PowerPoint Slides
Two PowerPoint presentations of the chapter are available in the Connect
Library:
1. With “Concept Checks” useful for classroom presentation, permitting the
instructor to intersperse in the presentation short exercises students can
be asked to solve individually or in small groups before the solution is
“revealed” by the instructor. {These are available only within Instructor
Resources.}
2. Without the “Concept Checks” so students don’t have the solutions
before being asked to solve individually or in small groups.
3. Accessible PowerPoint Presentations. Accessibility is becoming even
more important in the education marketplace. Students and instructors
with disabilities use many different assistive technologies, and
McGraw-Hill Education is working to increase compatibility and access
that will not only help those with disabilities achieve better learning
outcomes, but also serve the institutions that are teaching these students.
Accessible PowerPoint allows slide content to be read by a screen reader
and provides alternative text descriptions for any image files used that
enrich the learning experience. Accessible PowerPoint is also designed
with high-contrast color palettes and uses texture when possible, instead
of color to denote different aspects of the imagery used within the slide.
Note: The slides are intended to provide comprehensive coverage of the
chapter, but they can be easily edited to allow instructors to change
numbers and content in illustrations or to delete slides pertaining to
topics they choose to omit or deemphasize. (Using your students’
names for company names in the Concept Checks or Illustrations
can be fun.)
Suggestions for Class Activities
1. Real World Scenario
A Financial Times article reported the following:
Pension funds may act over inflated returns
By Julie Earle in New York
US pension funds are considering a crackdown on companies that inflate their earnings by using
too high pension fund return assumptions.
Calpers, the number one pension fund, and its sister fund Calstrs, are weighing up whether to
assess high-return assumptions on other companies’ pension funds, as part of their investing
strategy.
Companies like Weyerhaeuser, the forest products group, Delta Airlines, General Motors and
Ford have stuck with their high pension fund return assumptions, in spite of the sinking stock
market.
If companies do not make their assumed pension fund returns, they would then need to make up
the difference. Any earnings revisions are likely to harm companies’ share prices.
“In many corporations in America, pension income has been a substantial part of revenue growth
in the past three years,” said Kathleen Connell, California’s state controller and a board member
of Calpers and Calstrs.
“If you subtract pension earnings, you end up with an entirely different value for share prices.
These are phantom earnings,” she said.
A 2002 study of 50 of the largest pension plans by Millima USA, a Seattle-based actuarial firm,
shows the average rate of return on assets for 2001 was 9.3 per cent, producing an expected
return of $54bn. The actual returns, however, were a negative $36bn, a loss of more than $90bn.
Ms Connell wants Calpers and Calstrs to assess too high pension fund return assumptions as part
of their investing strategy. Both funds have said they will discuss the issue, but the process is
likely to be a lengthy one.
The funds are already assessing an overhaul of stock option accounting and whether to ban
investing in companies that relocate to offshore tax havens.
Ms Connell said pension fund investors, hit hard by losses on accounting scandals like
WorldCom and Enron, did not need any more pain.
In some cases, companies’ pension income accounted for more than 50 per cent of corporate net
income, she said. General Motors and IBM both assume they can earn 10 per cent a year on their
pension reserves. In GM’s case, 60 per cent of the pension fund is invested in equities.
Warren Buffet, the investment guru, has warned for some time that fund managers’ long-term
return assumptions for equities are “delusional.”
Ms Connell said pension fund return earnings would not be reason alone for investing or
divesting in a company’s stock, but part of the funds’ due diligence in reviewing companies.
Suggestions:
Ask students to discuss how companies “inflate their earnings by using too high pension fund
return assumptions.”
Points to Note:
Normally, a company’s net periodic pension cost represents an expense and therefore
decreases earnings. Often, though, circumstances cause this element of the income statement to
actually increase reported earnings. This occurs when the “expected return on assets,” a
negative
component of pension expense, is higher than the combined total of the other components.
