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STRYKER CORPORATION 2016 Form 10-K Dollar amounts in millions except per share amounts or as otherwise specified. 29 Uncertain Income Tax Positions 2016 2015 Balance at beginning of year $ 313 $ 315 Increases related to current year income tax positions 47 21 Increases related to prior year income tax positions 22 3 Decreases related to prior year income tax positions: Settlements and resolutions of income tax audits (82) (9) Statute of limitations expirations (9) (6) Foreign currency translation (4) (11) Balance at end of year $ 287 $ 313 Reported as: Current liabilities—Income taxes $ — $ 9 Noncurrent liabilities—Other liabilities 287 304 Total $ 287 $ 313 Our income tax expense would have been reduced by $281 and $304 on December 31, 2016 and 2015 had these uncertain income tax positions been favorably resolved. It is reasonably possible that the amount of unrecognized tax benefits will significantly change due to one or more of the following events in the next twelve months: expiring statutes, audit activity, tax payments, competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of controversy in various taxing jurisdictions in which we operate, including inventory transfer pricing, cost sharing, product royalty and foreign branch arrangements. We are not able to reasonably estimate the amount or the future periods in which changes in unrecognized tax benefits may be resolved. Interest and penalties incurred associated with uncertain tax positions are included in other income (expense), net. In the normal course of business, income tax authorities in various income tax jurisdictions both within the United States and internationally conduct routine audits of our income tax returns filed in prior years. These audits are generally designed to determine if individual income tax authorities are in agreement with our interpretations of complex income tax regulations regarding the allocation of income to the various income tax jurisdictions. Income tax years are open from 2012 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2005 through the current year. NOTE 11 - RETIREMENT PLANS Defined Contribution Plans We provide certain employees with defined contribution plans and other types of retirement plans. A portion of our retirement plan expense under the defined contribution plans is funded with Stryker common stock. The use of Stryker common stock represents a non- cash operating activity that is not reflected in our Consolidated Statements of Cash Flows. 2016 2015 2014 Plan expense $ 166 $ 148 $ 132 Expense funded with Stryker common stock 22 20 18 Stryker common stock held by plan: Dollar amount 272 203 198 Shares (in millions) 2.3 2.2 2.1 Value as a percentage of total plan assets 11% 11% 11% Defined Benefit Plans Certain of our subsidiaries have both funded and unfunded defined benefit pension plans covering some or all of their employees. Substantially all of the defined benefit pension plans have projected benefit obligations in excess of plan assets. Discount Rate The discount rates were selected using a hypothetical portfolio of high quality bonds on December 31 that would provide the necessary cash flows to match our projected benefit payments. Effective January 1, 2017, in countries where it was possible, we elected to change the method to calculate the service cost and interest cost components of net periodic benefit costs for our defined benefit plans and will measure these costs by applying the specific spot rates along the yield curve of the projected cash flows for the respective plans. Our defined benefit plans previously utilized the yield curve approach to establish discount rates and we believe the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change does not affect the measurement of our total benefit obligations for those plans and is accounted for as a change in accounting estimate inseparable from a change in accounting principle, which is applied prospectively. The reductions in service and interest costs for 2017 associated with this change in estimate are nominal. Expected Return on Plan Assets The expected return on plan assets is determined by applying the target allocation in each asset category of plan investments to the anticipated return for each asset category based on historical and projected returns. Components of Net Periodic Pension Cost Net periodic benefit cost: 2016 2015 2014 Service cost $ (33) $ (36) $ (26) Interest cost (11) (10) (13) Expected return on plan assets 10 11 10 Amortization of prior service cost and transition amount 1 1 1 Recognized actuarial loss (9) (13) (7) Net periodic benefit cost $ (42) $ (47) $ (35) Changes in assets and benefit obligations recognized in OCI: Net actuarial (loss) gain $ (26) $ 26 $ (88) Recognized net actuarial loss 9 13 7 Prior service cost and transition amount 1 (1) 4 Total recognized in OCI $ (16) $ 38 $ (77) Total recognized in net periodic benefit cost and OCI $ (58) $ (9) $ (112) Weighted-average rates used to determine net periodic benefit cost: Discount rate 2.1% 2.0% 3.2% Expected return on plan assets 3.6% 4.0% 3.7% Rate of compensation increase 2.3% 2.9% 2.9% Weighted-average discount rate used to determine projected benefit obligations 1.8% 2.1% 2.0% Investment Strategy The investment strategy for our defined benefit pension plans is to meet the liabilities of the plans as they fall due and to maximize the return on invested assets within appropriate risk tolerances. 2016 2015 Fair value of plan assets $ 308 $ 289 Benefit obligations (588) (529) Funded status $ (280) $ (240) Reported as: Current liabilities—accrued compensation $ (1) $ (1) Noncurrent liabilities—other liabilities (279) (239) Pre-tax amounts recognized in AOCI: Unrecognized net actuarial loss (171) (155) Unrecognized prior service cost 11 13 Total $ (160) $ (142) The estimated net actuarial loss for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit cost is $8 in 2017. We estimate that an immaterial amount of amortization of prior service cost and transition amount for the defined benefit