Finance and Accounting Principles

Questions: 1) Why do companies with defined benefit pension and opebs plans account for gains and losses on pension plan assets and liabilities in their income statement? 2) Research how such gains and losses can be reported for pensions and opebs under the FASBs ASC. In what different ways can managers choose to measure them over time?3) Which method had Ford management used previously to measure its gains and losses? Examine the third quarter Form 10-Q for 2015, Fords most recent financial report filing before the change. What are the cumulative effects of using this method on the companys balance sheet?4) Now examine the tables from the Form 8-K Ford filed with the SEC. The tables provide income statement information for the most recent 3 years of the 5 years for which Ford retroactively restated its records to reflect the change in measurement.a. What impact did the retroactive restatement have on these 3 years incomes?b. What impact will it have had on Fords balance sheet (which Ford did n ot disclose)?5) How do you expect investors to react, from the following standpoints:a. To the overall impact of the change on the company?b. To the informativeness of Fords accounting and disclosures moving forward? Answers: 1. In case of pension plans, companies are responsible for reporting pension gain or loss in the income statement. A pension plan is considered as agreement in which employer provides employees with defined or estimated benefits in exchange for current or past services. The pension benefits are not provided to the employee currently rather they are form of deferred compensation and employees receive the benefits at the time of retirement of post retirement. So, certain expenses are incurred by an organization that must be reported in the income statement. Pension accounting is based on accrual accounting (Spiceland, Sepe and Nelson 2013). In case of calculation of pension expenses, the employers must report the effects of gain or losses in income statement. Market instability impacts on pension expenses. The gain or loss components related to pension benefits shows the changes in the employers projected benefit obligation and the market impact on plan assets. Such as prior service co st generally increases the employers pension expenses, but can decrease the expenses if the employer does not provide retroactive pension benefits. Service and interest cost always increase pension expenses. The rate of return normally decreases pension expenses, but can increase it if the assets incur a loss. So, companies need to recognize the gain or loss of pension and OPEB in the statement to show the true picture. 2. There are different approaches for measuring the pension plan gains or losses such as minimum gain or loss amortization using the Corridor Approach and expected versus actual return. According to corridor approach, the amount of gain or loss is calculated as follows: (i) Current year unexpected gain or loss = (Current year actual return Current year expected return) (ii) Current year amortized gain or loss = {Beginning of year accumulated other comprehensive income (Gain or loss) Corridor amount}/Average remaining service life Current year amortized gain or loss is the summation of current year unexpected gain or loss and current year amortized gain or loss. Corridor amount is equal to the 10% of the larger of both projected benefit obligation and plan assets (Weygandt, Kimmel and Kieso 2012). According to method of expected return versus actual return, the pension gain or loss is the difference between the expected return and actual return. This is also referred to as unexpected gain or loss. Asset gain occurs when actual return is greater than expected return and asset loss occurs when actual return is less than expected return, gain or loss is recorded in Other Comprehensive Income (Gain or Loss). Prior year Gains Losses are accumulated in the account, expected return reduces the pension expense divided between actual return and unexpected gain or loss, the other comprehensive income includes two accounts Prior Service Cost) other comprehensive income: Gains Losses (Miller-Nobles, Mattison and Matsumara 2014). 3. Ford management has used the corridor approach for recognizing the pension gain or losses. This method has significant impact on the balance sheet (such as retained earnings and accumulated OCI). It is common for companies to capitalize the compensation costs (including net periodic pension expense). So, it also creates effect on the certain items of balance sheet such as inventory and fixed assets. On the side, it creates effect on the in legal contracts and financial leverage ratios (such as debt equity ratio). 4. It has found that retroactive statement has created impact on the income and also EPS of Ford. In 2013, it can be seen that net income attributable to Ford has increased from the previous reported profit. On the other side, EPS has also increased due increasing attributable income. In case of 2014, it is opposite. Net income attributable to ford motor has decreased from previously reported income. In 2015, it has increased again. The retroactive statement has created impact on the Other assets and Other liabilities and deferred revenue. It has reduced other assets by $301 million and increased revenue by $481 million. 5. Investor can show both positive and reaction on the overall impact of the change of the company. They can thing that changing of policy can improve the performance of the company can generate more revenues and profits. Actions can be taken more effectively to improve the performance. On the other side, they can show negative reaction if the company does not able to show the improvement. But after reporting financial statements, it has found that the earnings of the company have increased. So, it can attract investors to invest in the shares. The company has applied new accounting concept which can help to disclose more clear information about the company (Hoggett 2012). The accounting concept is changing sue to cope up with issues. Most of the firms are trying to apply fair value accounting for generating more useful information to provide support in decision making process. Reference List Hoggett, J., 2012.Accounting. Milton, Qld.: John Wiley and Sons Australia, Ltd. Miller-Nobles, T., Mattison, B. and Matsumara, E., 2014.Horngren's accounting. Boston: Pearson. Spiceland, J., Sepe, J. and Nelson, M., 2013.Intermediate accounting. New York: McGraw-Hill/Irwin. Weygandt, J., Kimmel, P. and Kieso, D., 2012.Accounting principles. Hoboken, NJ: J. Wiley Sons.