FedEx recently announced the planned changes to its accounting method for its pension and post-retirement benefits payments. This planned change was announced in 2015. The company is expected to move to mark-to-market accounting method, which is expected to recognize its profits and losses as related to the pensions (Prince, 2016). As a result, it is expected that this change will result in a clearer view of pension plan performances, compared to the previous regime, which amortized these profits and losses. This paper considers this news article and presents an argument for the mark-to-market reporting method.
There are several reasons why the company would choose to go this way, being the second company that chose to pursue this line of reporting. The main advantage attached to this method is the instant recognition of losses and profits, which is attached to its reporting. This is because the method treats the income statement at a time as related to the liabilities and assets on the balance sheet. Again, losses are mainly related to the legacy pension formula. In view of demographic variable changes and low interest rates, it is critical for pension plans to review losses incurred over a period. In the case where amortization would have continued, undue stress would be exerted on future operations.
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In view of these benefits, the incentives offered to pension companies through this reporting platform provide fair representation, thus ensuring sustainable business operations in future (van-Zyl, 2017). In the most recent changes, public pension companies are required to disentangle their costs in a bid to provide more clarity and transparency, thereby improving the usefulness of reported financial information.
GM Pension Question
General Motors recently introduced a US-financed bankruptcy plan as a means to ending its financial woes in the country. This was followed by transference of its pension liability to third parties, one quarter of which was transferred to such third parties. Subsequently, they would offer lump-sum payouts. One of the benefits of such a move is the financial burden it would remove from GM, which boasts of offering one of the most absolute retirement plans in the country (Seetharaman & Klayman, 2012). Notably, it came at a time when the company was facing significant financial challenges, meaning that this move would offset some of its financial responsibilities to third party partners. Additionally, this move would reduce losses that were covered by amortization in the course of its operations, thereby leaving more funds available for operations. On the flip side, such a move would also deny the company any profits that came from the 25% of the pension plans that were offered to third parties.
Nevertheless, transferring its pensions liability to the UAW significantly reduces the burden it bears to its former employees, providing the company with squirming space to settle its other financial woes. Moreover, the company maintained a sizeable part of the remaining liabilities, ensuring that not all its pension gains are lost, as much as the losses were partly eradicated.
References
Prince, S. (2016). Why Did FedEx Switch to Mark-to-Market Pension Accounting? Retrieved November 5, 2017, from Market Realist: http://marketrealist.com/2016/03/fedex-switch-mark-market-pension-accounting/
Seetharaman, D., & Klayman, B. (2012). GM to cut about one-fourth of U.S. pension liability . Retrieved November 11, 2017, from Reuters: https://www.reuters.com/article/us-gm-pension/gm-to-cut-about-one-fourth-of-u-s-pension-liability-idUSBRE85014S20120601
van-Zyl, A. (2017, March). FASB updates reporting on pension plans . Retrieved November 5, 2017, from Accounting Weekly: https://accountingweekly.com/fasb-updates-reporting-pension-plans/ .