2. Internet Activity
Ask students to use the Internet to locate the financial statements of a firm with a defined benefit
plan. The company’s corporate website and EDGAR (www.sec.gov) are good sources. Older,
established companies are probably the best possibilities because newer companies are more
likely to have defined contribution plans.
Suggestions:
From information in the financial statements and disclosure notes, have students:
1. Determine the amount of the projected benefit obligation.
2. Determine the change in the projected benefit obligation.
3. Speculate on the reasons for the change.
Points to Note:
The PBO will not be reported in the balance sheet, but its balance and the change in the
balance will be reported in the pension note. It’s possible, but improbable, that students will
encounter a company that amended its plan in the most recent year. More likely, then, there will
be no originating prior service cost, so the four changes in the PBO will be service cost, interest
cost, payments to retirees, and maybe a gain and/or loss. The service cost and interest cost will
be disclosed. Payment to retirees and gains/losses will not. However, sources of some gains or
losses will be evident. For instance, if the discount rate or estimated rate of change in
compensation levels (both disclosed) changed from the previous year, a gain or loss is indicated.
3. Real World Scenario
Following is a portion of Disclosure Note 7 from an annual report of Walgreens:
Employee Benefits (in part)
The company provides certain health insurance benefits for retired employees who meet
eligibility requirements, including age, years of service and date of hire. The costs of these
benefits are accrued over the period earned. The company’s postretirement health benefit plans
currently are not funded.
Funded status (In Millions):
Funded status $(392.5) $(349.6)
Net loss 220.1 197.0
Prior service cost (32.1) (6.2)
Suggestions:
Ask students to consider the following:
1. The funded status of Walgreens’s postretirement benefit plan is $(392.5 million) at the
end of the year. What does that mean?
2. What are its plan assets?
Points to Consider:
The funded status of Walgreens’s postretirement benefit plan being $(392.5 million) at the
end of the year means that its postretirement benefit obligation exceeds its plan assets.
Walgreens’s plan is not funded. If it were, plan assets would be included in the schedule. Thus
there are no plan assets. So its postretirement benefit obligation must also be $392.5 million.
This is not unusual. A majority of postretirement benefit plans are not funded.
4. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Cases 17–2 and 17–4, Real World Case
17–5 can be modified to ask students to write a short report. Judgment Case 17–1 does well
as a group assignment. Exercise 17–13, Problem 17–8, Judgment Case 17–3, and Real
World Case 17–10 are suitable for student presentation(s). Problem 17–12 can be adapted
to ask students to assume the role of a new accountant with Hilton Paneling, Inc., and write
a short memo to a superior explaining the amounts requested in the requirement.
Communication Case 17–4 requires group interaction. In addition, Ethics Case 17–6 does
well as a group assignment. Questions 17–11, 17–14, and 17–19 create good class
discussions.
Research Skills. In their professional lives, our graduates will be required to locate and extract
relevant information from available resource material to determine the correct accounting
practice, perhaps identifying the appropriate authoritative literature to support a decision.
Research Case 17–10 provides excellent opportunities to help students develop this skill. In
addition, Analysis Case 17–8 and Problem 17–21 can be adapted to require students to
research the authoritative literature on accounting for pension amendments.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for
making business and investment decisions. In addition to Analysis Cases 17–9 and 17–11,
Communication Case 17–2 and Real World Case 17–7 also provide opportunities to
develop analysis skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that
require students to critically analyze issues to apply concepts learned to business situations
in order to evaluate options for decision making and provide an appropriate conclusion. In
addition to Judgment Cases 17–1 and 17–3, Ethics Case 17–6 also requires students to
exercise judgment.
5. Ethical Dilemma
The chapter includes the following ethical dilemma.
