Question

In: Accounting

Ethical Dilemma . Earlier this year, you were elected to the board of directors of Champion...

Ethical Dilemma . Earlier this year, you were elected to the board of directors of Champion International, Inc. Champion has offered its employees post-retirement health care benefits for 35 years. The practice of extending health care benefits to retirees began modestly. Most employees retired after age 65, when most benefits were covered by Medicare. Costs also were lower because life expectancies were shorter and medical care was less expensive. Because costs were so low, little attention was paid to accounting for these benefits. The company simply recorded an expense when benefits were provided to retirees. The FASB changed all that. Now, the obligation for these benefits must be anticipated and reported in the annual report. Worse yet, the magnitude of the obligation has grown enormously, almost unnoticed. Health care costs have soared in recent years. Medical technology and other factors have extended life expectancies. Of course, the value to employees of this benefit has grown parallel to the growth of the burden to the company.

Without being required to anticipate future costs, many within Champion’s management were caught by surprise at the enormity of the company’s obligation. Equally disconcerting was the fact that such a huge liability now must be exposed to public view. Now you find that several board members are urging the dismantling of the postretirement plan altogether.

Required: Discuss whether the obligation to reduce the company's debt and employment expenses is greater than the obligation to employees to provide postretirement health benefits as a part of deferred compensation.

Solutions

Expert Solution

EMPLOYERS' ACCOUNTING FOR POST RETIREMENT BENEFITS OTHER THAN PENSIONS:

This Statement establishes accounting standards for employers' accounting for post retirement benefits other than pensions. In exchange for the current services provided by the employee, the employer promises to provide, in addition to current wages and other benefits, health and other welfare benefits after the employee retires.

It follows from that view that post retirement benefits are not gratuities but are part of an employee's compensation for services rendered. Since payment is deferred, the benefits are a type of deferred compensation. The employer's obligation for that compensation is incurred as employees render the services necessary to earn their post retirement benefits.

The ability to measure the obligation for post retirement health care benefits and the recognition of that obligation have been the subject of controversy. The Board believes that measurement of the obligation and accrual of the cost based on best estimates are superior to implying, by a failure to accrue, that no obligation exists prior to the payment of benefits. The Board believes that failure to recognize an obligation prior to its payment impairs the usefulness and integrity of the employer's financial statements. The Board's objectives in issuing this Statement are to improve employers' financial reporting for post retirement benefits in the following manner:

a. To enhance the relevance and representational faithfulness of the employer's reported results of operations by recognizing net periodic post retirement benefit cost as employees render the services necessary to earn their post retirement benefits

b. To enhance the relevance and representational faithfulness of the employer's statement of financial position by including a measure of the obligation to provide post retirement benefits based on a mutual understanding between the employer and its employees of the terms of the underlying plan

c. To enhance the ability of users of the employer's financial statements to understand the extent and effects of the employer's undertaking to provide post retirement benefits to its employees by disclosing relevant information about the obligation and cost of the post retirement benefit plan and how those amounts are measured

d. To improve the understandability and comparability of amounts reported by requiring employers with similar plans to use the same method to measure their accumulated post retirement benefit obligations and the related costs of the post retirement benefits.

Further, the Board believes that information about cash flows alone is insufficient. Accrual accounting goes beyond cash transactions and attempts to recognize the financial effects of non-cash transactions and events as they occur. Recognition and measurement of the accrued obligation to provide post retirement benefits will provide users of financial statements with the opportunity to assess the financial consequences of employers' compensation decisions.

The Board believes that those factors are insufficient reason not to use accrual accounting for post retirement benefits in financial reporting. With increased experience, the reliability of measures of the obligation and cost should improve.

This Statement requires that an employer's obligation for post retirement benefits expected to be provided to or for an employee be fully accrued by the date that employee attains full eligibility for all of the benefits expected to be received by that employee, any beneficiaries, and covered dependents (the full eligibility date), even if the employee is expected to render additional service beyond that date. That accounting reflects the fact that at the full eligibility date the employee has provided all of the service necessary to earn the right to receive all of the benefits that employee is expected to receive under the plan. An equal amount of the expected post retirement benefit obligation is attributed to each year of service in the attribution period unless the plan attributes a disproportionate share of the expected benefits to employees' early years of service.

