Accounting for Pension Plans & General Motors

Accounting for Pensions
Student’s Name
Institution
Accounting for Pensions
Question 1
Mark-to-market accounting method for pension accounting is easier to understand as it offers a clear picture on how actuarial gains and losses should be recognized as opposed to their amortization annually. The method can provide a snapshot of the current performance of the pension plan. It enables the firms to recognize pension expense with immediate effect rather than capitalize or amortize the costs. Based on this procedure costs become more transparent (Allen & Carletti, 2008). If transparency is improved, there will be a trickledown effect which will make the operating performance of the pension plans easy to understand.
Since the Mark-to-market accounting method focusses on recognition of gains and losses in the fourth quarter of every year rather than amortizing the latter from one year to another, earning volatility cannot be evaluated effectively. Therefore, the Mark-to-market accounting method does not provide a fair representation of the pension obligations (Allen & Carletti, 2008).
Question 2
GAAP rules provide that accrual basis of accounting should be used in accounting for the pension costs. This is a good idea since the compensation cost for workers is recognized over the years of service they have served. On the income statement, the pension expense is recorded in three categories; service cost, interest cost and expected return on assets. As elements of the operating expense, the division into components will enable the amortization of various items over the years.

In the balance sheet, the rules provide that the difference between expected and actual returns be recorded off the balance sheet until they reach a reasonable threshold for them to be reported on the balance sheet. This rule helps in smoothing financial reporting as only critical values that have an impact on the statements and decision making are reported (Allen & Carletti, 2008).
My recommendation is that the underfunded pension plans should record the extent of the underfunding in their balance sheets. Those with surplus should record the excess to the extent to which it can be recovered. To enable for amortization only the service component of the pension expense should be included under operating income, the other elements should be recorded as financing costs.
Question 3
The benefit of the U.S. Government-proposed bankruptcy plan is that it saved GM from bankruptcy. By offering loans to the firm and negotiating with the bondholders for concessions the plan helped to keep GM afloat during the tough economic times.
The detriment was a loss to the bondholders and UAW. The agreement to exchange part of their debt for stock in the company was not rational as the common stock were almost worthless at the time. The concessions meant that the bondholders and retirees would lose a lot of money in the coming years. Thus, I disagree with the approach since it will benefit only the firm by keeping afloat but will have a negative impact on the bondholders and the UAW in the case they agreed to the concessions.
Question 4
By transferring the post-retirement benefits to UAW, General Motors had the health care liabilities to its retirees assumed by the UAW trust. Since retirees require health care more often, this move would benefit them as GM’s financial condition was deteriorating. The firm was expected to make a substantial contribution to the UAW trust as well as increase the pension benefits paid to all GM UAW retirees. This move would impact negatively on the firm’s financial condition as the increase of the monthly payments to the latter by $66.70 would add up to their economic woes. It will impact negatively to the employees as they had to pay more to the fund to maintain it.
References
Allen, F., & Carletti, E. (2008). Mark-to-market accounting and liquidity pricing. Journal of accounting and economics, 45(2-3), 358-378.