, as of June 30, 2016 and 2015:


	As of June 30, 2016										As of June 30, 2015
	Total		Fair Value Measurements at Reporting Date Using										Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3		NAV		Total		Level 1		Level 2		Level 3		NAV
	(in millions)
Assets
Short-term investments	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Pooled funds:^(a)
Money market funds		—		—		—		—		—		4		—		4		—		—
Domestic equity funds		81		—		—		—		81		88		—		—		—		88
International equity funds		244		—		—		—		244		312		—		—		—		312
Domestic fixed income funds		160		—		—		—		160		162		—		—		—		162
International fixed income funds		618		—		—		—		618		585		—		—		—		585
Balanced funds		251		—		57		—		194		337		—		73		—		264
Other		13		2		—		11		—		18		6		—		12		—

Total	$	1,367	$	2	$	57	$	11	$	1,297	$	1,506	$	6	$	77	$	12	$	1,411

^(a)	Open-ended pooled funds that are registered and/or available to the general public are valued at the daily published net asset value (“NAV”). Other pooled funds are valued at the NAV provided by the fund issuer.

The table below sets forth a summary of changes in the fair value of investments reflected as Level 3 assets as of June 30, 2016 and 2015:


	Level 3 Investments
	(in millions)
Balance, June 30, 2014	$	12
Actual return on plan assets:
Relating to assets still held at end of period		1
Relating to assets sold during the period		—
Purchases, sales, settlements and issuances		(1	)
Transfers in and out of Level 3		—

Balance, June 30, 2015	$	12
Actual return on plan assets:
Relating to assets still held at end of period		—
Relating to assets sold during the period		—
Purchases, sales, settlements and issuances		(1	)
Transfers in and out of Level 3		—

Balance, June 30, 2016	$	11

The Company’s investment strategy for its pension plans is to maximize the long-term rate of return on plan assets within an acceptable level of risk in order to minimize the cost of providing pension benefits while maintaining adequate funding levels. The Company’s practice is to conduct a periodic strategic review of its asset allocation. The Company’s current broad strategic targets are to have a pension asset portfolio comprised of 26% equity securities, 62% fixed income securities and 12% in cash and other investments. In developing the expected long-term rate of return, the Company considered the pension asset portfolio’s past average rate of returns and future return expectations of the various asset classes. A portion of the other allocation is reserved in short-term cash to provide for expected benefits to be paid in the short term. The Company’s equity portfolios are managed in such a way as to achieve optimal diversity. The Company’s fixed income portfolio is investment grade in the aggregate. The Company does not manage any assets internally.

The Company’s benefit plan weighted-average asset allocations, by asset category, are as follows:


	Pension benefits
	As of June 30,
	2016			2015
Asset Category:
Equity securities		26	%		29	%
Debt securities		62	%		55	%
Cash and other		12	%		16	%

Total		100	%		100	%

Required pension plan contributions for the next fiscal year are expected to be approximately $25 million; however, actual contributions may be affected by pension asset and liability valuation changes during the year. The Company will continue to make voluntary contributions as necessary to improve funded status.