Pension Benefits

Cloud Nine Airlines provides airline service to most major cities in the continental United States. Mainly due to high fuel costs and the reduced demand for air travel, Cloud Nine has been generating very low earnings over the past 5 years and is able to generate enough cash flow to pay many of its short-term operating costs. Since its start in 1975, Cloud Nine has provided its pilots, crew members, and ground crew a defined benefit plan. Many of the company's employees are now nearing retirement, and Cloud Nine's projected benefit obligation is becoming very significant. Although the company has been making contributions to the plan, recent market declines have left Cloud Nine's pension plan considerably underfunded. In fact, at the end of 2019, the funded status of Cloud Nine's pension plans was at 68%.

In July 2020, Brad Richter, the Chief Financial Officer, comes into your office to discuss the pension plans with you. Brad is very happy that the stock market has had a stronger performance lately and states that the improving market and economic conditions justify changing the pension plan assumptions. Specifically, he asks that you increase the expected return on plan assets from 6.0% to 9.0% and also increase the discount rate from 4.0% to 6.0%. Brad states he has spoken with the company's actuary and independent accountant and that they have no issues with the changes in estimates.

As the accountant for Cloud Nine, you are in charge of preparing the financial statements and related note disclosures for the current year. You know that recent actual returns on pension assets over the previous 2 years have averaged 5.0% and that 10-year U.S. Treasury bond interest rates have been averaging 3.5% over the last 5 years. For these reasons, you tell Brad that there is no cause to change the pension assumptions. Brad is clearly agitated by your response and states that, as the CFO, these types of decisions are his alone and that he is not asking you to make the change but telling you to make the change. If you make the changes Brad wants, how will those assumptions affect Cloud Nine's pension obligation and pension expense? How would you handle this situation?