The Pension Reporting for Coca-Cola and Pepsi - Research Paper Example

? Coca-Cola Company vs. PepsiCo, Inc. s Analysis and discussion of the current effects of IFRS on the pension reporting for Coca-Cola and PepsiCo at 2009 year-end According to the Pension Plan Act of 2006 new standards were enacted and established in connection to the new methods of funding for the United States benefit pension plans. In the year 2008, Coca-Cola’s status of funding for the U.S based benefit pension plan fundamentally declined owing to the general decline in the stock market of the entire nation. Beginning 2009, the firm had injected about $ 175 million into the benefit pension plan (IASB, 2007). Consequent to this input, the plan is effectively funded to sustain total elasticity as laid down in the Pension Plan Act 2006. Generally, the fund was estimated to finance all the subsequent contributions in future from the operating activities. In accordance to the guidelines of IFRS the international pension plans of the company are funded in conformity to the domestic laws and the income tax guidelines. The company does not anticipate the contributions to the plans to be in effect in any near future. Following the enactment of the Pension Plan Act of 2006, no contributions are expected to be included in the schedule for funding the benefit pension plan. At the end of the financial year 2009, the estimated benefit requirement of the United States eligible pension plans was about $ 2.138 million and the reasonable value of the pension plan was about $ 1.975 million. The major part of this contribution was as a result of depressing effect that the previous financial crisis and financial mechanism’s vulnerability had on the company’s pension plan assets. The estimated benefit requirement as at end of fiscal year 2009 in addition to the U.S eligible pension plan was about $ 1.858 million whilst the reasonable value of all other pension plan assets was about $ 1, 057 million (The Coca-Cola Company Report, 2009). The PepsiCo’s major part of the observable under-financing is as a result of the intercontinental pension plan for specific employees who are non-citizens of the United States and who are not funded owing to the restrictions in tax laws in addition to the United States unfinanced nonqualified pension plans. The US non eligible pension plans stipulates for particular links which might not be allowed or be included in the financed qualified pension plans as a result of the constrains inflicted by the local revenue code of 1986. The anticipated benefit payments of the stated unfinanced pension plans might not be considered in the schedule for the calculation of the benefit plan. It was expected that the yearly benefit payments to the unfunded benefits plans to be about $ 35 million by 2010 (PepsiCo 2009). It was also expected to remain at that level until 2030 declining yearly thereafter. The profits and losses which emanate from the real familiarity might be different from the presumptions put down by the company which comprise of the disparity amidst the real benefits from the pension plan assets and the anticipated return on the plan assets. Moreover, as a result of the variations in the presumptions the returns are also established at every date of measurement. According to the IFRS, if the observable accumulated returns or losses are way above 10% of the entire market connected fair value of the benefit plan assets or liabilities, a section of the net margin or loss is considered in the expense for the preceding year. The charges or returns of the plan variations that enhance or decline the benefits for previous employee service cost is considered in the earnings or income on a straight-line basis over the optimal service duration that remains of the active plan contributors. This is normally approximately 10 years for the pension expense and about 12 years for the retiree medical expense (IASB, 2007) Calculation of the funding levels and capital gains experienced by Coca-Cola and PepsiCo in their respective pension funds The following is the funding level and the capital gains experienced by Coca-cola and PepsiCo’s pension funds. Funding and capital gains for PepsiCo Company’s pension funds As at Dec 2009 U.S International Benefit obligation at January 2009 $ 6217 $ 430 Servicer cost 238 54 Interest cost 373 82 Foreign currency Exchange rate changes _ 130 Amendments _ _ Actual loss (Gain) 70 221 Benefits paid (296) (50) Settlements _ (8) Curtailments - (1) Special termination benefits _ _ Other 4 _ Benefit obligation at December 31 $ 6,606 $ 1709 Fair value of plan assets at January 1, $ 3,974 $ 1165 Actual return on plan assets 501 20 Employer contributions 269 1 Foreign currency exchange rate changes 121 — Benefits paid (149) (26) Business combinations — — Settlements — — Other _ 3 Fair value of plan assets at December 31, $ (1,186) $ (146) Net liability recognized $ (1186) $ (146) Source: (PepsiCo 2009) Funding and capital gains for Coca-Cola