Present accounting standards report only the amount of unfunded pension obligations on the balance sheet. Gross pension assets and liabilities are not reported on the financial statements. This practice is based on the premise that the pension fund is an entity distinct from the employer firm.

a. Identify arguments in support of this premise and against it.

b. If the pension fund is not a distinct entity, how should pension assets and liabilities be reported in the financial statements?

c. Which key financial statement elements and ratios would be likely to change dramatically, if the pension fund were consolidated with (added to) the employer firm’s financial statements?

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