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Jim Loris is the food and beverage analyst at Eastern Trust & Investments. Jeremy Paul has just joined the firm as an intern, and this month he is under Loris’ supervision.Loris is planning on reviewing the financial statements of Atlantic Preserves, Inc., in the next few days. The company has recently signed a new collective agreement with its workers, and he is interested in seeing how the company’s employment costs have been affected. The company prepares its financial statements in accordance with U.S. GAAP, and the new collective agreement becomes effective January 1, 2012.Paul extracts portions of the new collective agreement related to the pension plan and mentions to Loris that there have been two changes related to the plan:1. The benefit formula has been changed to 1.75% × Final year’s salary × Number of years of service under the plan. Previously, the same formula was employed but a factor of 1.65% had been used.2. The vesting period has been changed from four years to three years. Paul makes the following two comments about these changes to the pension plan:1. The new formula will have a big impact on income because the past service costs that arise will be expensed immediately.2. The change to a shorter vesting period will give rise to an actuarial gain.Loris responds, “Any unamortized past service costs that arise will be reported in other comprehensive income and will be part of the determination of the net pension liability or asset.” Loris provides Paul with the information in Exhibit 1 about John Smith, an employee who has just started working for Atlantic, and other information taken from the company’s pension plan disclosures. Loris asks Paul to calculate the pension liability arising from Smith.  Following his calculation of the pension plan liability, Paul asks Loris two questions about the discount rate that is used:1. Exhibit 1 doesn’t mention how you determined the discount rate that was used. What rate is the most appropriate rate to use?2. What would be the effect of using a higher discount rate on various components of the company’s pension plan obligation?Loris answers Paul’s questions and then provides him with selected information from Note F of the 2011 Annual Report of Atlantic Preserves (Exhibit 2). He says to Paul that while he is aware that the company’s actual return on pension plan assets exceeds its expected return, he is more interested in determining how much of the periodic pension cost is due to changes in actuarial assumptions used in determining the benefit obligation. He also asks Paul to use the information in Exhibit 2 to calculate the net periodic pension cost for 2011.  |
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