Analysis of pension plan disclosures I Alice is puzzled by certain pension disclosures in Purdon Corporation’s x3 accounts. Purdon is a (fictitious)

US media company. ‘Purdon’s numbers are a complete wonderland to me’, she says. ‘Can you explain the information it provides about its defined benefit plans? I’ve highlighted the relevant note in its x3 accounts (see Exhibit 16.7).

‘My first question concerns the company’s income statement. If I understand it right, Purdon claims its DB plans generated net pension income in x3 – to the tune of US$290 million. (This is net of the cost of health-care and other post-employment benefit plans.) Pension income is a significant figure – around 10% of the company’s before-tax profits. It appears to be due, in large part, to the income of some US$850 million the company earned on its pension fund investments that year. Yet, as the exhibit shows, Purdon’s pension fund assets declined by US$930 million in x3. How can Purdon earn a return of US$850 million on pension fund investments and report a decline in them of US$930 million in the same year?

‘The relationship between the pension fund and the company’s balance sheet is the source of my next question. The numbers get curiouser and curiouser, the more I look at them. According to the numbers in the exhibit, Purdon’s DB plans were in surplus by US$2.86 billion at the end of x3 –

US$1.3 billion lower than a year earlier. Yet the company reports a net pension asset of US$2.4 billion at end-x3, a number that has grown by over US$400 million since end-x2. How can Purdon’s pension fund surplus decline year-on-year and yet the pension asset it reports on its balance sheet increase over the same period?’

Required Help Alice. Answer her two questions, using the information in Exhibit 16.7.

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