Question
Ballooning Out of Control LLC (BLOC or the Company) is a manufacturer of hot air balloons. Due to decreased demand for hot air balloons and
Ballooning Out of Control LLC (BLOC or the Company) is a manufacturer of hot air balloons. Due to decreased demand for hot air balloons and challenging industry conditions, BLOCs management is exploring ways to reduce the Companys rapidly rising compensation and benefit costs. Management has determined it will either (1) amend the Companys single employer defined benefit pension plan by eliminating the future earning of pension benefits for its employees (i.e., freeze its pension plan) or (2) reduce headcount across the Company by 5%. Either option will require approval by BLOCs board of directors. If BLOC decides to freeze its current pension plan, it will not offer any new pension benefits to its employees through another plan. BLOCs current pension plan is the only retirement benefit arrangement it provides to its employees. The plans pension benefits are based on years of service and average salary for the last five years of the employees service period, and all employees, both hourly and salaried, who have attained six months of service are participants in the pension plan. Under the plan freeze, the Company will eliminate the accrual of additional pension benefits for future service. However, the Company will continue to take future salary increases into account in computing the average salary for the last five years before retirement when determining the pension benefits earned for service prior to the plan freeze. (This type of plan amendment is commonly referred to as a soft freeze.). The pension plan freeze will be effective on October 1, the beginning of BLOCs next fiscal year, and is expected to be approved and communicated to employees prior to BLOCs September 30 year-end. If BLOCs management decides instead to reduce costs by reducing headcount by 5 percent, it anticipates that the board of directors would approve the reductions and management would communicate its plans to the affected employees prior to September 30. Before choosing which cost-cutting plan to recommend to the board of directors, management would like to determine how to account for each alternative.
Determine how to account for each of the following alternative actions to reduce BLOCs increasing compensation and benefit costs: a. Management decides to amend the pension plan by eliminating the accrual of pension benefits for future service, while continuing to take future salary increases into account in determining pension benefits at retirement (i.e. a soft freeze).
b. Management decides to permanently lay off 5% of BLOCs planeligible workforce while retaining the current pension plan
Where is this information in FASB?
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