Analyze and discuss the current effects of IFRS on the pension reporting for Coca-Cola and PepsiCo at 2009 year-end.
The two companies; Coco-cola and Pepsi are known for their fierce rivalry amongst themselves. Both the company’s products are highly diversified and they also have widely differing pension plans. The pension can be defined as the money that a person receives at a steady rate once the person retires. The significance of an appropriate pension plan in the company has increased to a great extent over this century. As a result of this, business executives have also started providing more defined constitutional pension plans for their employees. Coca-cola had adopted the cash balance method for reporting the pension plans in their financial statements. Under this type of reporting method, the employees will receive credits based on annual age weights which is roughly equal to a certain percentage their pay. As a general rule, these credits start off at around 3% of their pay and then steadily increase with age. The cash balance plan accounts of the employees will also credited along with the interest accounts. The employees were under this plan from 1st January 2010.
Conversely, Pepsi co. is just one of the rare employers to offer their employees a final salary pension or a defined benefit pension plan. This ensures a safe future for the employee as well as the employee’s entire family. From the employer’s point of view, this allows them to attract a well capable workforce. From the employee’s perspective they get access to a wide range of benefits, under this plan. Some of them are; automatic participation, benefit security, and a lifetime of income.
Automatic Participation means that the employees become a part of this scheme as soon as they become an employee of the organization. As a result of this, they are not required to pay any additional charges or fees to become a part of this pension plan with PepsiCo. The benefit security aspect of the plan ensures that the person issuing the plan is responsible for taking on the risks associated with the investment. This means that the employee is free from any sort of risks associated with bad investment as well as other market fluctuations. The feature of monthly income ensures that the employee or their spouses receive a fixed amount of money every month.
Based on the changes required by IFRS, the hourly pension plan rate in US, of all the employees was increased which were used to calculate the pension benefits. Based on the assumptions related to the health expenses and other demographics, the pension plan expenses for the year 2009 are also expected to decrease. This is mainly because the return on asset contributions for the year 2009 and other costs associated with the growth of productivity are mainly offset by the increase of the experience based loss amortization (David, 2011).
Calculate the funding levels and capital gains experienced by Coca-Cola and PepsiCo in their respective pension funds
The funding levels and capital gains of Coco-cola for the year 2009 were as follows:
Total pension funding levels= Benefit Obligation- Fair value of plant assets
= $3,996-$3,032
= $964 million
The US pension fund policy of Coco-cola is designed and maintained by investment managers and they establish allocation based targets and also the guidelines to be followed by the managers in implementing these policies. As such, in the year 2009, the company’s strategy for pension plans was to have a balance of 60% of equity investments and 30% of fixed income, whereas, the remaining 10% were consisting of alternative investments.
The pension funding level of PepsiCo is as follows:
Total pension funding levels= Benefit Obligation- Fair value of plant assets
= $6,606-$5,420
= $1,186 million
The pension plans of PepsiCo are applicable to all the full-time employees based in the United States as well as certain foreign employees. Apart from this all the employees in U.S and also Canada are eligible for the medical and other life insurance benefits.
Analyze which of the two (2) companies had a more secure pension fund, and explain why.
Coca-cola’s pension plan is more secure because by using the captive method, they will be able to consolidate the pension plans of all their subsidiaries scattered across the globe. This would mean that the hassles of creating different sets of pension plan for all the different countries would also be reduced tremendously. This also means that if there is gain on their investments, then under the captive method, Coco-cola will be able to use them instead of including it in the pension plan again. This is because under the cash balance method the employees are paid a hypothetical percentage of pension funds. Therefore, if the company makes more than that percentage, they are allowed to retain those gains within the company itself.
Conversely, the pension plan used by PepsiCo uses a method under which the employees are compensated based on the contributions they make to the company and therefore employees are not given a standard pension fund. This tends to be bit more risky for the employees as opposed to the method used by Coca-cola. Therefore, by concluding this analysis, the pension plan of Coca-cola seems to be better from the perspective of the company and also the employees. Whereas, the pension fund strategy used by PepsiCo focuses more on the contributions made by the employees and is therefore slightly more risky than the policy of Coca-cola. However, from the investor’s perspective the approach used by PepsiCo is more favorable as the company is not paying any extra funds to the employees, more than what they contributed to the company itself. In most cases, the employees also prefer the approach used by Coca-cola company for their pension strategy.
Evaluate how the status of the pension fund affects the level of risk that must be reported in the annual report. Justify your answer.
The retirement plans also come with their fair share of problems. For instance, in a lot of cases, the companies have come under fire for discrimination against the employees on the basis of age. Such lawsuits have certainly been a big hassle for the companies too. Apart from this since the pension funds are subject to the changes in the return on investments. If the return that the company is earning falls, then ultimately the company may have to add to the fund under the fixed pension fund plan.
The pension funds are subject to fluctuations in the earnings of the firm as well as the return on investments which are meant to support the pension funds plans. As a result of this, the pension plans would also be exposed to such risks; which can be reflected in the beta value of the company. Therefore, directly or indirectly the fluctuations are also reported in the financial statements and also the annual report of the company. The annual report also contains notes regarding any fluctuations in the other earnings of the company.
In would be safe to mention that the greater the pension plan funds, the greater will be the risk and uncertainty undertaken by the company. Therefore, the beta value of the company would also be greater than the other companies and this will also be reported in their annual reports. The annual report also contains other vital data and also the details from which they have been derived. The report can also help a potential investor check out the earnings and pension fund trends of the company over the years.
References:
- Annual Report PepsiCo. (2009). Retrieved on 12th December 2012 from
- Annual Report Coca-cola. (2009). Retrieved on 12th December 2012 from
- Stinson, T.A, Ashby, J.D and Shirey, K.M. (2011). Pension Accounting: The Changing Landscape of Corporate Pension Benefits. Journal of Business and Economics Research, 158, 27-34.
- Henderson, D. (2011). Financial Reporting. Journal of Accountancy. 59-65
