NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employee Future Benefits Hydro One periodically develops hedging strategies taking into account risk management objectives. At the inception of a hedging relationship  where the Company has elected to apply hedge accounting, Hydro One formally documents the relationship between the hedged item and the  hedging instrument, the related risk management objective, the nature of the specific risk exposure being hedged, and the method for assessing  the effectiveness of the hedging relationship. The Company also assesses, both at the inception of the hedge and on a quarterly basis, whether  the hedging instruments are effective in offsetting changes in fair values or cash flows of the hedged items.  Employee future benefits provided by Hydro One include pension, post-retirement and post-employment benefits. The costs of the Company’s  pension, post-retirement and post-employment benefit plans are recorded over the periods during which employees render service.  The Company recognizes the funded status of its pension, post-retirement and post-employment plans on its Consolidated Balance Sheets and  subsequently recognizes the changes in funded status at the end of each reporting year. Pension, post-retirement and post-employment plans  are considered to be underfunded when the projected benefit obligation exceeds the fair value of the plan assets. Liabilities are recognized on  the Consolidated Balance Sheets for any net underfunded projected benefit obligation. The net underfunded projected benefit obligation may  be disclosed as a current liability, long-term liability, or both. The current portion is the amount by which the actuarial present value of benefits  included in the benefit obligation payable in the next 12 months exceeds the fair value of plan assets. If the fair value of plan assets exceeds  the projected benefit obligation of the plan, an asset is recognized equal to the net overfunded projected benefit obligation. The net asset for  an overfunded plan is classified as a long-term asset on the Consolidated Balance Sheets. The post-retirement and post-employment benefit  plans are unfunded because there are no related plan assets. In accordance with the OEB’s rate orders, pension costs are recorded on a cash basis as employer contributions are paid to the pension  fund in accordance with the  Pension Benefits Act  (Ontario). Pension costs are recorded on an accrual basis for financial reporting purposes.  Pension costs are actuarially determined using the projected benefit method prorated on service and are based on assumptions that reflect  management’s best estimate of the effect of future events, including future compensation increases. Past service costs from plan amendments and  all actuarial gains and losses are amortized on a straight-line basis over the expected average remaining service period of active employees in  the plan, and over the estimated remaining life expectancy of inactive employees in the plan. Pension plan assets, consisting primarily of listed  equity securities as well as corporate and government debt securities, are fair valued at the end of each year. Hydro One records a regulatory asset equal to the net underfunded projected benefit obligation for its pension plan. The regulatory asset for the net underfunded projected benefit obligation for the pension plan, in the absence of regulatory accounting, would be recognized in AOCI. A regulatory asset is recognized because management considers it to be probable that pension benefit costs will be recovered in the future through the rate-setting process. The pension regulatory assets are remeasured at the end of each year based on the current status of the pension plan.  All future pension benefit costs are attributed to labour and are either charged to results of operations or capitalized as part of the cost of  property, plant and equipment and intangible assets. Post-retirement and post-employment benefits are recorded and included in rates on an accrual basis. Costs are determined by independent  actuaries using the projected benefit method prorated on service and based on assumptions that reflect management’s best estimates. Past  service costs from plan amendments are amortized to results of operations based on the expected average remaining service period.  Hydro One records a regulatory asset equal to the incremental net unfunded projected benefit obligation for post-retirement and post- employment plans recorded at each year end based on annual actuarial reports. The regulatory asset for the incremental net unfunded  projected benefit obligation for post-retirement and post-employment plans, in the absence of regulatory accounting, would be recognized in  AOCI. A regulatory asset is recognized because management considers it to be probable that post-retirement and post-employment benefit costs will be recovered in the future through the rate-setting process.  HYDRO ONE ANNUAL REPORT 2013 62 Post-retirement and post-employment benefits Pension benefits