ETHICAL DILEMMA
Earlier this year, you were elected to the board of directors of Champion International,
Inc. Champion has offered its employees postretirement health care benefits for 35 years. The
practice of extending health care benefits to retirees began modestly. Most employees retired
after age 65, when most benefits were covered by Medicare. Costs also were lower because life
expectancies were shorter and medical care was less expensive. Because costs were so low,
little attention was paid to accounting for these benefits. The company simply recorded an
expense when benefits were provided to retirees. The FASB changed all that. Now, the
obligation for these benefits must be anticipated and reported in the annual report. Worse yet,
the magnitude of the obligation has grown enormously, almost unnoticed. Health care costs
have soared in recent years. Medical technology and other factors have extended life
expectancies. Of course, the value to employees of this benefit has grown parallel to the growth
of the burden to the company.
Without being required to anticipate future costs, many within Champion’s management
were caught by surprise at the enormity of the company’s obligation. Equally disconcerting
was the fact that such a huge liability now must be exposed to public view. Now you find that
several board members are urging the dismantling of the postretirement plan altogether.
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Some members of the board of directors of Champion International, Inc., are considering
discontinuing postretirement health care benefits because the FASB now requires companies to
record an obligation (debt) for these benefits on their financial statements. No longer can
Champion record the health care benefits as an expense when services are provided to retirees.
The fact that medical costs and life expectancies are increasing makes potential obligations even
higher. Postretirement benefits are important to employees as a form of deferred compensation
earned during employment.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the obligation to reduce the company’s debt and
employment expenses is greater than the obligation to employees to provide postretirement
health benefits as a part of deferred compensation.
Stakeholders include you as a director, other members of the board of directors, company
management, present and future employees, current and future creditors, and current and future
investors.
Step 3—Values:
Values include integrity, objectivity, loyalty to employees, loyalty to the company, and
responsibility to users of the financial statements.
Step 4—Alternatives:
1. Dismantle the postretirement health care benefits plan.
2. Maintain the current postretirement health care benefits plan.
3. Pay employees higher wages and ask them to invest in their own health care plans.
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to protecting the company’s financial statement position
and protecting the interests of current investors.
2. Alternative 2 reflects values of integrity and responsibility to employees.
3. Alternative 3 reflects both loyalty to the company and its employees.
Step 6—Consequences:
Alternative 1
Positive consequences: The company would reflect a stronger financial position and
higher net income without the health care expense. Creditors may be more willing to loan the
firm money in the future, and possible shareholders may be more willing to invest. Current
shareholders may benefit financially, at least in the short run.
Negative consequences: Current employees would lose postretirement benefits. Some
may quit their jobs in order to seek higher wages and postretirement benefits elsewhere. The
company may experience difficulty in hiring new employees if other companies provide
these benefits.
Alternative 2
Positive consequences: Current employees would retain benefits and perhaps be more
satisfied with their current employment. Future employees may be more willing to work for
the company. Management and board members may gain respect and gratitude from their
employees.
Negative consequences: The company would be forced to reflect a substantial debt
obligation on its balance sheet and postretirement benefit expense on the income statement.
The company may have future difficulty obtaining loans or may have current debt called in if
a weakened financial position violates any current debt covenants. Investors may withdraw
their support, and future shareholders may invest in other companies. The company may be
forced into bankruptcy, causing current employees to lose their jobs as well as their
postretirement benefits.
Alternative 3
Positive consequences: The company would reflect a stronger financial position and
possible higher net income without the health care expense. Wage expense would increase.
The improved financial condition may mean that creditors may be more willing to loan the
firm money in the future and stockholders may be more willing to invest. Employees may be
more satisfied with their current employment, and the company may experience an easier
time hiring future employees. Management and board members may gain respect and
gratitude from their employees.
Negative consequences: The increased wages would decrease net income and may cause
investors to withdraw their support. Future shareholders may invest in other companies.
Some employees may be dissatisfied, resign, and go to work for other companies. Some
employees may use the increased wages for current living expenses without investing the
funds in their own postretirement health care plans.
Step 7—Decision:
Student(s) must decide their course of action.