Coca-Cola and PepsiCo

Both Coca-Cola and PepsiCo are large and highly profitable organizations worldwide. Whereas Coca-Cola are the most known brand worldwide, PepsiCo has a more diversified product range and is renowned for its great brand re-organization strategy. Coca-Cola has shown a more stable and slightly higher profit margin while PepsiCo has registered a higher growth rate. Since 2009, the International Accounting Standards Board has made a variety of changes to the International Financial Reporting Standards with regard to Pensions. This paper seeks to analyze the changes as well as compare the effect the new standards have had on the Coca-Cola Company and PepsiCo comparatively.

The Global financial crisis left thousands of people jobless and without a sustainable income. The layoffs that followed deprived thousands of people pension-less. This called for action through the IFRS to ensure that employees’ funds are in the right hands and are managed appropriately to ensure that their futures are protected.

In 2011, changes were made to the IFRS in regard to the pension plans in the document labeled IAS 19 (2011). Progressions presented by IAS 19 (2011) as contrasted with IAS 19 (1998) include:

  • Acquainting a necessity to completely perceive changes in the net characterized profit liability (asset) including prompt recognition of characterized profit costs, and require disaggregation of the general defined profit cost into parts and obliging the recognition of recalculation in other far reaching income (wiping out the “corridor” approach)
  • Presenting improved revelations about characterized benefit plans
  • Adjustments to the accounts for termination benefits, including recognizing profits provided in return to administration and profits provided in return to the termination of contract, and changing the recognition and estimation of termination benefits
  • Illumination of different issues, including the characterization of representative profits, current evaluations of death rates, expense and organization expenses and risk offering and contingent indexation characteristics.
  • Consolidating different matters submitted to the IFRS Interpretations Committee.

In regard to those changes every company was required to make changes to its pension plan to ensure the security of it employees. These regulations were effective from January 2013. With this regard, all complying companies must have shown the effect of the plan on their end of year financial results.

The Coca-Cola Company adopted the cash balance pension plan in 2009. The cash balance pension plan is a type of the defined benefit plan. According to the annual report 2013, Coca-Cola spent a total of $197 million towards defined benefit plans. This is in line with the requirements of the IFRS. The company was also obliged to report the status of the pension plan. According to the Coca-Cola Annual Report (2013), the company contributes to the retirement, healthcare and life insurance plans of its employees.

Administration is obliged to make certain evaluations identified with actuarial suppositions used to focus the cost of benefits and related commitment. We accept the most basic suspicions are identified with (1) the markdown rate used to focus the present estimation of the liabilities and (2) the normal long haul rate of profit for arrangement possessions. The majority of the company’s actuarial suppositions are looked into yearly. Changes in these presumptions could have a material effect on the estimation of our annuity cost and related commitment.

At every estimation date, the company focuses the rebate rate by reference to rates of superb, long haul corporate securities that develop in an example like the future installments we envision making under the arrangements. As of December 31, 2013 and 2012, the weighted-normal rebate rate used to register the company’s profit commitment was 4.75 percent and 4.00 percent, respectively.

The normal long haul rate of return for plan assets is based upon the long haul standpoint of our speculation system and the company’s recorded returns and volatilities for every asset class. Coca-Cola additionally surveys current levels of investment rates and expansion to evaluate the sensibility of its long haul rates. The company’s annuity plan venture goal is to ensure the majority of its arrangements have sufficient funds to meet their profit commitments when they get to be expected. Subsequently, the Company occasionally modifies holding distributions, where needed, to enhance returns and oversee hazard. The weighted-normal expected long haul rate of return used to compute its annuity cost was 8.25 percent in 2013 and 2012.

PepsiCo also uses the defined benefit plan. In this plan, the benefits are mainly dependent on the period of service of the employee or a combination of the period of service and the annual income of the employee. In the PepsiCo plan, only some people qualify for a life and health insurance plan. Those who qualify may qualify for a capped amount in cover and be expected to cover any excess amounts. To determine the obligations the company needs to make in respect to the pension plan of each employee is dependent on the amount of time worked, during the years as well as the lump sum amount those benefits as they accrue and grow. The PepsiCo pension plan is based on various assumptions to determine the annual pension and medical plan entitled to a retiree. These include:

  • The rate of interest used to calculate the current value of liabilities,
  • Several factors that are unique to each employee like retirement age, mortality and turnover
  • The return on assets expected from the companies funded plans
  • Where benefits are based on income, the rate of salary increment is used to determine the pension expenses
  • The trend health care cost may be used to determine the medical expenses to be allocated to a retiree.

As seen above, the two companies utilize different pension plans. In the defined benefit pension plans, the company and the employee agree on the total benefits that will be allocated to the employee upon retirement and then strives to contribute towards it. The company stops making contribution when the targeted amount is attained. On the other hand, the cash balance pension plan is mainly dependent on the employees’ annual earnings.

According to Elliot and Moore (2000) the two pension plans differ in terms of the risks that accompany each plan. First, the cash balance plan offers a more flexible funding system compared to the defined benefit plan. It therefore eases the burden of planning for future pension plan disbursements. The cash balance plan defines the total future benefits that should be accrued in the retiree’s account at the end of his tenure rather than defining the employer’s contribution. Second, the employer assumes the risk of the investments in which the monies are invested. However, the risk factor involved with the defined benefit plan is higher than that which is associated with the cash balance plan. When large salary increments are made to the employee during the final year of employment, both employers are expected to contribute a higher amount of money towards the pension plans. However, the increment rises higher in the case of the defined benefit plan than in the case of the cash balance pension plan. It is therefore evident that the Coca-Cola Company is in a less risky pension plan than PepsiCo.

The rate at which

This risk must be reported in the financial statement yearly. A company that is exposed to more risk factors is likely to cause disinterest to investors. The Coca-Cola’s adoption of the cash balance pension was very likely informed by the high risk factors associated with the traditional defined benefit system.

References

Elliott, K. R., & Moore Jr, J. H. (2000). Cash Balance Pension Plans: The New Wave. Compensation and Working Conditions, 5(2), 3-12.

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