Coca-Cola Company Versus Pepsi Company Incorporation - Essay Example

? Coca-Cola Company vs. Pepsi Co Inc Institute Coca-Cola Company vs. Pepsi Co Inc Pepsi incorporation and the coca-cola company are international beverage producing companies. Over the years, Different people have had different views and opinions about the two companies despite that their products serve a similar purpose. Both companies have set numerous sub-plants in different regions while the coca-cola company holds the largest number of sub-plants situated across the whole world. These sub-plants serve as strong holds for the companies and ensure satisfied distribution of products for the companies. The two companies have set some pension plans that have had many effects on the companies’ level of investment and risk while also, it affects their levels of sale and production of products. These plans are aimed at benefiting their retired employees while each company uses a quite different approach from the other. The two companies have developed strong public relations across many nations that assist them in linking customers to their company. The International Financial Report Standard (IFRS) has been a significant unit within the management of funds on the pension plan. It helps the companies realize whether the scheme of pension plan brings a loss or a profit for the company. The companies can therefore classify the pension plans as either assets or liabilities according to the IFRS report. It also enables the companies determine whether they have overfunded or underfunded the pension plan. In 2009, the coca-cola company held a third position among the companies that have adopted a cash balance report meant to cater for the pension plan schemes (Diebold, 2010).  The coca-cola executive managers rejected the use of a constitutional approach in funding pension plans. As a result, there were minimized risks to the coca-cola company. Additionally, the company secured more benefits to the employees in comparison to year 2008. Following this actions, the company reported $31.9 billion in revenue operation, which was a higher value compared to $28.9 billion in the preceding year. On the other hand, because of the plan, mobility of the workforce went up while the career benefits accumulated from the plan increased compared to the preceding approach that dealt with pension plan. During the same year, 2009, Pepsi Co Company, through the assistance of the International Financial Report Standard (IFRS), developed a method of offering a final salary pension to the new employees. These were meant to benefit its workers and their family members upon their retirement. This plan included medical fees among other benefits for the retired employee and is differently calculated. This method required a high quality pension scheme capable of securing the retirement of both the present and the newly employed workers. Up to date, the method is still applied in the company (Warfield et al. 2012). However, the method posed a higher risk to the Pepsi Company and brought in a decline of the total sales of Pepsi as compared to the year 2008. At Pepsi Company, Pension plans cover full time employees while their benefits are determined on the bases of either years of service for the worker, or a combination of service or the years of service. Retirees are eligible for life and medical insurance benefits upon meeting a specific age and service requirements. Their share of the pension costs is capped at certain dollar amounts on bases of years of service. The expected return on the pension plan assets is based on the company’s investment strategy on the pension plan as well as on their expectations for their long-term rates of return. In calculating their funding levels and capital gains in the pension plans, a market-related valuation method that realizes investment loses or gains for the securities included in their equity allocations. With complete reliance to the Financial Report Standard (IFRS), the company ensures that the amount of funds allocated for the pension plan does not exceed the expected gains. This is meant to ensure that the pension plan remains an asset rather than a liability to the company. Based on their claim experience and the information provided by their health plans, their trade rates considers such factors like plan design, demographics and the new medical technologies. The average assumptions for pension expense as well as the retiree benefits were recorded as; The expense discount rate - 6.2% The expected rate of return on the pension plan assets- 7.6% Rate of salary increment- 4.4% On the retiree discount rate, the expense discount rate was 6.2% while the company’s cost trade rate for the time was 8.0%. The pension contributions for the Pepsi Company in 2009, therefore, bring a total of 1.2 billion dollars. Compared to their 2008 pension contributions, which amounted to 149 million dollars, their 2009 contributions amounted to 1.1 billion dollars with not more than 1 billion dollars being discretionally. The retiree payments in 2009 are estimated to approximately 100 million dollars. Profit and gains by the Coca-Cola Company and Pepsi influenced a combined 21.5 billion dollars in the estimated retirement assets. According to the 10-k report, the coca-cola enterprises had a total benefit of 3.4 billion dollars without assets related to pension liabilities. Three main rates have been adopted in the calculation. This includes the rate of discount, the rate of compensation and the rate of return on the pension plan assets. The pension amount is seen to be greatly affected by the rate of discount. Coca-cola expense discount rate was 5.5% while its expected rate of return on the plan asset was 7.75%, which evaluates the magnitude of the total funds allocated to the assets. Medical benefits for the retiree were calculated on the bases of the existing rates of 5.8% for the discount rate and 9.0% for the health care cost. The net periodic pension expense as calculated for both coca-cola and Pepsi companies for the 2009 year-end is recorded as; the coca-cola company net periodic benefit cost was 230 million dollars while Pepsi Co. had a total of 258 million dollars pension expense (United States. 1999).  On determining the company, which had a more secure pension fund, we consider the provided disclosure by the two companies on their expected contributions and benefit payments. The cash flow information about the coca-cola expected contribution and payment benefits are as follows; For Coca-cola company 2010 2011 2012 2013 2014 Pension benefits $230 $232 $242 $252 $263 Expected benefits payments 33 35 38 39 40 For the Pepsi company Pension benefits $340 $360 $395 $415 $450 Retiree medical $110 $120 $125 $130 $135 The represented benefit payments to the beneficiaries are inclusive of net payments from both unfunded and the funded pension plans while they omit any discretionary contributions that have been made by the companies. The Pepsi Company expected an approximated $600 million of such contributions in 2010. On this viewpoint, Pepsi company seems to have a higher cash claim compared to its pension benefit plans and a higher amount of expected benefit payments than the coca-cola company. According to the information represented in the disclosures about the cash outflows of the two companies, we can understand the potential cash outflows on the pension plan in a better way. We can also access the solvency and the liquidity of each company and provide an assessment of the overall flexibility of each company. After making some consideration on the strategies of expectations for each company, it is very evident that the Pepsi Company has had more secure pension funds than the coca-cola company. The status of the pension fund affects the level of risk that must be reported in the annual report. It has been found out that the pension plan has taken on a new meaning than it was in the past. Originally, pension plan referred to some retirement benefits that were organized to assist an employee upon his retirement. This program was meant to provide some funds for employees after retirement with respect to some requirements. Pension plans were different from retirement plans that came after them (New society, 1962). In the recent days, many people have started their own personal pension plans for the enhancement of their retirement savings. It is also very vital for the self-employment persons and employees in a small business to set up a retirement plans for themselves. The status of pension plans enforces a risk that can affect a company’s risk-taking activities because of the increased risk that accompanies the defined benefit plans in a company. This may affect the company’s cash flow to becoming more unstable hence leading the company to some financial constraints. In order to decrease the instability in their cash flows, the company would be forced to reduce its involvement to all risky projects. The level of risk enforced by the pension plans can also affect the company’s risk-taking activities since the company’s equity risk reflects its pension plan risks. If a company decides to finish its established benefit plans, it reduces the equity risk accredited to the pension plan. If the equity risk of a company decreases, their cost of capital also decreases. If a company is faced with some financial constraints from their internal cash flows, they can only look for other external sources to fund their processes. References Diebold, N. F. (2010). Non-discrimination in international trade in services: 'likeness' in WTO/GATS. Cambridge, UK: Cambridge University Press. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate accounting. Hoboken, NJ: Wiley. New society. (1962). London: New Society Ltd. etc.. United States. (1999). ESEA, from tales to tapes: Hearing of the Committee on Health, Education, Labor, and Pensions, United States Senate, One Hundred Sixth Congress, first session, on examining legislation authorizing funds for programs of the Elementary and Secondary Education Act, May 20, 1999. Washington: U.S. G.P.O. 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