In February 2011, Seaton’s Limited filed for protection under the Companies’ Creditors Arrangement Act due to liquidity problems. The act gives troubled companies time to restructure their debt and to hopefully avoid bankruptcy. As part of the restructuring process, Seaton’s approached its employees and pensioners to split the surplus in the pension plan and allow Seaton’s to withdraw a portion of the surplus in cash to help lessen the liquidity problems. In note 9 to the unaudited financial statements, the following was disclosed with respect to the company’s pension plan for the year ended December 31, 2011 (in thousands of dollars):
Plan assets at market ................. $735,501
Plan assets—four-year moving average market basis .......600,662
Projected benefit obligations................327,101
Pension surplus......................273,561
Unrecognized actuarial experience adjustment.........119,181
Pension surplus per financial statements............154,380
The company further notes that, effective January 1, 2011, the interest rate assumption changed from 9% to 8% to reflect more conservative long-term interest rate expectations.
Instructions
Adopt the role of the pensioners as well as the role of company management and discuss the financial reporting issues related to management’s desire to split and withdraw from the pension plan surplus. Assume that Seaton’s is a private company.