Pension disclosure

From the Case

The company has a net pension liability of $24.6 million ($58.9 million - $34.3 million)
as of 1994, which will have to be paid over the next 15 years as per the labor
agreement of Southstar Mining Limited. The company has two diversified group for
pension purposes: Salaried and hourly employees. $7.5 million has already been
expensed for the year for the current fiscal year.

Observation

Southstar Mining Limited has a projected benefit obligation of pension which has
been pro rated on services. It is also known as accrued benefit obligation. Pension
plans are organized by either a mutual funds or insurance companies. The
responsibility of these enterprises is to report the accrued gains or losses annually. In
CICA under section 4100.14 it says that any changes in pension plan’s net asset
should differentiate between:
♦ Investment income by type and
♦ Changes during the period.

Section 4100.14 only requires the disclosure of the net change in the fair value. The
gains/losses on the disposal are not required by the GAAP.

Section 3280 which states that any contractual obligation in relation to the current
and future financial position should be disclosed. So in this case, as per the labor
agreement, the company must disclose all the necessary information regarding the
pension plan for the employees.

Section 3461.150 states that a company must disclose the information to the users of
financial statements about: (i) effect of employee future benefits on the financial
statements and (ii) the effect of plan obligations. 3461.076 states that a company
must disclose whether the benefits are prorated based on service or number of years.
It should also describe whether the return on assets is based on fair value or market
value. 3461.092 tell us to disclose whether all the gains or losses are amortized or
only the excess of benefit, the method used to amortize and the amortization period.

All the above mentioned must be disclosed in the foot notes but the company does
not have to include a pension liability on the balance sheet. The main objective here
is to provide the best and most accurate and as much information as possible to the
users in order for them to track and control the business risk, especially when the
statements are materially misstated. Not only it affects their business decisions but
also allows them to look into the future and make predictions more precisely. After
the fateful events of Enron and WorldCom, the business world was changed. The
implementation of CPAB right after Sarbanes Oxley Act, is being the most important
legislation affecting the Canadian Accounting Board. The main purpose of the
footnote is to display the meaning of the account stated in the financial statements
accordance with the GAAP. Companies must disclose anything which is most likely to
affect the decision of the users in the footnotes or in the Management, Decisions and
Analysis (MD&A). The users must know how to read between the lines to fully
understand the meaning of a particular account. In order to see the warning signs, a
reader must be able to read thoroughly. For example an increase in debt or an
increase in write off’s are major signs to keep in mind.