Pension Issues
Response to the following problem:
The MacAdams Company had engaged in large amounts of R&D to develop a new product that would put the company ahead of its Japanese competition. As a result, the company's profits were severely reduced and the president was concerned about the possibility of a takeover by a European competitor. The president was discussing the situation with the controller and said, "Your accounting principles make me so mad. Here we are working hard to develop a product to beat the rest of the world and you won't let me treat any of those costs as an asset."
The controller replied, "I understand your frustration. And please remember they are not ‘my' principles."
"I know," responded the president. "Do you have any suggestions?"
"Well," the controller replied, "we can't adjust R&D expense, but we can reduce our pension expense. One easy way to increase our profits would be for the board of directors to vote to increase the discount rate used for computing the present values and to increase the expected rate of return on plan assets. Both of those would have the effect of reducing the pension expense."
"Great idea. I will have to remember that when it is time for the year-end bonuses."
Required:
Write a short report evaluating the controller's suggestion.