Case Study (Besser Pharma)

CASE STUDY: BEESER PHARMA INC.

PART 1

PART 2

ASSIGMENTS

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MEMO
BACKGROUND
The accounting and financial reporting rules for employers’ pension and other postretirement benefit (OPEB) obligations have many vocal critics, including investors, analysts, regulators, other financial statement users, academics, and even the business press. The main criticism of the currentaccounting is that the primary financial statements do not portray the economic reality of an employer’s benefit arrangement. This results largely from the delayed recognition features that the international accounting rules permit and to a lesser extent US GAAP requires.
For example, under the current guidance, gains and losses (also referred to as actuarial gains and losses), includingassumption changes, changes in the value of investments set aside to pay benefits (plan assets), and changes in the benefit obligation that result from experience that differs from what was assumed, as well as the effects of plan amendments, are deferred and recognized in the income statement in future periods.
These concerns have been heightened by the volatility in the securities markets during thepast few years and the low level of interest rates used to set the discount rate to measure the benefit obligation. In addition, the accounting rules are so complex that most analysts and other financial statement users don’t understand them or the information that results from their application. Accordingly, the user community finds it difficult to use the information presented in assessing thepotential impact of these plans on an employer’s future operations and cash flows.
These issues — and the positions of these two groups — have not changed very much over the past 30 years. Each time the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) reviewed pension accounting, they agreed on compromises that continue the deferral mechanisms andcontribute to generally smooth reported benefit expense in the income statement from period to period.
Recently, the IASB issued a proposal on pension and OPEB accounting that would amend its current accounting standard, IAS 19, Employee Benefits, to change this approach. The FASB also has a project on its agenda to reconsider employers’ accounting for pensions and OPEBs, which will likely includereconsideration of the deferral techniques allowed under US GAAP. The FASB’s project is currently inactive, but we expect that the board and its staff will pay close attention to the IASB’s project.

FINANCIAL AND ECONOMIC IMPACTS
The changing to the full recognition through SRIE option in IAS no. 19 and the new U.S. standard would impact financial and economic in various ways. It wouldrequire immediate recognition of the full amount of plan amendments in determining operating income; the unvested portion would no longer be recognized on a deferred basis. Gains and losses, including gains and losses related to plan asset performance, would be recognized in other comprehensive income in the statement of comprehensive income when they occur; they would no longer be recognized on adelayed basis or considered in determining net income.
Further, the expected return on investments set aside to pay benefits would be determined using the discount rate used to estimate the present value of the benefit obligation; it would no longer be based on an expected long-term rate of return on plan assets. And benefit expense would be disaggregated and the components presented in differentplaces in reporting net income and comprehensive income; it would no longer be presented as a single number.
PwC performed a study of the potential impact of the proposal, looking at US and non-US (European) companies and evaluating how their historical reported financial information would have been affected had they been applying the proposal in past years. The impact of the proposal varied...