Accounting of Pension Obligations - Coca-Cola and PepsiCo - Essay Example

? Coca-Cola Company versus PepsiCo, Inc. Table of Contents Table of Contents 2 Answer 3 Answer 2. 4 The Coca-Cola Company 4 The Pepsi Company 7 Answer 3. 8 Answer 4. 10 The Coca-Cola Company 10 The Pepsi Company 11 References 12 Answer 1. Pension plan is an important benefit that is to be offered by a company to its employees. Coca-Cola and Pepsi Co are the two global competitors but have done well in ensuring that the employees of the company get full benefits from the pension arrangements of the company though their process of offering benefits may differ. In 2009, the companies work under the 401k pension plan which provides insurance advantage on the medical requirements of the employees. In Coca-Cola the contributory plan is done by both the employer and the employees where the employer enjoys the benefit of taxation for their employees. The pension plan of PepsiCo is based on the willingness of the employees as the benefits are availed by both the full-time and international employees. The rates used by Coca-Cola and PepsiCo for calculating the pension amounts are rate of return on assets, rate of compensation, and rate of discount. For the year 2008, the expense discount rate and the rate of return on planned assets for Coca-Cola was 5.8% and 7.75%. The medical benefits for the retiree were calculated based on the available rates. PepsiCo had a discount rate of 5.7% on all US beneficiaries and 5.2% on foreign workers. The expected rate of return for PepsiCo in 2008 was 7.7%. Retirement rewards calculated were often based on the compensation rate for employees. Recent events in corporate finance have depicted the importance of efficient administration. The need to fund corporate pension plans have made many executives to offers offer defined constitution plans as because of the recent changes in IFRS. Whereas Coca-Cola have rejected such approach and have preferred the plan of cash balance plan design as it offered risk-free benefits to the employees and made the employees secured. Coca-Cola was a part of multi-employer pension plans of US, but from 2012 the company opts to change the accounting methodology for determining the market related value of assets for the defined benefit pension plans. Coca-Cola sponsors to the pension plans covering all US employees and has made necessary assumptions to determine the pension expense and other related obligations. As per the assumption the discount rates would be related to the present value liabilities and the expected long-term rate would relate to planned assets. The company decided to periodically revise asset allocation so as to improve returns and manage risks. PepsiCo is one of those major employers who are still planning to offer their new employees a final salary pension. In 2012, PepsiCo decided to decrease the fair value of pension so as to reduce the future employee benefit costs. The company made certain changes in their US Pension plans, which stated that employees earning benefit under the pension plans as stated in IFRS, were not eligible for the company matching contributions on the 401k contributions. The annual pensions is to be calculated based on 4 components, i.e. the value of benefits earned by employees during their working hours, the increase in liability due to time , other gains and losses and the expected return on assets which was based on pension plan investment strategy and the long-term rates of return by asset class. These schemes were essential to plan a secure retirement for the employees and to meet the future expectation of the management. Answer 2. The Coca-Cola Company In 2012 the company’s total pension expense related to defined benefit plans were $251million. The company’s primary US plan in 2012 represented 59% and 64% of the Company’s consolidated pension benefit obligations and pension assets. The pension expense is expected to decrease by $60 million in 2013 by the management because of expected $640million of contributions to be made by the company. The favorable impact of such is expected to decrease the unfavorable impact of weighted-average discount rate used to calculate the Company’s benefits obligations. The total accrued benefit liability for pension and other post-retirement benefits plans was $3,406million on 31st December 2012. The international pension plans were funded as per the income tax regulations and local laws. On 31st December 2012, the projected benefit obligations of US qualified pension plans was $6,604million and other pension fund was $3,089million, and the fair value plan assets of US qualified pension plan was $5,549million and other plans was $2,035million. Obligations and Funded Status Pension Plan Assets The Pepsi Company The pension contribution for 2012 was $1,614million, of which $1,375million was discretionary, which includes $405million pertains to pension lump sum payments. It was expected that in 2013, pension and retiree medical contributions would approximate to $240million, with an approximation of $17million to be considered as discretionary. A decrease in discount rate and expected rate of return would increase the pension expense by $69million in discount rate and $33million in expected rate of return. The pension lump sum settlement charge on 2012 in corporate unallocated expenses is $195million. Obligations and Funded Status Answer 3. Though Pepsi and Coca-Cola are the two most popular and widely recognized beverages brand in the United States (US), yet their pension plans and their funding status face a competitive comparison. PepsiCo Inc. has a defined voluntary pension plan that consists of all full time US employees and also some international employees. The plan is a non-contributory plan for the employees since the employer is the only contributor of the plan as the employer funds the plan as a whole and bears the full cost of the plan. The pension plan formed by PepsiCo can be termed as a qualified pension plan since the plan has the provision of tax incentives that is to be received by the employer for his contributions based on the years of service of the employees or on both the income and years of service of the employees. In addition to it, PepsiCo offers life insurance and medical benefits, and a retiree medical plan that are funded on the basis of “pay-as-you-go”. This plan is funded by the employees since the employer is not interested in funding a plan in which he receives no tax benefits. Coca-Cola has a defined contribution plan and as compared to PepsiCo the plan also includes all U.S. Employees and some international employees. This plan is a contributory plan for both the employer and the employee as both have to contribute in the plan. The employer receives substantial tax benefits for the part contributions made. But as compared to PepsiCo the defined benefit pension plan of Coca-Cola is considered to be the non-qualified pension plan and unfunded for the organizations officers, and most of the US employees and some international employees since it does not offer proper tax benefits for the contributions made partly by the employer and employees. The plan offers life insurance and medical benefits for the employees but does not provide the provision of retiree medical plan for the employees. Thus, the employees of Coca-Cola fail to avail the benefits of such plan. The tax incentive makes a plan more attractive to the contributors, which lacks in the pension plan of Coca-Cola, but PepsiCo have provided such a benefit for the contributor. The benefit obligation received by Coca-Cola at the end of the year 2012, is much less than that received by PepsiCo, whereas the net liability recognized in Coca-Cola is greater than that of PepsiCo. Answer 4. The Coca-Cola Company In the recent months the company has faced unprecedented disruptions in the global credit markets and if situation continues it would lead to an increase in the cost of borrowing and affect the profitability. The currently prevailing credit market conditions would lead to the deterioration of the operations and financial conditions and the economic environment. The resulted significant decline in the equity market and in the valuation of assets would affect the value of the pension fund assets. The reduction in pension plan asset would reduce the return on such assets and increase the pension fund expenses. If such a condition continues then it would impact the future benefit pension expense, thus resulting in decrease in fair value of pension plan assets, discount rate for calculating pension benefit obligations, and in contributions made in US and international pension plans. This would lead to the rise of counterparty risk for the company. The risks may negatively leave an impact on the demand and net revenue of the company. Since the impact on pension plans, due to the unprecedented disruptions, would affect the net revenues of the company, which will in turn affect the shareholders, so the effect of such risk must be reported in the annual report. The Pepsi Company The company is exposed to market risks in the form of changes in commodity prices, foreign exchange rates and interest rates. In the normal course of business such risks are managed through the implementation of various strategies. Even the company performs assessments so as to hedge against counterparty credit risks. The fair value of equities is affected by the fluctuations in market prices and rates. The pension plans investment strategy of the company includes the use of managed securities that are reviewed periodically in-line with the planned liabilities, market conditions, cash requirements and risks. The expected return on the pension plans is based on the pension plan investment strategy. Thus any market fluctuation would lead an impact on the pension plans which would affect the demand, pricing and the net revenue of the company. Thus such effect must be reported in the annual report. References The Coca-Cola Company. (2012). Annual Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act Of 1934. Retrieved from: http://www.coca-colacompany.com/annual-review/2012/pdf/form_10K_2012.pdf. PepsiCo. (2012). 2012 Annual Report. Retrieved from: http://www.pepsico.com/download/PEP_Annual_Report_2012.pdf. braviaresearchpapers.com. (2012). The Coca-Cola Company versus PepsiCo, Inc. Retrieved from: http://braviaresearchpapers.com/attachments/article/572/The_Coca-Cola_Company_versus_PepsiCo__Inc..pdf. Allianz Global Investors. (2012). IFRS Accounting of Pension Obligations. Retrieved from: https://www.allianzglobalinvestors.de/cms-out/kapitalmarktanalyse/docs/pdf-eng/portfoliopractice-IFRS-accounting-of-pension-obligations.pdf. Read More