Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281



Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem

You are an accountant for Lanthier Company. Lanthier’s president calls you into the office and says, “We have to find a way to reduce our pension costs. They are too high, and they are making us uncompetitive against our foreign competitors whose employees have state-funded pensions. I think we might have to abandon our defined benefit plan, but I know the employees would not be happy about that. I was also thinking that perhaps we could raise the discount rate we use up to the high end of the acceptable range. I also think we need a trustee who will pursue a more aggressive investment strategy for the pension funds; that way we can raise our expected rate of return.”


From financial reporting and ethical perspectives, discuss the issues raised by this situation.

To determine

Discuss the issues that are raised by the given situation, from the perspective of financial and ethical reporting.


From the perspective of financial reporting:

In this case, the president is worried about the higher pension cost as it leads to uncompetitive against the foreigner competitors. Hence the presidents asked the accountant to either abandon the defined pension plan or raise the discount rate.

In order to change the amount of net income and pension expense, the company should either select the discount rate or expected rate of return. Under GAAP, the discount rates are market-based hence it is treated as a settlement rate, and the expected rate of return as a rate that can be expected from the market, there is obviously a range of acceptable rates. Hence, the president can select the rates that are in the upper range of acceptable amounts which would probably reduce the pension expense and increases the net income. However, both the auditor and the actuary would have to agree to those rates which the president of the company chose.

From an ethical perspective:

From this viewpoint, the issue involves whether it is appropriate to influence pension expense...

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