Accounting for pension and Employee benefit at Ford and Toyota Case Study Solution
Answer Number 7:
It can be said that there are many reasons which can affect the future healthcare cost of any company and same is the case for Ford Motors. The main factor that leads to the reduction in the future healthcare cost of Ford Motors is the introduction of the new legislation which reimburses some part of the healthcare cost of the employer and provides the subsidy to the company in their expenses regarding the post-retirement healthcare costs. Furthermore, the discount rate is also changed in the year which is also responsible for reducing the healthcare costs of Ford Motors.
In addition to this, the future healthcare costs are derived on the basis of various demographic assumptions, fluctuation in these assumptions an estimation can drastically affect the figures of future healthcare costs. These assumptions are very subjective because of the highly technical nature of the assumptions, the main areas where the assumption lies are the estimation of the health position of the employee, the expected life of the employee and the expected expense on the healthcare of the employee in future. It is an inherent limitation of the management that the fluctuations in the assumptions are expected because of the subjectivity and uncertain in the nature of the assumptions. Furthermore, the assumptions are also depended excessively on the policies of the government which can threaten the accuracy of the assumptions.
The impact of the change in assumptions can be negative or positive for the company, however, in the case of Ford Motors, the impact of this is positive for the company because the expenses and liabilities are reducing due to the change in future healthcare assumptions. Because of the favourable change in the discount rate the management estimates that they will save around $80 million and because of the new legislation the management expects to save almost $1.8 billion.
Answer Number 8:
By analysing the pension plan and OPEB of Ford and Toyota, it can be assessed that the pension and healthcare plan of Ford is more favourable than Toyota. The comparison between both the companies is justified to some extent because both the companies provides a very similar pension plan. However, the comparison between Ford and Toyota is wrong to some extent because both the companies have a different number of employees and the demographic assumptions and habits of the employees of both companies are very different.All the costs and expenses of Ford are away to higher as compare to the Toyota, and the actuarial loss of Ford is also way too high as compare to the Toyota.
The current service cost and prior service cost (recognized and unrecognised) should have to be immediately charged to the income statement as an expense, and the benefits that would have been paid must have to be deducted from the plan asset and defined benefit obligation. The increase in the net defined obligation is shown as an increase in the non-current liability and the decrease in the net defined obligation should have to be shown as a reduction in the non-current liability on the balance sheet of the company. Furthermore, the actuarial gain or loss should have to be shown in the equity portion under the head of the account of other comprehensive income......................
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