The Board concluded that, like accounting for other deferred compensation agreements, accounting for post retirement benefits should reflect the explicit or implicit contract between the employer and its employees.

  • Please do upvote if you found the answer useful.
  • Feel free to reach in the comment section in case of any clarification or queries.

Related Solutions

How are the board of directors elected for Coca-cola in United Arab Emirates?
How are the board of directors elected for Coca-cola in United Arab Emirates?
If you were on the Board of Directors for a publicly traded company, what type of...
If you were on the Board of Directors for a publicly traded company, what type of share-based compensation (Stock options, RSU’s, SAR’s, etc.) would you choose as part of your executive compensation packages and why?
If you were on the Board of Directors for a publicly traded company, what type of...
If you were on the Board of Directors for a publicly traded company, what type of share-based compensation (Stock options, RSU’s, SAR’s, etc.) would you choose as part of your executive compensation packages and why? ( Answer should be 75-100 words only)
You were recently appointed to the board of directors for Dropbox. a. What are the main...
You were recently appointed to the board of directors for Dropbox. a. What are the main responsibilities of the board of directors? b. Suppose that Microsoft just approached Dropbox about acquiring it. You and the board decide to ght this takeover attempt. What tools could you use to deter Microsoft? c. How does the Sarbanes-Oxley Act and the Dodd-Frank Act affect the board of directors at Dropbox? d. Suppose that an activist investor at Dropbox is attempting to remove the...
What is the role of a board of directors from an ethical governance standpoint? What is...
What is the role of a board of directors from an ethical governance standpoint? What is the role of CEO, Vice President, Manager, Supervisor, staff and administrative orall other employee groups of an organization. What is the ethical governance and accountability level of each group using all forms/norms or codes of ethics in today’s social and work environment.
PROBLEM 19-2 Various Funds—Hospital On January 1, 2015, a new Board of Directors was elected for...
PROBLEM 19-2 Various Funds—Hospital On January 1, 2015, a new Board of Directors was elected for Bradley Hospital. The new board switched to a different accountant. After reviewing the hospital’s books, the accountant decided that the accounts should be adjusted. Effective January 1, 2015, the board decided that 1. Separate funds should be established for the General Fund, the Bradley Endowment Fund, and the Plant Replacement and Expansion Fund (the old balances will be reversed to eliminate them). 2. The...
why do we often overlook the role of the board of directors in ethical scandals or...
why do we often overlook the role of the board of directors in ethical scandals or conversely in ethical organizational successes? can you think of other factors that might encourage boards to act irresponsibly? which of the reforms is most important to board performance? why?
Suppose you were the financial Accountant for Max Company Pty. Ltd. The board of directors promoted...
Suppose you were the financial Accountant for Max Company Pty. Ltd. The board of directors promoted you to position of Finance manager considering the satisfactory services that you rendered to the company. The CEO has asked you to analyze two proposed capital investments, Projects Naru and Oheema. The cost of capital for each project is 12%. The projects’ initial cost and expected net cash flows are as follows. The two projects are mutually exclusive projects. Year Cash Flow Naru ($)...
You are the chairman of the board of directors at Epson Information Systems, Corporation. The board...
You are the chairman of the board of directors at Epson Information Systems, Corporation. The board has decided to encourage employees to take college courses by reimbursing each eligible employee a maximum of $3,500 in tuition during any one calendar year. Anyone who wants to participate in the program must apply before the first class meeting and the application must be signed by the employee’s immediate supervisor. The only courses employees may choose are those either related to the employee’s...
You are the chairman of the board of directors for an innovative technology company, and you...
You are the chairman of the board of directors for an innovative technology company, and you are looking to hire a new CEO. Your shareholders require an 8% return. Your firm has 1,200 engineers who on average each contribute $240,000 to the annual revenue of the company and receive an average annual salary of $120,000. The first candidate for the CEO position, Jane Doe, successfully increased the productive output of engineering employees at her last firm by 5%, and is...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT