Johnson & Johnson—Retirement Obligations Essay

SFAS No. 87 “Employers’ Accounting for Pensions” maintains that pension information should be prepared on the accrual basis and retained three fundamental aspects of past pension accounting: 1. delaying recognition of certain events, 2. Reporting net cost, and 3. offsetting assets and liabilities” (Schroeder, Clark, & Cathey, "Pensions and Other Postretirement Benefits," 2011). “The components of pension costs reflect different aspects of the benefits earned by employees and the method of financing those benefits by the employer. The following are required to be included in the net pension cost recognized by the employer sponsoring a defined benefits pension plan: 1. Service cost, 2. Interest cost, 3. Return on plan assets, 4. Amortization of unrecognized prior service cost, 5. Amortization of gains and losses, 6. Amortization of the unrecognized net obligation or unrecognized net asset at the date of the initial application of SFAS No. 87” (Schroeder, Clark, & Cathey, "Pensions and Other Postretirement Benefits," 2011).

According FASB, compensation plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. Compensation cost should be measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, under the fair value based method. Compensation costs are recognized for other types of stock-based compensation plans under Opinion 25, including plans with variable, usually performance-based, features. Some stock-based compensation plans require an employer to pay

I attest that this document is an original creation submitted in accordance with the requirement for the Comprehensive Written Project (CWP) in Seminar in Business Strategy (GB-5388) during the Fall 2015 academic term.

ReferencesGuinn, R.E., Schroeder, R. G. and Sevi, S. K. "Accounting for Asset Retirement Obligations Understanding the Financial Statement Impact SFAS N.O 143," Understanding the Financial Statement Impact, December 2005, available at http://www.nysscpa.org/cpajournal/2005/1205/essentials/p30.htm

In order to better grasp the idea of accounting for pensions, understanding the different intricacies of various plans and their characteristics is a must. For example, there are two types of defined pension plans; a defined contribution plan, and a defined benefit plan. In a defined contribution plan, the employer agrees to contribute to a pension trust a certain sum each period, based on a formula. This formula encapsulates factors such as age, length of employee service, employer’s profits, and compensation level. A common form of this plan is a 401(k) plan. This type of plan only defines what the employer will contribute and makes no promise regarding the ultimate benefits paid out to the employees. As it will be discussed in more depth later, the accounting for this type of plan is rather straight forward and is covered by several

Brands Inc.’s 10-k, in 2013, Corporate G&A was decrease by the lower pension costs, also including “lapping higher pension settlement charges, and lower incentive compensation costs, partially offset by higher legal and professional fees.”(From Yum! Brands Inc.’s 10-k) In 2014, the partially offset by higher legal and professional fees, lapping higher pension settlement charges which are including in the pension cost let the Corporate G&A decrease.

The company’s accrual return on plan assets in 2013 was $ 2,285 million, and its expected return on plan assets was $ 2,004 million. It seemed that the company includes the interest cost and expected return on assets in the calculation of pension expense recognized for a period since it is by an employer sponsoring a defined benefit pension plan.

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From an accrual accounting perspective, the cost of OPEB, like the cost of pension benefits, generally should be associated with the periods in which the exchange occurs, rather than with the periods when benefits are paid or provided (usually many years later). When implementing GASB 45, many governments will report annual OPEB costs and the unfunded actuarial accrued liabilities (UAAL) for past service costs. Disclosure of this information will foster improved accountability and better informed policy decisions about the level and types of benefits provided by employers and potential methods of financing and managing those benefits.

Accordingly, the $39.3 million actuarial gain which resulted from the restructuring is included in Accrued Pension Costs in the accompanying Balance Sheet and is being amortized to income over a ten-year period commencing in 1984. The effect of the changes in the investment return assumption rates for all U.S. plans, together with the 1984 restructuring of the U.S. Salaried Employees' Plan, was to reduce pension expense by approximately $4.0 million in 1984 and $2.0 million in 1983, and the actuarial present value of accumulated plan benefits by approximately $60.0 million in 1984. Pension expense in 1983 was also reduced $2.1 million from the lower level of active employees. Other actuarial gains, including higher than anticipated investment results, more than offset the additional pension costs resulting from plan changes and interest charges on balance sheet accruals in 1984 and 1983.

Currently, defined contribution plans have gained more popularity over the last few years because companies save more money due to the addition of the employee’s contribution. Defined benefit plans are more complex than defined contribution plan’s way of estimating the budget of liabilities. The off-balance sheet provision that is used raises issues that corrupt the financial statements and distort the financial condition. It is easier for companies to have a third party to consult and take care of investments and complexities associated with investing plans. The last reason for its gain in popularity is that the size of the defined benefit plan assets requires more attention due to the large size in which requires more focus time than to have defined contributions where employers have more time on core business endeavors than retirement plan administration (Churyk et al 90).

Original written by professor Pablo Pedro Melero Perlado at IE Business School. Original version, 14 January 1998. Last revised, 27 May 2008. Published by IE Business Publishing, María de Molina 13, 28006 – Madrid, Spain. ©1998 IE. Total or partial publication of this document without the express, written consent of IE is prohibited.

Defined contribution (DC) pension plan, workers, accrue funds in their accounts administered by their employer. The input of the employees is typically deducted directly from their salary. Since contributions to DC plans are fixed percentages of earnings DC assets, build at a relatively steady rate over time avoiding accumulation of benefits, which is a hallmark of DB plans. In contrary to the defined benefit approach, defined contribution strategies are similar to savings financial records. The worker and employer or companies both add money to these accounts, and the employee identifies the investments from a catalog of alternatives presented by this plan (International Monetary Fund, 2005). Therefore, the benefit projected at the period of retirement is

Accounting for costs of pension plans was established in 1966 when GAAP had to address the use of the accrual method when recognizing the expense of pensions. Before then, companies recorded pension expenses as retirement benefits were paid, which was the concept of cash basis. Pension plan assets were never recorded and a portion of the pension liability was recorded only when the obligation to pay benefits exceeded the plan assets. It was not until 1980 when limited recognition of pension plan liabilities were required to be recorded on the balance sheet. Since then, GAAP has had some additional disclosure requirements and balance sheet recognition of the pension plan’s assets and liabilities. There are two different kinds of pension plans that companies account for: defined contribution and benefit plans.

The intent of this memo is to answer questions regarding the pension plans and operating segments of the company we recently acquired with 100% ownership. This company has two operating segments, each with its own pension plan. Reporting requirements for these issues are explained below.