COCA-COLA COMPANY VERSUS PEPSIC, INC

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COCA-COLA COMPANY VERSUS PEPSIC INC. 8

COCA-COLACOMPANY VERSUS PEPSIC, INC

June9, 2014.

Effectsof IFRS on the pension reporting for Coca-Cola and PepsiCo in 2009

Coca-Colaand PepsiCo Inc are two major manufacturers and distributors ofdiversified beverage products. The two firms have their foundationbase in the United States with large number of employees who enjoydiverse funding and pension plan products. These pension plans variessignificantly between the two companies. Corporate pension refers tofunds given to employees after retiring from active employment from acompany and is normally given as steady stipend to the beneficiariesdepending on the agreed time (Ball,2006).

Therecent requirement for improved finance administration has influencedthe need for proper funding and administration of pension’sschemes. PepsiCo staffs local and abroad enjoys a voluntarynoncontributory pension plan in this case PepsiCo Company funds allthe cost under the employees’ pension plan this plan has taxincentives to the employer. Pension plan is calculated alongsidenumber of years worked and income. Besides a pension plan, PepsiCohas a medical plan for retirees, life insurance and medical benefitswhich are paid in advance after retirement.

However,these plans are not funded by the PepsiCo Company but retirees arerequired to contribute part of funds during their active employmentand the employer-PepsiCo fills in the remaining part no tax benefitsare received by the company for these plans. Coca-Cola on the otherhand, has a contributory pension plan for its local staffs (U.S) andpart of international employees. The employer and the employees chipsin contributions under this pension scheme the company is thusentitled to relative tax benefits (Ball,2006).

Inthe same note, Coca-cola offers its local and some internationalstaffs a defined benefit pension which does not offer tax benefit forcontributions made by the organization. Recent changes in pensionfunds management have prompted the PepsiCo corporate managers todevise constitution for funding and managing pension plans. However,coca-cola embraced a different approach of cash balance plans fortheir defined benefit pension scheme. In 2009, Coca-Cola registeredoperating revenue of $31.9 billion than the preceding year. Cashbalance has been touted as effective in offering secure benefits forpensions as well as risk free benefits. Mobility of workforce isenhanced by the new plan design. Other benefits associated withemployees career accrues faster compared to the traditional plan thatrequired employees to wait for benefits after retirement.

Therefore,the new pension funding reforms provides empowerment to employees whocan access cash without litigation threats especially if they arestill below the retirement age. PepsiCo on the other hand is stillconsidering offering its staffs with a salary pension. As such, thecompany needs well trimmed schemes to help them plan for a secureretirement for the staffs and the organization in general. In cocacola Company, there new IFRS influenced the company to change itsapproach on financial reporting.

Inparticular, a de-consolidation approach was applied to controlinterests and other operations that did no incorporate votinginterest. In this light, Coca-Cola Company amended its accountingpolicies to involve quantities and qualitative analysis entitiesaffected in this case were loans and other areas requiring financialsupport. PepsiCo also applied consolidation of variable interests inits financial reporting. In both cases, the two companies, needed tochange their pension plan financial reporting to reflect the newguidelines of IFRS(Ball, 2006).

Calculationof funding levels and capital gains experienced by Coca-Cola andPepsiCo in their respective pension funds.

Inorder to calculate the amount of funds required to facilitate newpension plans in Coca-Cola and PepsiCo the following formula would beused in the calculations.

TheAFN equation is as follows:

AFN= (A*/S0) ΔS– (L*/S0)ΔS – MS1(RR)

Or

AFN= Projected increase in assets – spontaneous increase inliabilities – any increase in retained earnings

Where:

A*= Assets tied directly to sales and will increase

L*= Spontaneous liabilities that will be affected by sales. (NOTE: Notall liabilities will be affected by sales such as long-term debt)

S0= Sales during the last year

S1= Total sales projected for next year (the new level of sales).

ΔS= The increase in sales between S0and S1

M= Profit margin, or the profit per unit of sales

MS1= Projected NetIncome

RR= The retention ratio from Net Income and is also calculated as (1 –payout ratio)

Therelevant ratios within the formula are:

(A*/S0):Called the capital intensity ratio

(L*/S0):Called the spontaneous liabilities ratio

Thefunding level for Coca-Cola pension plan will be

AFN= Projected increase in assets – spontaneous increase inliabilities – any increase in retained earnings

AFN=$ 48, 671-$13, 721-$ 6,824

AFN=$28,126

Fundinglevel of Coca-Cola stands at $28,126

Thefunding level for PepsiCo pension plan will be

AFN= Projected increase in assets – spontaneous increase inliabilities – any increase in retained earnings

AFN=$ 12, 571-$8, 756-$5,946

AFN= -$1231

Fundinglevel of PepsiCo stands at -$1231

CapitalGain on Pension Fund is calculated as

Capitalgain on pension fund for Coca cola

CapitalGain =P1-P0

P0

CapitalGain=11,374-11,088

11,088

CapitalGain=0.025%

Capitalgain on pension fund for PepsiCo

CapitalGain =P1-P0

P0

20351-20,099

20,099

CapitalGain on Pension fund=0.013%

Coca-ColaCompany had a more secure pension fund plan compared to PepsiCo ltdthis is evident in their consolidated financial reports. In 2009,Coca-Cola had operating revenue of $ 30, 990 millions compare toPepsiCo which had $ 5,979. High operating revenue indicates that, thecompany was in a position to create extra funds that could be used tofinance an expanded pension scheme. In addition, Coca-Cola had ahigher funding level $28,126million compared to PepsiCo Ltdwhich had negative funding level (-$1231). Similarly, assessing thecapital gains between Coca cola and PepsiCo for year 2009 indicatesthat, Coca cola had more capital gain (at 0.025%) on pension fundscompared to PepsiCo (0.013%). Therefore, based on the values ofoperating revenue, capital gain and funding level, Coca cola had amore secure pension fund compared to PepsiCo Ltd.

Thestatus of pension fund level increased should be reflected in thefinancial report as a liability in the income statement. The finalreport should reflect interest rates used to determine the value ofliabilities, other pension expenses and the expected returns on theassets on the funded pension scheme. In addition, when reportingpension plan, all other retiree benefits and expenses should beconsolidated in the final report for each individual. In mostscenarios, when reporting pension plans, they are subject to changedue to many factors such as interest rates, deviations in actual andexpected assets returns, changes in tax and other benefit laws (Ball,2006).

References

BallR. (2006). InternationalFinancial Reporting Standards (IFRS): pros and cons for investors.Accountingand Business Research