(Implications of GAAP Rules on Pensions) Jill Vogel and Pete Dell have to do a class presenta- tion on GAAP rules for reporting pension information. In developing the class presentation, they decided to provide the class with a series of questions related to pensions and then discuss the answers in class. Given that the class has all read the rules related to pension accounting and reporting, they felt this approach would provide a lively discussion. Here are the questions:

1. In an article in Business W eek prior to new rules related to pensions, it was reported that the discount rates used by the largest 200 companies for pension reporting ranged from 5% to 11%. How can such a situation exist, and does GAAP alleviate this problem?

2. An article indicated that when new GAAP rules were issued related to pensions, it caused an in- crease in the liability for pensions for approximately 20% of companies. Why might this situation occur?

3. A recent article noted that while “smoothing” is not necessarily an accounting virtue, pension ac- counting has long been recognized as an exception—an area of accounting in which at least some dampening of market swings is appropriate. This is because pension funds are managed so that their performance is insulated from the extremes of short-term market swings. A pension expense that reflects the volatility of market swings might, for that reason, convey information of little rele- vance. Are these statements true?

4. Understanding the impact of the changes required in pension reporting requires detailed informa- tion about its pension plan(s) and an analysis of the relationship of many factors, particularly the: (a) Type of plan(s) and any significant amendments.

^{(b) Plan participants.}

^{(c) Funding status.}

^{(d) Actuarial funding method and assumptions cur r ently used.}

^{What impact does each of these items have on financial statement p r esentation?}

^{5. An article noted “ Y ou also need to decide whether to amortize gains and losses using the corridor}

^{method, or to use some other systematic method. Under the corridor app r oach, only gains and}

^{losses in excess of 10% of the g r eater of the p r ojected benefit obligation or the plan assets would}

^{have to be amortized.” What is the corridor method and what is its purpose?}

Instructions

^{What answers do you believe Jill and Pete gave to each of these questions?}