Comparison of Coca Cola and Pepsi Pension Plans

Analyze and discuss the current effects of IFRS on the pension reporting for Coca-Cola and PepsiCo at 2009 year-end.

These two companies have pension’s plans that are distant from each other in terms of their structure. However, both companies are subject to the changes that will occur because of the IFRS about their reports on the pensions plan for the year that ends 2009. In this new method, the expectation is that there are voluntary contributions to the pension plans for the companies. Therefore, there will be changes in accounting for these contributions in the final financial statements. With these voluntary contributions, this means that the funds that are mandatory for the company to set aside will become lower than before. This will be of benefit especially to Coca Cola, which has a system that demands for both the employees and the employers to offer their contributions to the fund (Marketwatch 2009). The new regulations also provide for the deductions of taxes from the funds.  However, it is imperative to note that this is not wholesome and is only done up to a certain level. When it comes to the taxes, this means that balance sheets of the companies will reflect a different figure than before. PepsiCo will be affected by this change adversely because of the pension policy that the company has now.

Calculate the funding levels and capital gains experienced by Coca-Cola and PepsiCo in their respective pension funds.

The pension funds provide a situation where the funding levels and the capital gains are highly affected. Considering that the two companies have different policies in the pensions funding, the expectation is that there is a difference in these two figures. However, it is also worth to note that the two companies have different capitals (Marketwatch 2009)

In the recent past, there has been a decrease in the funding levels of the two companies owing to the economic volatile conditions. Therefore, both companies have recorded negative funded statuses in the recent past (Gastineau 2010).  In Coca Cola, the expenses that the company accrued in 2009 were $170 million. The company has assets that have the total $5623 million (Marketwatch 2009).

The funded status for the company was, therefore, $719 million. After calculation of the PBO, this brings its representation to only 3 % of the total market capitalization. This means that the company does not concentrate many of its efforts in the pension’s fund. The pension contribution for PepsiCo in 2009 was $1.2 billion. PepsiCo’s assets are $9851 million. The funded status of the company is 90 %. Therefore, there are enough funds for the pensions fund in the company. The PBO of the company is approximately 10% of the market capitalization for the company (Gastineau 2010). Therefore, the company puts more effort in the pensions plan unlike its archrivals.

Analyze which of the two companies had a more secure pension fund and explain why.

There are certain differences that are clear from an examination of the financial report of the two companies. These are especially in the pension’s fund, which are clearly different from each other. PepsiCo has a pension’s fund that is voluntary to join. This means that the employees are not under the obligation to contribute any funds to the plan. By the members, the company includes all the employees of the company who work in the US and those who work in the other countries. The only contributors of this plan are the employers and the employees do not have to offer anything in return. Therefore, the plan is extremely beneficial to the employee in terms of cost. However, the employer gets some tax incentives.  However, it is imperative to not that such incentives are subject to some conditions. The number of years that an employee has given service to the company is particularly important. These form the basis for the tax incentive to the company. In the same pensions plan, PepsiCo is able to provide other retirement benefits. For the employees who leave the company after a long period, they are entitled to medical benefits. There are also life insurance benefits for the retired employees. However, it is worth to note that these are not mandatory for the company to pay (Gastineau 2010). This is because a company is not liable to undergo such a cost especially where the company does not receive any tax benefits.

Coca cola’s pension plan is not as stable as that of their competition. It is worthy to note that the pension plan is a contribution mechanism. Briefly, this means that the employees of the company have to contribute to the plan. In addition, the employers also offer their contributions to the plan. The employees who are liable to contributing are those that work in the US and those who work in the international markets. Another reason why the plan by PepsiCo is better than this one is that the employer is more favored than the employee is. This is because the employer receives some exclusive tax benefits when they contribute. Therefore, this plan by Coca Cola has a clearer definition than that of PepsiCo. However, the plan can be considered to be unfunded because of the high leaning towards the employees. There are also no clear benefit plans on retirement for the employees. This is unlike that of PepsiCo that clearly states the benefits that the employees are entitled to once they leave the organization (Appendix 2011). Therefore, PepsiCo’s plan is more stable than that of Coca Cola.

Evaluate how the status of the pension fund affects the level of risk that must be reported in the annual report. Justify your answer.

In the assessment of the financial position of any company, there must be the inclusion of the long-term liabilities. These are important as they show the position of the company in a financial perspective. The pension fund is one of these liabilities although most organization ignores them. Worse still, some companies do not even reflect their value in the final balance sheet of the year. This in turn leads to the company offering an assessment of the company that is not true and may mislead the stakeholders. However, most of the companies find the process of accounting for the pensions funds as cumbersome (Appendix 2011). Others will not account for these in the balance sheet because of the idea that they are already accounted for elsewhere, and that the financing is off the balance sheet. According to the accounting standards, the transactions in the pensions fund should be represented in the balance sheet as a footnote. This is because the finances still come from the company and are not donations. In most cases, the funds set for an employee can be calculated earlier and accounted for mathematically. Therefore, it is necessary that appropriations for such funds be reflected in the financial documents of the organization. The company does not hoard the money and instead invests with it in other sectors. These risks only affect the employer since the employee is guaranteed of payment. Therefore, the appropriations for such risks have to be in the annual report (Appendix 2011).

The pension fund could bring two extremes in a company. These include the overfunded and the underfunded state. First, it is imperative to note that a pension plan where both the employee and the employer are contributors does not have the same mechanism as that explained above. Where both are paying, there is a rare chance of having the pension fund being stable. These two extreme conditions are not appropriate for the company since they affect the planning tool of the company. In this instance, it is imperative for the company to calculate projected benefit obligation (PBO) (Appendix 2011)The calculation of the PBO is then calculated alongside the plan assets of the company. These plan assets are a mere representation of the pension fund. In a case where the pension fund is more than the PBO, then the plan is overfunded. Consequently, in a situation where they are less than the PBO, then the overall plan is underfunded. Therefore, the subtraction of the two figures gives the actual state of the plan. In order to reduce any risks for the future investments of the company, then the pension plan has to be included in the annual report for the purpose of transparency. Any extreme condition of the pension plan for the company has serious ramifications on the overall situation of the company (Appendix 2011).

References

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Appendix. (2011). Black Book – U.S. Beverages & Snacks: Opportunity Outweighs Risk, 271-        289.

Company spotlight: Coca-Cola Company. (2009). MarketWatch: Global Round-up, 8(9), 51-58.

Gastineau, G. L. (2010). The exchange-traded funds manual. Hoboken, NJ: Wiley.