In its December 31, 2008, Consolidated Financial Statements, The Cola-Cola Company (Coca-Cola) reports a substantial shift in its net pension liability ($1,328 million) relative to December 31, 2007 ($85 million).
a. Given a portion of Coca-Cola’s Note 16 reconciliations provided below, write a memorandum explaining the change in the net pension liability. (Do not assume that the reader knows what items such as service cost mean.)
*Some pension plans are ‘‘unfunded,’’ meaning that the company does not hire an independent trustee and send the funds to the trustee for investment, but, instead, pays retirees out of company rather than trustee pension fund assets. Coca-Cola paid $44 million out of company assets to retirees who are covered by unfunded plans. Source: The Coca-Cola Company, Form 10-K for the Fiscal Year ended December 31, 2008.
b. For each item in the reconciliation, explain whether the effect on the PBO and the fair value of plan assets is reflected in current period pension expense or as a change in other comprehensive income.
c. Provide a general justification for keeping some PBO and fair value of plan asset changes out of current period net income.
d. In the same note, Coca-Cola indicates that it changed a key assumption during the period. The expected rate of increase in compensation levels was decreased by 1%. What effect does this assumption change have on the pension liability (PBO) and current and future pension expense?
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