Analyzing and Interpreting Pension Disclosures

Analyzing and Interpreting Pension Disclosures General Mills, Inc. reports the following pension footnote in its 10-K report.

Analyzing and Interpreting Pension Disclosures

General Mills, Inc. reports the following pension footnote in its 10-K report.

Defined Benefit Pension Plan ($ millions) 2013 2012
Change in Plan Assets    
Fair value at beginning of year $ 4,353.9 $ 4,264.0
Actual return on assets 698.7 56.3
Employer contributions 223.1 222.1
Plan participant contributions 15.2 20.3
Benefit payments (222.6) (203.3)
Foreign currency (2.2) (5.5)
Fair value at end of year $ 5,066.1 $ 4,353.9
Change in Projected Benefit Obligation    
Benefit obligation at beginning of year $ 4,991.5 $ 4,458.4
Service cost 124.4 114.3
Interest cost 237.3 237.9
Plan amendment 0.2 (13.4)
Curtailment/other (27.1)
Plan participant contributions 15.2 20.3
Medicare Part D reimbursements
Actuarial loss (gain) 237.5 405.7
Benefits payments (222.8) (203.5)
Foreign currency (1.9) (5.9)
Acquisitions 4.8
Projected benefit obligation at end of year $ 5,381.4 $ 4,991.5

Estimated benefit payments . . . are expected to be paid from fiscal 2014–2023 as follows:

(in millions) Defined Benefit
Pension Plans
2014 $ 236.3
2015 243.6
2016 251.6
2017 260.3
2018 270.1
2019-2023 $ 1,512.3

(a) Which of the statements below best describes what is meant by service cost and interest cost? 

Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is the expense we incur on funds borrowed by the pension plan.

Service cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is the expense we incur on funds borrowed by the pension plan.

Service cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is an expense that accrues on the pension obligation during the year.

Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is an expense that accrues on the pension obligation during the year.

(b) What is the total amount paid to retirees during fiscal 2013?
Answer 222.6 ($ million)

What is the source of funds to make these payments to retirees? 

pension liabilities

operating cash flows

pension obligations

pension assets

(c) Compute the 2013 funded status for the company’s pension plan. 
Answer -315.3 ($ million)

(d) Which of the following statements best describes what are the plan amendment adjustments, and how they differ from actuarial gains and losses? 

Actuarial gains (losses) are decreases (increases) to the PBO resulting from changes in the assumptions used to estimate the pension or health care liability, while amendment adjustments are changes to the liability arising from amendments to the plan itself.

Actuarial gains (losses) are decreases (increases) to the PBO resulting from changes in the assumptions used to estimate the pension or health care liability, while amendment adjustments are adjustments made in accounting for the plan as a result of those estimates.

Actuarial gains and losses represent charges that the pension plan incurs from actuaries that it hires to perform various estimates, while amendment adjustments are adjustments made in accounting for the plan as a result of those estimates.

Actuarial gains and losses represent charges that the pension plan incurs from actuaries that it hires to perform various estimates while amendment adjustments are changes to the liability arising from amendments to the plan itself.

(e) General Mills projects payments to retirees of over $236 million per year. Which of the following statements best describes how it is able to contribute only $223.1 million to its pension plan? 

Federal law does not require companies to fund pension plans. Any contributions that General Mills makes are purely voluntary.

The funding for payments to retirees comes from the pension assets. General Mills, therefore, does not need to contribute its own funds to the pension plan.

Contributions to pension plans are made mostly by employees. Any contributions that General Mills makes are purely voluntary.

The funding for payments to retirees comes from pension assets. General Mills’ plan assets yield investment returns that currently provide the cash inflow.

(f) Which of the following statements best describes the effect from a substantial decline in the financial markets on General Mills’ contribution to its pension plans? 

Should pension investments decline as a result of a decline in the financial markets, General Mills might be required to increase its cash contribution to the pension plan.

General Mills’ contributions to its pension plans are purely voluntary. Fluctuations in the general financial markets would, therefore, have no effect.

Any shortfall in contributions is covered by contributions from the Federal Government under its various pension benefit guarantee programs. Fluctuations in the general financial markets would, therefore, have no effect.

General Mills’ pension plans are not affected by fluctuations in the general financial markets. There would be no effect on General Mills.

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