Farquar Inc. is in the process of going public. The company is in the Canadian oil and gas industry but has decided that it would like to list its shares on the London Stock Exchange. Currently, the company follows pre-2011 Canadian PE GAAP.
Farquar has a significant pension plan that is currently underfunded. For the year ended December 31, 2011, the company (under PE GAAP) did not recognize this large deficit as a liability since it related to past service costs. Farquar’s controller, Perry Barta, has on his desk the new U.S. accounting standard and the almost identical proposed Canadian PE Exposure Draft on employee future benefits. Under the new U.S. standard, companies will have to recognize such unfunded amounts through Other Comprehensive Income.
Perry also has on his desk some information about the differences between PE GAAP and IFRS.
Instructions
Adopt the role of the controller and discuss the relative strengths and weaknesses of the three differing views of accounting for the unfunded costs. Perry is very concerned about the impact on the company’s debt-to-equity ratio and the earnings per share numbers.