Company’s pension funds As at Dec 2009 Pension benefit other benefits Benefit obligation at January 2009 $ 3618 $ 1270 Servicer cost 113 21 Interest cost 213 29 Foreign currency Exchange rate changes 161 3 Amendments 1 (1) Actual loss (Gain) 89 23 Benefits paid (206) (30) Settlements (2) - Curtailments - (1) Special termination benefits 9 4 Other - 5 Benefit obligation at December 31 $ 3,996 $ 483 Fair value of plan assets at January 1, $ 2,290 $ 175 Actual return on plan assets 501 20 Employer contributions 269 1 Foreign currency exchange rate changes 121 — Benefits paid (149) (26) Business combinations — — Settlements — — Other _ 3 Fair value of plan assets at December 31, $ 3,032 $ 173 Net liability recognized $ (964) $ (310) Source: (The Coca-Cola Company Report, 2009) Analysis of the two (2) companies concerning the security of the pension fund Based on the above calculations and evaluations, PepsiCo has a more secure pension fund than the Coca-Cola firm based on a number of explanations. The considerable decrease in the equity markets and in the assessment of other assets instigated by the previous world financial crisis and the connected financial vulnerability had a great impact on the Coca-Cola’s pension plan assets. Despite the growing value of assets in the year 2009, the considerable value of the company’s plan assets continued to be lower than the anticipated pre-crisis points. This might result into an increased expense for the pensions in the near future. Owing to the decline of the considerable value of the company’s pension plan assets and the subsequent decline in the rate of discount applied in the calculation of the benefit plan requirement the company contributed $ 269 million to the country’s and intercontinental benefit plans in 2009. Nevertheless, the company expected to input more benefit plans in 2010 and many more in the subsequent years (The Coca-Cola Company Report, 2009). Moreover, the majority of the financial institutions in the country remained feeble and the counterparty risk related to the current derived instruments of finance sustained continued to be more than the pre-crisis points. The company was expected to secure the creditworthiness of the counterparties for the derived transactions or activities in the future or may experience more than the expected costs in the hedging processes of the firm. The decline in the accessibility of consumers to credit that emanate from the credit crisis on top of the universal uncalled for fiscal situations may have resulted into a reduction in the consumers’ optional expenditure. This might eventually diminish the demand for the company’s drinks and pessimistically have an impact on the net revenues and the profitability mechanism of The Coco-Cola Company. PepsiCo’s pension plans encompass full time workers in the United States and other intercontinental employees. The returns and benefits are established and determined in connection to the years of service or a merger of service and earning costs. According to the company’s policies, the United States and Canadian retirees are entitled to medical and life benefits of insurance commonly known as retiree medical benefits if they fulfill the age and service provisions. Universally, the company’s contribution of retiree medical charges is culminated at a particular amount of dollar which change based on the number of years an employee has served the company where the retirees account for the remaining cost of insurance. The company’s pension obligation for the year 2009 was about $ 1.2 billion where $ 1 billion was optional. In the year 2010 PepsiCo expected to contribute about $ 700 million where approximately $ 600 million was anticipated to be optional. The company’s cash payments for retiree medical benefits were anticipated to be about $ 100 million by the end of 2010 (PepsiCo 2009). Evaluation of the Impact of Pension Fund on the Level of Risk Reported In the Annual Report Some of the major risks which must be included in the financial report include the commodity price risk, foreign exchange risk and the credit risk. The pension plan must incorporate these risks in its report. For instance, the foreign exchange risk must incorporate the derivatives of the total face value of the pension plans assets including the unrealized profits and expected requirements for the process of hedging. The total offsets in the changes of the fair value of the fundamental hedged pension items which lead into the net material effect on the earnings must be effectively reported. The impact of the credit risk is critical in the valuation of the pension plans assets, thus the annual report must constitute all the changes that accrue on the pension funds. References International Accounting Standards Board (2007): International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis PepsiCo (2009) Annual Financial Report The Coca-Cola Company Report (2009) United States Securities and Exchange Commission Form 10-K Read More