The Effect of Changes in Accounting for Defined Benefit Pensions and Other Postretirement Benefit Plans on Companies' Financial Statements and Stakeholders
James, Marianne L., Journal of the International Academy for Case Studies
The primary subject matter of this case concerns changes in accounting for defined benefit pensions and other postretirement benefit plans proposed and promulgated by the Financial Accounting Standards Board (FASB) and their effects on the financial statements of companies that currently sponsor these plans. Secondary, yet important issues are the potential effects of these changes on companies' willingness to offer these plans to their employees, and the resulting potential economic impact on the companies' stakeholders. This case has a difficulty level of three to four and can be taught in about 45 minutes. Approximately two hours of outside preparation is necessary to fully address the issues and concepts. This case can be utilized in intermediate accounting as part of the coverage of pensions, or in a more advanced graduate class focusing more extensively on underlying conceptual and economic issues. The case has conceptual, analytical, and research components. Both oral and written communication skills can be enhanced using this case.
Since the introduction of the first pension plan by American Express in 1875, traditional (defined benefit) pension plans have become an important source of millions of employees' retirement income. At one time, defined benefit pensions, which promise employees a specific amount of retirement income, represented the most common type of employer-sponsored plan. Legislation, especially the ERISA ACT of 1974 and the creation of the Pensions Benefit Guarantee Corporation (PBGC) added security to these benefits. Sadly, these traditional pensions have become less popular. In 1981, 81% of employees who were covered by employer-sponsored retirement plan were covered by a traditional pension plan; by 2003, that percentage decreased to 38% (Clements, 2006). This trend appears to be continuing. For example, recently, several large well-known public companies have decided to freeze their existing pension plans. Reasons for this reduction in traditional pension plans include the financial risk to the employer, and the uncertainty created by negative or low-performing stock markets. Other postretirement plans (e.g., postretirement health care) also have become less popular, primarily due to rising costs.
Changes in accounting for traditional pensions and other postretirement benefit plans may sharply increase the liabilities and expenses and decrease the equity shown on companies' financial statements and may further increase the risk and cost of these types of plans. These changes may affect employers' willingness to continue offering these plans.
The primary focus of this case is to examine the potential short-term and long-term effects of recently promulgated and expected accounting changes on companies' (1) financial statements, (2) stakeholders, and (3) willingness to offer these plans. The case can be taught at the same time that retirement benefits are covered in an intermediate accounting class, or in an advanced accounting class focusing primarily on underlying concepts. The case has analytical, communication, and research components.
Accounting for pensions evolved from the "pay-as-you-go" basis to the full accrual basis. The currently pertinent primary accounting …
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Publication information: Article title: The Effect of Changes in Accounting for Defined Benefit Pensions and Other Postretirement Benefit Plans on Companies' Financial Statements and Stakeholders. Contributors: James, Marianne L. - Author. Journal title: Journal of the International Academy for Case Studies. Volume: 14. Issue: 1 Publication date: January-February 2008. Page number: 47+. © The DreamCatchers Group, LLC 2008. COPYRIGHT 2008 Gale Group.
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