Whether to Consolidate a Company’s Pension Trust Fund Many companies have employee pen¬

sion plans. Such companies set aside money each year in their pension trust funds to be invested.

When a company disburses cash to a pension trust fund, the company reduces its pension liability.

Companies having pension plans must disclose extensive information regarding pension plan as¬

sets, pension plan obligations, and other pension plan matters in their notes to the financial state¬

ments (as required under FAS 87, “Employers’ Accounting for Pensions”).

A pension trust fund’s activities are limited to making investments and paying pensions to re¬

tirees. Pension plan trust funds invariably have minimal liabilities, all of which pertain to admin¬

istering the pension trust fund. Thus a pension trust fund does !tot report the present value of ei¬

ther the projected benefit obligation or the accumulated benefit obligation to the employees that are covered by the plan. Accordingly, the excess of pension trust fund assets over pension trust fund liabilities is called Net Assets Field in Trust for Members in the balance sheet of the pension trust fund. A pension trust fund has no income statement — instead, it presents a “Statement of Activ¬

ity” that for the most part summarizes the items that increase and decrease the net assets during the year (for the most part, these items are the cash receipts and disbursements for the year).

1 Using the Internet, find General Motors Corp.’s latest annual financial report (http://

www.gm.com). Note that the financial statements are described as consolidated. Determine if CM consolidated the balance sheet of its employee pension trust fund at year-end — in addi¬

tion to having consolidated the financial statements of its several subsidiaries. Explain what factors led you to your conclusion.

2 What are the total assets of the company’s pension trust fund?

3 Calculate GM debt to equity ratio with and without consolidation of the pension trust fund.

(For simplicity, assume that the pension trust fund has zero liabilities.) If you were a potential lender, would the difference between the two ratios matter to you?

4 If GM had not debited the pension liability account when it transferred money to the pension trust fund, what other account might it have made sense to debit? What might be an advan¬

tage of this approach?

5 What consolidation entry is necessary to consolidate the pension plan trust fund at the end of the year? (For simplicity, assume that the pension trust fund has zero liabilities.) If GM had debited the account you came up with in requirement 4 when it transferred cash to the pen¬

sion plan trust fund, what would be the worksheet entry to consolidate the pension trust fund?

6 Assuming consolidation of the pension plan trust fund, how should the pension trust fund as¬

sets (virtually all of which are investments in stocks and bonds) be reported in the consolidated balance sheet?

7 Assume that Debtco Inc. has filed for Chapter 7 bankruptcy protection, which will result in the sale of its assets, settlement of its liabilities to the extent possible, and going out of busi¬

ness. Debtco has

(a) liabilities of $75 million,

(b) assets of $45 million (at liquidation value), and

(c) a 100% funded pension plan that has $25 million of assets (and zero liabilities). In the settlement of its claims, will Debtco’s creditors receive $.60 on the dollar ($45 milliorL/$75 mil¬

lion) and the pension plan employees 100% on the dollar or would creditors and pension plan employees each receive $.70 on the dollar ($70 million/$I00 million)? If the pension plan were ouerfunded by $5 million, who would receive the $5 million? If the pension plan were under¬

funded by $20 million (only $5 million of assets exist), what would the bankruptcy court do?

8 What arguments can be made for and against consolidating the pension trust fund’s balance sheet?

9 Which presentation best reflects economic reality — consolidated or unconsolidated?