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Pension Plans, Ethical Reporting, Bribes and Kickbacks

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1) According to the text, there still are differing opinions on what constitutes a company's liability and periodic expense for a pension plan.What part of the pension formula gives rise to this controversy? In your opinion, how should this expense be measured? Give an example using your measurement criteria.

2) In the current economy, pension plans have greatly suffered in value due to inflation and recession. How can companies compensated for this loss in value? How can individuals compensate for this loss in value? Give an example of how an individual can recoup a 25 - 30% loss on a pension portfolio that was estimated at $214,000 prior to the recent market decline.

3) The book gives much information concerning financial reporting requirements and ethical responsibilities. Although no precise definition can be given, in my opinion, exists for the word 'ethical'. In your opinion, what are ethics and how do they relate to financial reporting? What type of positive and negative implications, if any, exist in the absence of ethics? Can laws and regulations compensate for a lack of ethics in the business world?

4) The Foreign Corrupt Practices Act of 1977 lists several sanctions for offering bribes, kickbacks, etc. While this is the rule for accounting in the United States, other countries have no such laws. How does the International Accounting Standards Board (IASB) compensate for this inconsistency in accounting rules, if at all? How would you compensate for this difference in accounting standards? Do you believe that allowing bribes, kickbacks, etc. is necessarily unethical?

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Solution Preview

Question #1:
Recall that the pension expense is comprised of six elements which are the following:
1. Service cost
2. Interest cost
3. Return on plan assets
4. Amortization of unrecognized prior service cost
5. Amortization and deferral of gain or loss; and
6. Amortization of the unrecognized net obligation or asset existing at the date of initial application of SFAS No. 87

All of the above elements except the return on plan assets are all based on estimates. In my opinion these elements must be computed based on best estimates. For example, the interest cost element is computed by applying the assumed discount rate to the amount of the projected benefit obligation at the beginning of the period. The assumed discount rate should be comparable to the actual rate of return on plan assets or if possible equal to this return. On the other hand, the projected benefit obligation is the estimate of the present value of the benefits employees has earned factoring future expected compensation increase. In regard, the expected compensation increase must be realistic and the discount rate conservative.

Question #2:
The burden of the loss in the value of the ...

Solution Summary

This solution discusses ethical considerations with regards to pension plans, ethical reporting, bribes, and kickbacks.